FBR Issues Clarification Over Taxes on Pensions and Salaries

The Federal Board of Revenue (FBR) has categorically said that no tax has been imposed on pensions, major components of salary, gratuity funds payments, leave prior to retirement (LPR), commutation of pension and other allied benefits.

The Federal Board of Revenue (FBR) has issued a clarification regarding recent budget proposals on the taxation of salary income.


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The FBR has clarified that withdrawal of exemption & reduced rates should not be confused with the imposition of new taxes. It is very clearly and candidly informed that the present budget proposals do not contain any new item for taxation of pensions or major components of salary as initially discussed. Omission of Clause (39) of Part I of Second Schedule to the Income Tax Ordinance, 2001 is only of technical nature.

This clause provided exemption to reimbursement of expenditure incurred by employees on behalf of the employer organization. This type of transaction cannot form part of the salary in any circumstances.

The omission has been made only because there were some interpretations of the courts that were not in accordance with the actual purpose of this clause. The clause has accordingly been, omitted to avoid multiple interpretations or confusions.

FBR has further clarified that no tax has been imposed on pensions, gratuity funds payments, leave prior to retirement (LPR), commutation of pension and other allied benefits. However, profit on debt or markup component on provident fund has been proposed to be taxed @ 10% as a separate block of income only if such markup exceeds Rs.500, 000 in a tax year.


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FBR firmly believes that this change will not result in any significant burden on taxpayers. Similarly, the exemption to reimbursement of medical expenditure has been proposed to be omitted as a streamlining measure because there were complaints of fake claims of exemption on this account. Slight changes on account of traveling allowance of newspaper employees, free supply of food or other perquisites etc., and salary of seafarers that was wholly exempt have been proposed for rationalization of salary tax regime rather than as revenue generation measure.

The tax rate on capital market transactions has been lowered from 15% to 12.5% in order to encourage ordinary people to invest their savings in the stock market tradable securities. This change will result in enhanced savings and investment in an activity that will lead to industrial expansion and economic growth.

Needless to highlight, enhanced confidence in the stock market ultimately translates into raising funds/money by initial public offerings (IPOs) by existing companies or new companies joining the field. The incentive has been offered for promoting sustainable and inclusive economic growth.

Ministry of Finance and FBR are always open to positive critique for making changes if any required in the proposals, however, take a strong exception to undue, unwarranted and unjustified criticism, FBR added.

 



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