By

Dr. Ikramul Haq

Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is also a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.

A step-motherly treatment is meted out by the Central Board of Revenue under the Income Tax Ordinance, 1979 (hereafter, “the Ordinance”) towards salaried persons, especially those earning Rs. 3,00,000 or more annually, as compared to other taxpayers.

Since 1^st July 1996 when sub-rule (1A) was inserted in Rule 3 of the Income Tax Rules, 1982 (hereinafter “the I.T. Rules”) the salaried persons have been a constant victim of CBR’s highhandedness. There were spate of amendments since 1996 to discriminately tax the salaried persons earning Rs. 3,00,000 or more annually. The position with effect from assessment year 1996-97 is that, in their case, concessions available in Rule 3 to 18 (except that of medical reimbursement under Rule 17) of the I.T. Rules are not available and their gross salaries have been subjected to tax. The unjust, unfair and tyrannical treatment in the case of such employees is highly lamentable. The CBR abused its rule-making power under section 165 of the Ordinance in such a blatant way that there is no similar precedent in the history of fiscal laws in the Sub-continent. Initially, it created a class of corporate employees earning Rs. 3,00,000 or more, excluding employees of government owned corporations, PIA, OGDC etc. as target of Rule 3(1A). This discriminatory treatment was challenged under Article 199 of the Constitution of Pakistan. The CBR then amended sub-rule (1A) of Rule 3 of the I.T. Rules and removed this discriminatory classification. However, it kept on penalizing the salaried class by providing harsh tax provisions in the First Schedule to the Ordinance under one pretext or the other.

The Finance Act, 1998 provided enhanced rate of withholding tax u/s 50(1) in respect of perquisites and allowances in terms of clause (h) of proviso to paragraph A of the First Schedule (hereinafter called “the clause”) to the Ordinance.

The following two examples elaborate the tax liability for the Assessment Year 1999-2000 on the basis of generally understood provisions of the said clause:

	Mr. X	Rs.			Mr. Y	Rs.
(i)	Basic salary	2,60,000		(i)	Basic Salary	10,00,000
(ii)	House Rent Allowance	1,04,000		(ii)	House Rent Allowance	4,00,000
(iii)	Utilities	26,000		(iii)	Utilities	1,00,000
Total emoluments		3,90,000		Total emoluments		15,00,000
Calculation of Tax				Calculation of tax
Total taxable salary excluding perquisites		2,60,000		Total taxable salary excluding perquisites		10,00,000
Tax after credit of Rs. 2,500		21,500		Tax after credit of Rs. 2,500		1,67,500
Tax on perquisite of Rs. 1,04,000		5,400		Tax on perquisite of Rs.4,00,000		50,000
Total tax payable		26,900		Total tax payable		2,17,00

[Note: Mr. X was not liable to pay tax under the said clause as narration in the forthcoming paragraphs would show though CBR illegally asked them to do so through an unlawful circular.

The key word in the said clause was “income chargeable under the head ‘salary’”. The chargeability and computation of income under the head “salary” are governed by section 16 of the Ordinance read with Rule 3 to Rule 18B of the I.T. Rules. The law required that first of all income chargeable under the head “salary” should be computed as per rule 4 to 18 of I.T. Rules to determine whether provisions of the said clause apply or not. The relevant provisions of law as prevailing at the material time read as under: –

            “Rule 3(1A) – Where the income chargeable under the head “salary” of an employee computed under sub-rule (1) is three hundred thousand rupees or more for any income year the value of perquisites, allowances and benefits shall be determined in accordance with the provisions of rule 17 and 18A, wherever applicable”.

            “Rule 3(1) Valuation of perquisites, allowance benefits.‑ For the purposes of computing the income chargeable and benefits to be “salary”, the value of perquisites, allowances and benefits to be included in the said income shall be determined in accordance with the provisions of rule 4 to rule 18.

            “Clause (h) of proviso to Paragraph A, Part I, First Schedule. –Notwithstanding anything in clause (g), for the purpose of assessment year 1999-2000, in the case of an assessee whose income consisting of, or including any income chargeable under the head “salary” (inclusive of allowances and perquisites) exceeds Rs. 300,000, income tax shall be charged in respect of income representing allowances and perquisites, at the following rates:

            Where the amount representing the value of allowances and perquisite: –

(a)	does not exceed 100,000	5% of such amount;
(b)	exceeds Rs. 100,000 but does not exceed Rs. 200,000	Rs. 5,000 plus 10% of the amount exceeding Rs. 100,000
(c)	exceeds Rs. 200,000 but does not exceed Rs. 300,000	Rs. 15,000 plus 15% of the amount exceeding Rs. 200,000;
(d)	exceeds Rs. 300,000	Rs. 30,000 plus 20% of the amount exceeding Rs. 300,000”.

