Daily Times

The proposed taxation under Finance Bill, 2021 of salary income including reimbursed medical expenses or medical allowance for the first time in Subcontinent since the introduction of income tax law in 1886, low and middle income groups, instead of getting any relief will suffer increase in their tax burden, especially when notional benefits like free or concessional loans, transport facilities, medical facilities are includable in employees’ salary. An analysis of the Finance Bill, 2021 shows that the “promise” of not further burdening salaried persons, especially low-paid employees, has not been kept. On the contrary, a vast majority of salaried persons, who are presently below the 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 healthcare. This will certainly increase the 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 relating to medical treatment or hospitalization or both as per terms of employment. 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 has been shown, no matter how much the employee actually spends for healthcare. The impact of the proposed amendment, in the case of civil and military employees, especially for low and middle income groups, is going to be enormously high as highlighted in Budget 2021-22 and erratic taxation, Daily Times, June 13, 2021.

The Federal Board of Revenue (FBR) issued a clarification on June 14, 2021 as under:

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

FBR has clarified that withdrawal of exemption & reduced rates should not be confused with 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. The figures of revenue generation of Rs.1.82 billion reported by the Express Tribune in this regard are absolutely unwarranted and misleading.

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. FBR firmly believes that this change will not result in any significant burden on taxpayers. Similarly, 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 were wholly exempt have been proposed for rationalization of salary tax regime rather than as revenue generation measure.

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, an 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.

The 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”.

The above clarification was issued erroneously as clause (39) Part I of the Second Schedule to the Income Tax Ordinance, 2001 has nothing to do with unjustified proposed taxation of medical facility/allowance or other allowances mentioned in Press report [Govt  proposes to slap Rs. 10 billion taxes on salaried class]. It was dubbed as “undue, unwarranted and unjustified” in its (mis)clarification by the FBR. The report noted as under:

“The Finance Bill 2021 showed that the government omitted Clause 139 of the Ordinance that deals with giving exemptions on employees’ medical reimbursement. This has been done to generate Rs1.82 billion revenue.

The Rs1.8 billion revenue impact is lower than Rs2 billion revenue loss that the government would sustain due to proposed reduction in the capital gains tax (CGT) on trade of securities at the stock market. The government has reduced the CGT rate from 15% to 12.5%.”

The above report is legally correct as explained in Budget 2021-22 and erratic taxation, Daily Times, June 13, 2021 as under:

“Clause (139), Part I of the Second Schedule of the Income Tax Ordinance, 2001 is proposed to be omitted through Finance Bill, 2021 reads as under:

(a) The benefit represented by free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment:

Provided that National Tax Number of the hospital or clinic, as the case may be, is given and the employer also certifies and attests the medical or hospital bills to which this clause applies;

(b) any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment.                                    

While complete focus by FBR and many experts and analysts is on reduction in custom duties, corrective measures and business friendly budget, salaried individual has again been penalised as narrated in Govt  proposes to slap Rs. 10 billion taxes on salaried class and earlier in Budget 2021-22 and erratic taxation, Daily Times, June 13, 2021.

The medical facility/reimbursement and medical allowance provided by the employer has been proposed to be taxable as against the current exempt position narrated. The disastrous impact of this withdrawal of this exemption can be understood with the following examples:

1. Mrs. A, a widow, is supporting a family of five, parents-in-law and three minor children. Her present basic salary is Rs. 1,800,000 per annum that excludes 10% exempt medical allowance and her tax liability is Rs. 90,000. From 1st July 2021, if medical allowance becomes taxable, her total salary would be Rs. 1,980,000 on which she would have to pay tax of Rs. 117,000—an increase of 30%.
2. Mr. Y, a government servant is presently getting Rs. 600,000 salary which is below taxable, along with medical reimbursement of around Rs. 40,000 per annum for medical expenses of his dependents that include old parents. From  July 1, 2021 he will have to pay tax of Rs. 2,000 whereas earlier his liability was zero.
3. Mr. X, salaried individual working for a multinational, earning annual salary of Rs. 8,000,000 and paying monthly tax of Rs. 112,083 withheld by employer under section 149 of Income Tax Ordinance, 2001. Unfortunately, he underwent a major surgery on July 1, 2021 and cost Rs. 4,000,000 reimbursed by employer on July 1, 2021. For withholding tax purposes for July 2021, it is added in his taxable salary that is now 12,000,000 and employer to withhold tax on yearly income of 12,000,000, an increase of 33%! This will fall in the 9th slab now, from earlier 8th and monthly withholding would now be Rs. 195,417 that means an increase of 57%.

