IN THE NAME OF ALLAH THE MOST BENEFICIENT THE MOST BENEVOLENT

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Preface
This report is based on the Presentation regarding the facilities provided by the employer to the employees. The main objective of this report is to give detailed explanation for the different facilities provided and how Income Tax Ordinance 2001 has provided treatments for such facilities. The report is focused on three types of facilities i.e. accommodation facility, medical facility and conveyance facility. Facilities are described in a very easy and understandable ways with the help of illustrations; the solutions to the illustrations are completely based on the guidelines provided by the Income Tax Ordinance, 2001 of Pakistan. We hope this report will be helpful for the readers to better understand the tax treatments and nature of facilities provided by the employers to the employee. This report is only applicable for Pakistan.

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Acknowledgements
We are thankful to Almighty Allah for the countless blessing and help, which enabled us to give our presentation and to complete this report work. We wish to extend our sincere appreciation to our course instructor Ms. Shireen Ejaz, we are thankful to her for her extremely valuable advises and help.

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Table of Contents
1.0- Income Tax Laws in Pakistan..7
1.11.21.3Income Tax Act, 1922...7 Income Tax Ordinance, 19797 Income Tax Ordinance, 20017

2.0- Salary..8 3.0- Scope of Salary Income.8 4.0- Nature of Facilities9 4.1- Allowance..9 4.2- Perquisites....10 5.0- Major Facilities10 6.0- Accommodation Facility.....11
6.1House Rent Allowance....11
6.1.1- Tax Treatment.....11 6.1.2- Illustration/Solution...11

6.2- Accommodation Facility/Perquisite12

6.2.1- Tax Treatment.12 6.2.2- What is M.T.S..12 6.2.3- Illustration/Solution...12

6.3-

Related Notes...13

7.0- Medical Facility...15

7.1Medical Allowance......15
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7.1.1- Tax Treatment.15 7.1.2- Illustration/Solution...15

7.2- Medical Facility/Charges/Reimbursements.........16

7.2.1- Tax Treatment.16 7.2.2-Illustration/Solution....16

8.0- Conveyance Facility....17

8.1Conveyance Allowance.......17
8.1.1- Illustration/Solution...17

8.2- Conveyance Facility for Personal Use.........17

8.2.1-Illustration/Solution....18

8.3- Conveyance Facility for Personal and Official Use........18

8.3.1-Illustration/Solution....18

9.0- Numerical (All Facilities)19 10.0- References20

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1.0- Income Tax Laws in Pakistan

Historically, there have been three laws imposing tax on income in Pakistan:

1.1-

Income Tax Act, 1922:

Before the independence of Pakistan, Income Tax Act 1922 was implemented in

Sub-Continent and after the independence Islamic Republic of Pakistan implemented this Act as it is because at that time it was not possible to provide its own Income Tax rules.

1.2-

Income Tax Ordinance, 1979:

Income Tax Ordinance 1979 was promulgated through the Finance Ordinance on

28th June, 1979 and came into force on the 1st July of the same year. It adopted all the basic concepts of the repealed Income Tax Act 1922 and this law continued to prevail in the country for 22 years.

1.3-

Income Tax Ordinance, 2001:

Government felt that after the 22 year of service, the law is not fulfilling the

requirements of a modern taxation system thus Government formed a commission and on its recommendations Income Tax Ordinance 1979 was replaced by Income Tax Ordinance 2001, which is claimed simple, less complicated and effort to make it easy to understand even for a lay man. There are 13 Chapters in Income Tax Ordinance, 2001.  Chapter are divided into Parts  Parts may be further sub-divided into Divisions  Divisions consists of Section No. of original sections No. of omitted sections 240 11
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No. of sections inserted later on No. of current sections No. of schedules

37 266 07

2.0- Salary 2(55):

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

3.0- Scope of Salary Income:

According to Income Tax Law scope of salary include following items: 1. Salary and Wages 2. Annuities, Gratuities and Pensions 3. Fees, Commissions and Allowances 4. Perquisites 5. Profits in lieu of Salary 1. Salary: Salary means fixed weekly or monthly remuneration for the job done. 2. Wages: Wages means amount of money earned by labor and these are payable on daily, hourly or piece rate basis. 3. Annuities: Annuities are the amounts paid by the employer annually. 4. Gratuities: Gratuity is a lump-sum amount received by the employee from his/her employer normally at the time of retirement.
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5. Pensions: Pension means the amount received from the past employer after retirement. 6. Fees: A fee is the amount of money paid by employer to his/her employee on the basis of work performed. 7. Commission: Commission is the amount of money which is paid in addition to salary to employee by his/her employer. E.g. paid on profits/sale 8. Perquisites: Perquisites means facilities or benefits provided by the employer to his/her employee. E.g. Value of accommodation facility, Value of conveyance facility 9. Profits in lieu of or in addition to salary or wages: These are the amounts paid by employer to the employee in addition to his/her salary. E.g. Bonus received from employer, medical allowance, accommodation allowance, conveyance allowance

4.0- Nature of Facilities:

The Facilities provided by employer to employee can be divided into types on the bases of its nature:

4.1-

Allowances:
Allowances are part of profit in lieu of salary, they are additional amounts added to

the salary of employees, and cash is involved. These are monetary benefits.