It is clear from the reading of above provisions that: –    

            (i)        Tax on perquisites and allowances would be applicable in the case of an assessee whose income consisting of, or including any income chargeable under the head “salary” (inclusive of allowances and perquisites) exceeds Rs. 3,00,000

            (ii)       “Salary” is first to be computed in the light of Rule 4 to 18. If it is Rs. 3,00,000 or more then rule 3(1A) will be applicable.

            (iii)      The provisions of Rule 17 are still in force for all employees, whether their salary is less or more than Rs. 3,00,000, therefore, medical reimbursement will not be “salary” for the purpose of taxation. It does not attract the provisions of section 16, 24(i) or clause (h) of proviso to paragraph A of the First Schedule to the Ordinance.

The above position of law is absolutely unambiguous, yet the Central Board of Revenue in its Circular No. 10 of 1998 opined:

            “Certain changes have been introduced through the Finance Act, 1998. Under the relevant provisions, if salary and perquisites exceeded Rs. 3,00,000, the perquisites were taxable as a separate block at relatively lower rates than those provided for salaries. From Assessment year 1999-2000, perquisites in such cases, would be taxable at same rates as are applicable to salaries. However, for purposes of deduction of tax under section 50(1), the tax rates are effective from 1^st July, 1998.”

The circular was issued in utter violation of the expressed position of law. The taxability of perquisites under the said clause could arise only where “income chargeable under the head “salary” (inclusive of taxable allowances and perquisites) was Rs. 3,00,000 or more. Rule 3(1A) clearly requires that first “salary” should be computed as per rule 4 to 18 and if it is Rs. 3,00,000 or more only then provisions of rule 18A can be applied. The position of law is, therefore, totally undisputable and any interpretation contrary to it can be challenged in the court of law if Central Board of Revenue or assessing authorities still insist on their self-assumed interpretation.

Now w.e.f. 1.7.1999 there is no application of the said clause. The CBR’s perverse interpretation for assessment year 1998-99 and thereafter on the basis of the said clause is no more relevant. For the assessment year 2000-2001, the language of sub-rule (1A) of Rule 3 of the I.T. Rules will be fully applicable, even from the standpoint of interpretation (perverse) of the CBR. There is no clause like ‘g’ or ‘h’ available now to the CBR to resort to any illegal and self-assessed interpretation of law!

The following two examples show the tax liability for the A/Y 2000-2001

	Mr. X	Rs.			Mr. Y	Rs.
(i)	Basic salary	2,90,000		(i)	Basic Salary	3,00,000
(ii)	House Rent Allowance	1,10,000		(ii)	House Rent Allowance	1,20,000
(iii)	Utilities	29,000		(iii)	Utilities	30,000
Total salary		4,29,000		Total salary		4,50,000
Income chargeable under the head “salary”		2,90,000		Income chargeable under the head “salary”		4,20,000

            *         Mr. X will not be hit by Rule 3(1A), as his total income chargeable under the head “salary” is less than Rs. 3,00,000. His total tax for assessment year 2000-2001 will be Rs. 26,000.

            *         Mr. Y will be hit by Rule 3(1A) of I.T. Rules. His total tax liability will be Rs. 51,500 for the assessment year 2000-2001. The difference in gross salaries of Mr. ‘X’ and ‘Y’ is Rs. 21,000, whereas extra tax liability in the case of Mr. ‘Y’ is Rs. 25,500 (51,500 – 26,000). This shows the extent and nature of step-motherly treatment meted out to the salaried class by the CBR stalwarts (sic). The difference in tax liability is more than the difference in their salaries.

The above illustrations prove beyond any doubt that salaried persons earning salary of Rs. 3,00,000 or more are suffering because of the hostile attitude of CBR stalwarts and due to perverse interpretation resorted to by them. Even in the case of persons drawing salary below Rs. 3,00,000 per annum, tax treatment is highly unjust, and unfair. In spite of the rising cost of life, the increases in salaries in our economy have been too meager even to match the admitted inflation by official quarters. The salaried class in Pakistan has suffered irreparable loss and hardship as a result of ever-increasing cost of life and denial of basic facilities of health and education by the State.