As evident from above, the only benefit of medical reimbursement or free medical facility left with salaried class is intended to be withdrawn but the Federal government, without increasing slab rates, has tacitly increased tax burden of 57% in the above example. This impact has not been highlighted by anyone posing as tax experts and all-knowing anchors on popular TV shows. Obviously it will affect all government employees, including those working in FBR, or will they create a special exemption for themselves like clause (27) of Part II of the Second Schedule to the Income Tax Ordinance, 2001 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”. It shows the hollowness of the PTI Government’s claims that it is committed not to increase the tax burden of employees and tall claims of prioritizing health needs of all citizens. The reality speaks otherwise as discussed above”.

The FBR, while issuing clarification, without applying mind, assumed that provision under discussion was/is clause (39) of Part I of the Second Schedule to the Income Tax Ordinance, 2001 while in both Govt  proposes to slap Rs. 10 billion taxes on salaried class and Budget 2021-22 and erratic taxation, Daily Times, June 13, 2021, it was clause (139) of Part I of the Second Schedule to the Income Tax Ordinance, 2001.

Clause (39), Part I of the Second Schedule to the Income Tax Ordinance, 2001 became redundant after section 12(2)(c) of the Income Tax Ordinance, 2001. However, the FBR for 20 years failed to take note of it till the time it was explained by 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 subordinate 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. Accordingly, withholding of income tax on the aforesaid amounts is hereby declared to be illegal and without lawful authority. Consequently, both the constitutional petitions are allowed along with listed applications. Respondents are directed not to withhold any amount of income tax from judicial allowance and special judicial allowance of the Members of establishment of Sindh High Court as well as the Members of establishment of subordinate judiciary in Province of Sindh. The amounts already deducted from the salary of the Members of establishment of Sindh High Court as well as to the subordinate judiciary, shall be refunded by the FBR, on their filing refund applications in accordance with law, preferably, within a period of three months from the date of such claims’ ‘.

Before the above judgement, FBR never took notice of section 12(2)(c) of the Income Tax Ordinance, 2001 vis-à-vis the fact that the same language contained in clause (39) of the repealed Income Tax Ordinance, 1979, later appeared without any justification as clause (39), Part I of the Second Schedule to the Income Tax Ordinance, 2001. This shows the level of understanding of simple and unambiguous provisions of section 12(2)(c) of the Income Tax Ordinance, 2001 on the part of some all-knowing wizards sitting in the FBR misconstruing it as exemption clause (36) under discussion which is now proposed to be deleted through the Finance Bill, 2021. In the repealed Income Tax Ordinance, 1979, clause (39) Part I of the Second Schedule read as under:

“(39) Any special allowance or benefit (not being entertainment or conveyance allowance or other perquisite within the meaning of sub-section (2) of section 16 specially granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit”.

In the Income Tax Ordinance, 2001, (39) Part I of the Second Schedule read as under:

“(39) Any special allowance or benefit (not being entertainment or conveyance allowance) or other perquisite within the meaning of section 12 specially granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit”.

Interestingly, clause (39) of Part I of the Second Schedule to the Income Tax Ordinance, 2001 was copied from repealed Income Tax Ordinance, 1979 having the same number and language, expect earlier salary income was taxed under section 16 of the repealed Income Tax Ordinance, 1979 and now under section 12 of Income Tax Ordinance, 2001.

Section 12(2)(c) of the Income Tax Ordinance, 2001 reads as under:

Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including—

(c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment.