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4.2-

Perquisites:
Perquisites are the benefits given to employees, cash is not involved but the benefits

of cash are certainly involved. These are non-monetary benefits.

5.0- Major Facilities:

Following are the three major facilities provided by the employers to the employees: 1. 2. 3. Accommodation Facility Medical Facility Conveyance Facility

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6.0- Accommodation Facility:

Accommodation can be defined as the place to live in, and the accommodation facility is provided by the employer to the employee to provide him with a place to live in i.e. perquisite or to make him able to live some place i.e. allowance The Accommodation Facility can be divided into two types: 1. House Rent Allowance 2. Accommodation Facility

6.1-

House Rent Allowance:

It is the monetary benefit provided by employer to employee in addition to his/her

salary. 6.1.1- Tax Treatment: According to Income Tax Law, 2001 the whole amount given by employer to employee as house rent allowance will be taxable 6.1.2- Illustration: Mr. XYZ is working in an ABC company and receiving basic salary of Rs. 40000 p.m. ABC Company is also paying him Rs.10000 as house rent allowance p.m. What will be the taxable income of Mr. XYZ? Solution: The solution to the illustration according to the Income Tax Ordinance 2001 will be as follows: Rs. Basic Salary @ Rs. 40,000 p.m. (Rs. 40,000 12) Add: House Rent Allowance @ Rs.10,000 p.m. (Rs. 10,000 12) Rs. 480,000 120,000
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Completely Taxable Taxable Income of MR. XYZ

120,000 600,000

So, the tax payable of Mr. XYZ will be calculated on Rs. 600,000

6.2-

Accommodation Facility/Perquisite:
It is the non-monetary benefit, in which furnished or un-furnished house is provided

by employer to employee as a perquisite. 6.2.1- Tax Treatment: According to Income Tax Law, 2001 the Value of Accommodation will be calculated as follows: 1. The amount that would have been paid by the employer in case accommodation was not provided 2. 45% of M.T.S of Basic Salary 3. Whichever of (1) or (2) is higher will be taxable 6.2.2- What is M.T.S M.T.S stands for minimum of time Scale. Every employee is provided with the salary scale, which looks as follows: 20,000-3,000-35,000 M.T.S can be defined as the amount where salary scale starts. So, for the above mentioned scale the M.T.S is Rs 20,000 6.2.3- Illustration: Mr. XYZ is working in an ABC Company and receiving basic salary of Rs.40,000 p.m. his employer provides him with rent free accommodation; he was entitled to an accommodation allowance of Rs. 10,000 p.m. if accommodation

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was not provided to him. Scale (30,000-5,000-50,000), what is Mr. XYZ taxable Income? Solution: The solution to the illustration according to the Income Tax Ordinance 2001 will be as follows: Rs. Basic Salary @ Rs. 40,000 p.m. (Scale: 30,000-5,000-50,000) (Rs. 40,000 12) Value of Accommodation 120,000 (1) Accommodation Allowance @ Rs.10,000 p.m. (Rs. 10,000 12) (2) Accommodation Facility 162,000 (45% M.T.S of Basic Salary 12) (45% 30,000 12) Whichever of (1) or (2), is higher Taxable Income of MR. XYZ Rs. 480,000

162,000 642,000

So, the tax payable of Mr. XYZ will be calculated on Rs. 642,000

6.3-

Related Notes:
Following are the important points to consider during the calculation of Value of Accommodation Facility: a. M.T.S is not known: If M.T.S is not available then basic Salary will be used in calculation of Value of Accommodation. b. Accommodation to Govt. Employees in Small Cities/Areas: If the accommodation is provided to the government employees that are living in small city, area or place the instead of 45 % of M.T.S. of Basic Salary
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30% will be charged to give them tax benefit and to encourage the government employees to provide their services in small areas also. This will only apply if the area or city is known and the tax authority considered that area or city as small city. c. If Area of Accommodation is not known: If the area of accommodation is unknown then calculations will be made according to large city using 45% of M.T. S. of Basic Salary for the calculation of Accommodation Value.

