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Finance Bill 2021

Salaried class and tax brutality

Huzaima Bukhari & Dr. Ikramul Haq

The proposed taxation of salary income on gross basis, for the first time in Subcontinent since the introduction of income tax law in 1886, instead of giving any relief to low and middle income groups will increase their tax burden, especially when notional benefits like free or concessional loans, transport facilities, medical facilities are includable in employees’ income. An analysis of Finance Bill 2021 shows that “promise” of not further burdening the salaried persons, especially low-paid employees, has not been kept. On the contrary, a vast majority of salaried persons, who are presently below taxable threshold of Rs. 600,000 will now also pay tax due to withdrawal of concessions and exemptions on various allowances, perquisites and benefits, especially health care. This will certainly increase tax burden of low and middle income salaried persons.

The Finance Bill 2021 seeks to withdraw all kinds of benefits, concessions and exemptions presently available to salaried class including clause (139), Part I of the Second Schedule to the Income Tax Ordinance, 2001 [“the Ordinance]. This relates to medical treatment or hospitalization or both as per terms of employment on reimbursement basis with proof of actual spending. This is scarcely available to most of the private sector employees. However, in all cases for tax benefit purposes, medical allowance up to 10% of basic salary is tax free to compensate employees who take care of themselves and family members. The impact of proposed amendment, in the case of civil and military employees, especially for low and middle income groups, is going to be enormously high.

The Federal Board of Revenue (FBR) issued a clarification on June 14, 2021 (https://fbr.gov.pk/tax-on-salary–fbr-issues-clarification/153022) claiming: “Omission of Clause (39) of Part I of Second Schedule to the Income Tax Ordinance, 2001 is only of technical nature”.

The above clarification was issued erroneously as clause (39), Part I of the Second Schedule to the Ordinance has nothing to do with proposed taxation of medical facility or allowance dubbed as “undue, unwarranted and unjustified” by FBR in its clarification. The said report was legally correct, based on an article Budget 2021-22 and erratic taxation (https://dailytimes.com.pk/771957/budget-2021-22-and-erratic-taxation/) explaining that proposed deletion of clause (139), Part I of the Second Schedule to the Ordinance in Finance Bill, 2021 will create great hardship for employees both in public and private sector. It was also mentioned that high-ranking government officials in grade 20 to 22 are enjoying exemption under (27) of Part II of the Second Schedule to the Ordinance which says: “The tax on payments under the Compulsory Monetization of Transport Facility for Civil Servants in BS-20 to BS-22 (as reduced by deduction of driver’s salary) shall be charged at the rate of 5% as a separate block of income”.

The FBR, while issuing clarification misconstrued clause (139) as clause (39), Part I of the Second Schedule to the Ordinance, copied from repealed Income Tax Ordinance, 1979, though it became redundant in view of section 12(2)(c) of the Ordinance. For 20 years, FBR failed to take note of it. The alarm bell came after decision of the Sindh High in Muhammad Ayaz Khan & Others v Federation of Pakistan & Others (2020) 122 TAX 187 (H.C. Kar.) holding as under:

We are of the considered opinion that amount of judicial allowance and special judicial allowance paid to the Members of establishment of Sindh High Court as well as to the Members of the establishment of sub-ordinate judiciary of Province of Sindh falls within the exclusion in terms of clause (c) of sub- section (2) of section 12 of the Income Tax Ordinance, 2001, therefore, not part of their taxable salary income, hence, not chargeable to tax or deduction under section 149 of the Income Tax Ordinance, 2001.

Before the above judgement, FBR never took notice of section 12(2)(c) of the Ordinance vis-à-vis the same language contained in clause (39), Part I of the Second Schedule to the Ordinance. This shows the level of comprehension of provisions of the Ordinance on the part of FBR. 

Section 12(2)(c) of the Ordinance clearly says that “any allowance solely expended in the performance of the employee’s duties of employment”  shall not be part of taxable salary. Therefore, there was no need of creating specific exemption. Exemption is created when something is taxable/chargeable under any tax code.

The Finance Bill, 2021 now proposes an amendment retrospectively in section 12(2)(c) by way of “Explanation” that for “the removal of doubt”,  the allowance solely expended in the performance of employee’s duty does not include allowance which is paid in monthly salary on fixed basis or percentage of salary or one which is not wholly, exclusively, necessarily or actually spent on behalf of the employer”. This retrospective and amendment is also faulty as it does not specifically override the judgement of Sindh High Court. Unless it is done, the past and closed transactions cannot be reopened as decided by Supreme Court in a number of cases. Superior judicial allowance of the judges of the Supreme Court and High Courts is exempt under clause (56)(1)(b), Part I, Second Schedule to the Ordinance. The proposed amendment to tax the same in the hands of judges of subordinate Hugh Courts and their staff will be in violation of Article 25 of the Constitution. The members of National Assembly, above party affiliations, should remove this anomaly in the Finance Bill, 2021.                                                                           

The Finance Minster needs to amend the Finance Bill, 2021 as per procedure laid down in the Constitution and retain clause (139), Part I of the Second Schedule of the Ordinance. Millions of young people are dependent on their parents who are salaried persons. Taxiing a right of life, healthcare, is unconstitutional and against the vision of Prime Minister Imran Khan. The people voted for Pakistan Tahreek-i-Insaf (PTI) so that they would take the powerful predatory elites and tax cheats to task and not to over-tax the salaried class, especially low-paid employees.

The Prime Minter should also order a probe as to how many officers of grade 20-22 have been taking benefit of clause (27) of Part II of the Second Schedule to the Ordinance as well as using official vehicles. It is strange that this concessionary treatment for high-ranking officers is not proposed to be omitted in the Finance Bill 2021.

Section 13(11) of the Ordinance says: “Where, in a tax year, property is transferred or services are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the property or services determined at the time the property is transferred or the services are provided, as reduced by any payment made by the employee for the property or services”.

The Prime Minister claims to uproot corruption. It is thus imperative for him to order FBR to recover lost revenue of billions of rupees from all servants of state who received plots or lands or any other benefit without paying due tax under section 13(11) of the Ordinance. The recovery of this huge amount will offset exemption given to employees under clause (139), Part I of the Second Schedule to the Ordinance. The state is bound to provide healthcare to all its citizens as their fundamental right to life under the Constitution of Islamic Republic of Pakistan [“the Constitution] as explicitly explained by Supreme Court of Pakistan in Shehla Zia v WAPDA (PLD 1994 SC 693). It is binding under Article 189 of the Constitution.

The employers providing healthcare free to their employees or giving 10% fixed medical allowance of basic salary should be encouraged. The proposed taxation of this facility in the hands of the employees is a naked tax brutality. The extension of free healthcare to the needy is very close to the heart of Premier. Till the time, he is not able to provide Sehat Sahulat (health facility) Cards to all citizens, of course, priority must be given to the poorest of the poor, the benefit of clause (139) under discussion should not be withdrawn.


The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)

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