Taxes on Salaries and Pensions: FBR Issues Clarification

FBR Clarification of Tax On Salary and Pensions

Federal Board of Revenue (FBR) issued a clarification on a news published in the daily Express Tribune, in its issue dated 14th June, 2021 regarding budget proposals on taxation of salary income. FBR explained that the news contains some incorrect or misleading content; therefore FBR likes to issue a clarification in this regard.

Withdrawal of exemption over Reimbursement of Expenditures by Employer

FBR clarified that withdrawal of exemption & reduced rates should not be mixed with imposition of new taxes. It is very clearly that the recent budget proposals do not contain any new taxation of pensions or major item of salary. 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 re-imbursement of expenditure incurred by employee on behalf of the employer organization.

This type of transaction cannot form part of the salary in any circumstances. The omission made only because there were some interpretations of the courts that were not in accordance with the actual purpose of this clause. The clause omitted to avoid multiple interpretations or confusions. The figures of revenue generation of Rs.1.82 billion reported by the Express Tribune in this regard are absolutely misleading.

Profit on Provident Fund to be charged to Tax

FBR said, “No tax imposed on pensions, gratuity funds, leave prior to retirement (LPR), and commutation of pension. However, profit on debt or markup component on provident fund proposed to tax @ 10%. As a separate block of income only if such markup exceeds Rs.500, 000 in a tax year.

Omission of exemption on medical expenditure

According to FBR, this change will not result in any major burden on taxpayers. Similarly, exemption to reimbursement of medical expenditure proposed to omit because of fake claims of exemption on this account. Changes on account of traveling allowance of newspapers employees, free supply of food and salary of seafarers. That wholly exempt previously now proposed for rationalization of salary tax regime rather than as revenue generation measure.

Tax Relief on Capital Market Transactions

Tax rate on capital market transactions lowered from 15% to 12.5%. In order to encourage ordinary people to invest their savings in the stock market tradable securities.

FBR further said that “Ministry of Finance and FBR are always open to positive critique for making changes. However, take a strong exception to undue, unwarranted and unjustified criticism.”

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