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7.0- Medical Facility:

According to Clause 139 of part 1 (Exemption from total income) of 2nd Schedule of Income Tax Ordinance, 2001; medical facility can be of two natures which are as follows:

1. 2.
7.1-

Medical Allowance Medical Charges, Hospital Charges and Medical Reimbursements

Medical Allowance:
It is the monetary benefit provided by employer to employee in addition to his/her

salary. 7.1.1- Tax Treatment: If the medical allowance is provided by the employer to the employee, then the medical allowance will be exempt up to 10% of basic salary of employee. 7.1.2- Illustration: Mr. XYZ annual salary is Rs. 240,000. His employer also provides him medical allowance Rs.5000 per month. What is the total income of Mr. XYZ? Solution: The solution to the illustration according to Income Tax Law, 2001 will be as follows: Rs. Basic Salary Add: Medical Allowance Exempt (10% of basic salary) Included in total Income Total Income 60,000 (24,000) 36,000 2,76,000 Rs. 240,000

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7.2-

Medical Charges, Hospital Charges and Medical Reimbursements:

It is a perquisite, in which employer pays all the hospital charges/medical expenses to

the employee. 7.2.1- Tax Treatment: Medical Charges, Hospital Charges and Medical Reimbursements will be completely exempt if following conditions are full filled:  NTN of medical practitioner/hospital and employer's attestation for bills are available.  Not in accordance with terms of employment: The amount provided is fully taxable. 7.2.2- Illustration: Mr. XYZs annual salary is Rs. 240,000. His employer also reimbursed him medical charges Rs. 60,000. The employee has showed the NTN of the hospital to his employer. What is the total income of Mr. XYZ? Solution: The solution to the illustration according to Income Tax Law, 2001 will be as follows: Rs. Basic Salary Add: Medical charges Exempt (wholly) Included in total Income Total Income 60,000 (60,000) 2,40,000 Rs. 240,000

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8.0- Conveyance Facility:

Conveyance can be defined as the means of transportation provided by the employer to the employee; conveyance facility can be of two natures: 1. Conveyance Allowance 2. Conveyance provided for Personal Use 3. Conveyance provided for Personal and Official Use

8.1-

Conveyance Allowance:
Conveyance allowance meaning thereby the expenses for going from the employees

residence to office or vice versa must be deemed to be included in our pay scale. 8.1.1- Illustration: Mr. XYZ annual salary for the tax year 2011 is Rs. 200,000. He was also provided Rs. 2500 per month as conveyance allowance by his employer. Calculate his taxable income Solution: Rs. Basic Salary Conveyance allowance @Rs. 2500 p. m. Fully taxable Taxable Income Rs. 200,000 30,000 2,30,000

8.2-

Conveyance provided by Employer for Personal use of Employee:

If employer has provided a conveyance to employee for purely personal use, 10% of

the cost which employer paid for acquiring the motor vehicle will be included in the taxable income of employee.

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8.2.1- Illustration: Mr. X annual salary for the tax year 2011 is Rs. 500,000. He was also provided a car was his personal use by his employer. The car was purchased by the employer for Rs. 1,000,000 Calculate his taxable income Solution: Rs. Basic Salary Value of conveyance facility 10% of acquisition cost of the car (10% of Rs. 1,000,000) Taxable Income Rs. 500,000 100,000 600,000

8.3-

Conveyance provided partly for Personal and Official use:

When a motor vehicle is provided b the employer to be used by the employee both for

official and personal purposes, 5 % of the cost paid by the employer for acquiring the motor vehicle will be included in the income of the employee. 8.3.1- Illustration: Mr. X annual salary for the tax year 2011 is Rs. 500,000. He was also provided a car was his personal as well as for the office use by his employer. The car was purchased by the employer for Rs. 1,000,000. Calculate his taxable income Solution: Rs. Basic Salary Value of conveyance facility 5% of acquisition cost of the car (5% of Rs. 1,000,000 ) Taxable Income 50,000 5,50,000
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Rs. 500,000

9.0- Numerical (All Facilities):

Mr. Qasim is working in XYZ Company with the salary scale of (Rs.12,000-1,00015,000). His basic salary for the year ended 30th June, 2011 was Rs.13000 p.m. And he also

enjoys following perquisites and allowances: Rs. Accommodation facility Conveyance Facility Medical allowance 75000 (P.A) 70000 (Personal and Official Use) 26200 (P.A)

Requirement: Calculate the Total Income of Mr. Qasim

Solution:
Mr. Qasim Tax Year: 2011 Tax Year Ended: 30/6/2011 Residential Status: Resident Computation of Total Income Rs. Basic salary (13000x12) Add: Conveyance Facility For personal and official use (70000 x 5%) Medical allowance Exempt 10% of basic Salary (156000 x 10%) Accommodation facility: (a) Value of Accommodation (b) 45% of minimum of time scale (45% * 12,000) whichever is higher from a & b Total Income Rs. 156000

3500 26200 (15600) 75000 64800 75000 245100 10600

So, the taxable Income of Mr. Qasim is Rs. 245,100

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10.0- References:
1. 2. Income Tax Ordinance, 2001 Income Tax: Principles and Practice by Muhammad Muazzam Mughal, Year (2011-2012)

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