[underlined by us for emphasis]

Section 12(2)(d) of the Income Tax Ordinance, 2001 says “salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including any amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment”. In the presence of this provision, the Finance Bill, 2021 is proposing amendment:

“In section 12, in sub-section (2), after clause (c), the following explanation shall be added, namely:-

“Explanation.– For removal of doubt, it is clarified that the allowance solely expended in the performance of employee’s duty does not include

(i)             allowance which is paid in monthly salary on fixed basis or percentage of salary; or

(ii)       allowance which is not wholly, exclusively, necessarily or actually spent on behalf of the employer”.

The above retrospective (curative) amendment by way of Explanation intends to nullify the judgement of Sindh High in Muhammad Ayaz Khan & Others v Federation of Pakistan & Others (2020) 122 TAX 187 (H.C. Kar.) is again faulty. Since, in curative amendment, the judgement of Sindh High is not specifically overruled, it will not affect the past and closed matters as decided by the Supreme Court in a number of cases.

It is worthwhile to mention that all allowance including judicial allowance and special judicial allowance of the judges of the Supreme Court and High Courts are exempt under clause (56), Part I, Second Schedule to the Income Tax Ordinance, 2001. The intended amendments in the Finance Bill, 2021 aimed at denying the amount of judicial allowance and special judicial allowance paid to tax establishment of any High Court as well as the members of establishment of subordinate judiciary in any province. Does this not violate Article 25 of the Constitution of the Islamic Republic of Pakistan? All the members of Senate and National Assembly, above party affiliations, should remove this anomaly in the Finance Bill, 2021.

The Prime Minister Imran Khan must ask the Finance Minster to amend the Finance Bill, 2021 as per procedure laid down in the Constitution and must retain clause (139), Part I of the Second Schedule of the Income Tax Ordinance, 2001. Millions of young people are dependent on their parents being salaried persons and taxing them for a right of life, healthcare services, 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 Minister should also order a probe into how many officers of BS 20-22 have been taking benefit of clause (27) of Part II of the Second Schedule as well as using official transport? It should also be ascertained why this matter of abuse of the law was not brought to the notice of the Government and Parliament. Why did the officials of FBR not apprise the Finance Minister about withdrawing this clause that benefits officers in Grade 20 to 22?

Section 13(11) of the Income Tax Ordinance, 2001 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”.

Section 39(1)(j) of the Income Tax Ordinance, 2001 declares the following as income chargeable to tax:

“The fair market value of any benefits, whether convertible to money or not, received in connection with the provision, use or exploitation of property”.

The Prime Minister is determined to uproot corruption and therefore must order FBR for recovery of lost revenue of amount due from all servants of State who received plots or lands or any other benefit and did not pay due tax under section 13(11) and ection 39(1)(j) of the Income Tax Ordinance, 2001. The recovery of this huge amount will offset benefit given to employees by employers under clause (139), Part I of the Second Schedule of the Income Tax Ordinance, 2001.

In any case, the State is bound to provide healthcare to all its citizens as its constitutional obligation, explicitly explained by the Supreme Court of Pakistan in Shehla Zia v WAPDA (PLD 1994 SC 693) and it is binding under Article 189 of the Constitution of Islamic Republic of Pakistan. 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 would be a brazen highhandedness and tax brutality. The extension of free healthcare to the needy is very close to the heart of Premier, Imran Khan. 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.

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Ms. Huzaima Bukhari, MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram and Huzaima Ikram & Ijaz, leading law firms of Pakistan. From 1984 to 2003, she was associated with Civil Services of Pakistan. Since 1989, she has been teaching tax laws at various institutions including government-run training institutes in Lahore. She specialises in the areas of international tax laws, corporate and commercial laws. She is review editor for many publications of Amsterdam-based International Bureau of Fiscal Documentation (IBFD) and contributes regularly to their journals.

She has co-authored with Dr. Ikramul Haq many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes, Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Dr. Ikramul Haq, is Pakistan Tackling FATF: Challenges & Solutions

available at: https://www.amazon.com/dp/B08RXH8W46

She regularly writes columns/articles/papers for Pakistani newspapers and international journals. She has contributed over 1500 articles and research papers on issues of public finance, taxation, economy and on various social issues in various journals, magazines and newspapers at home and abroad.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, IT, intellectual property and international tax laws. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at: https://www.amazon.com/dp/B08RXH8W46

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax.

He regularly writes columns/articles/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.