The CBR authorities’ hostile attitude has added further to their sufferings by withdrawing standard deductions and rebates. The basic taxable limit in their case is just Rs. 50,000. It is the worst one can imagine. They have no protection against rising cost of life. The increase in salaries during the last five years in public and government sector is negligible, not even to cover the official version of rate of inflation. On the other hand there has been more burden of tax rather than any relief. It appears nobody has thought of what a miserable life these salaried persons are living. One wonders how the low-paid employees in civil/military establishments are surviving? Corruption, they say, is compulsion under these circumstances. It is strange how the State expects its own employees to live honestly when the quantum of their salaries is not even enough to meet both the ends. It is tragic. What makes the situation more tragic is tax hostility towards salaried class.

Concept of income and its applicability in case of salaried employees

In principle, income means income after deduction of all expenses that have been paid or incurred in earning such income. It is thus net income that should be taxed. For a person who earns his income from business or profession, the Ordinance expressly provides for deduction of a host of expenses from the gross receipts before the taxable income is worked out as for example, for rent, rates, repairs, insurance, depreciation, BMR/rebate/ investment allowance, scientific research expenditure, fees for technical know-how, preliminary expenses and so on and so forth. Additionally, miscellaneous expenses which are not capital or personal and which have been incurred for carrying on the business or profession are also allowed as a deduction from such income. Against this bundle of deductions, the salaried class can at the best claim expenditures on medical treatment or a tax rebate of 5% on the amount expended for children’s education subject to maximum of Rs. 1,500 per child! Now, the question arises if this deduction is adequate, to which the undoubted answer would be that it is too meager. In all fairness deductions on account of education  should be allowed as straight deduction from income, especially in the circumstances where government is least interested in providing education to all of its citizens.

Marginal Relief

There was a concept of providing marginal relief to salaried persons when due to a meager change in salary; the higher slab of tax is attracted. This was withdrawn in 1997. The adverse effect in the case of salaried person of this withdrawal is immense. Sometimes, the increase in salary results in more tax than the actual increase, which is really amazing. The employee is left with no choice but to request the employer not to increase his salary! The CBR must consider the hardship and old method of marginal relief should be restored.

Actual expenses need to be allowed in case of salaried persons too

With increase in population, particularly in urban areas, the salaried person has generally to live at a place far off from his usual place of employment and has to incur conveyance expenses from residence to office and back. This costs a lot of money, and the actual expenses may even exceed the statutory deductions.

In certain situations, the assessee has to incur expenses necessary for discharge of his duties as an employee. For instance, in the case of a teacher in a University, to keep himself abreast of recent trends in his field of specialisation, he has to purchase books and has to subscribe to magazines and journals. This may claim a considerable portion of his salary. In the same manner, the judges of the Supreme Court and High Courts have to brush up their knowledge every now and then, calling for maintenance of a good library. At the same time, they have to adorn themselves with gowns, etc. A Judge, to prove his mettle may have to incur an expenditure of not less than 40 per cent of his salary over such items. These expenses are incidental to employment but are not deducible as such. Lawyers, doctors, engineers, software engineers and other professionals working as salaried persons should be allowed tax-free research and library allowance.

In certain situations a salaried employee to earn salary incurs legitimate expenses but no deduction of such expenses is allowed. Take for example the case of a University teacher who takes up an appointment in a foreign country, say, for a period of one year, and the stipulation is that the traveling expenses would have to be borne by him. Though these expenses have been incurred in earning his salary, yet the law does not provide for their deduction.

Earned income allowance

One may compare the nature of incomes arising in the hands of a landlord with the salary of an employee. In case of the former, there is hardly any application of physical or mental labour whereas in the case of a salaried person it is by dint of his merit and ability and sweat of his labour that he earns his income. It is, therefore, proper that earned income allowance should be made available to the salaried class.

Conclusion

It is an undeniable fact that the salaried class deserves a far better deal than what is meted out to them at present. It should be given appropriate tax relief. For the contribution it makes to the society, its income should be taxed rationally and in no way at a disadvantage than others. All actual expenses incurred wholly and exclusively for the performance of employment should be allowed as a deduction. This benefit and relief should be given to all salaried persons and the present extra tax burden in the case of employees earning Rs. 3,00,000 or more should be withdrawn. This is hampering the growth of IT industry in Pakistan. Any highly paid software engineer, who is capable of bringing enormous foreign exchange for the country, for this unjust tax burden would be discouraged to work in Pakistan. There is an urgent need to rationalize our tax policies towards the salaried class. They contribute substantially towards economic growth and social development. Let us not harm their productivity by regressive and unjust tax measures.