Tax Deduction at source from Salary
Tax Deduction at source from Salary is one of mainstream source of revenue for Government and has been consistent in tax collection. Every employer paying salary to an employee shall, at the time of payment, deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head “Salary” for the tax year in which the payment is made
The employer can deduct tax after making adjustment of tax withheld from employee under other (explained in later slides) and tax credit admissible under sections 61, 62, 63 and 64 during the tax year, after obtaining documentary evidence as may be necessary, for:
(i) tax withheld from the employee during the year;
(ii) any excess deduction or deficiency arising out of any previous deduction; or
(iii) failure to make deduction during the year
Important points on Tax Deduction at source from Salary
At the time of deducting tax at source, the person responsible for paying salary should keep the following points in mind:
- No tax is required to be deducted at source, unless the estimated taxable salary exceeds taxable limit.
- Directors’ fee tax is deductible at the rate of twenty percent
Directors’ Fee is included in the definition of salary but tax is not being deducted as per average rate of tax on the estimated income of the salaried individual.
Average rate of tax deduction as per section 149 on Director’s fee cannot be determined by the person paying the fee, since in most cases the person responsible for paying director’s fee is not the same person as the person responsible for paying salary.
The person paying the fee is not aware of the bracket in which the income of the Director falls.
As substantial amounts are generally paid as director’s fee, the rate of tax deduction is generally much lower than the average rate of tax on which tax was required to be deducted
Through the Finance Act, 2014, the rate of tax deduction for directorship fee, fee for attending board meeting or such fee by whatever name called shall be 20% of the gross amount payable The tax deducted shall be adjustable against income under the head salary.
ADJUSTMENT OF TAX CREDIT AND WHT BY EMPLOYERS
FBR explained changes vide Circular No. 1 of 2007 dated 2.7.2007 which reads as under:
Previously, employers while making deduction of tax, from salary paid to employees were authorized to adjust withholding tax collected on telephone subscription and private motor cars only. Amendment has been made in section 149, empowering the employer to;
(i) adjust tax withheld under other heads: and
(ii) allow tax credits available to an employee on—
(a) donations to approved NPOs (section 61);
(b) investment in shares (section 62),
(c) contribution to approved pension funds (section 63); and
(d) profit on debt (section 64).
The employers shall, however, be responsible to obtain documentary evidence and for correct application of relevant provisions of law.
This amendment will be effective from the tax year 2008 and onward.
Adjustment of tax liability of salaried taxpayers by employers being withholding agents
The employer shall obtain the evidence of payment of the aforesaid tax by the employee, before allowing adjustment for such payments claimed by the employee. The evidence shall be retained by the employer for production before the tax authorities when required by them
In order to ensure correct implementation of the aforementioned facility, the tax payments/deductions including those adjusted shall be reflected by the employer in the ‘certificate of deduction from salary’ as prescribed under rule 44 of the Income Tax Rules. 2002 which is issued under section 164 of the Income Tax Ordinance, 2001.
Tax Deduction at source from Salary
These payments/ deductions shall also be indicated separately in the quarterly and annual statements as required under section 165 and rule 51A of the income Tax Rules, 2002.”
- Where the employee claims or is entitled to any rebate under sections 61, 62 63 or 64. it is the duty of the employer to verify whether rebate is actually available or not. If rebate is not admissible, full deduction is to be made before the end of the relevant financial year.
- If by any reason, tax at any stage has been over-deducted or under-deducted, the deducting authority is allowed to make appropriate adjustments in the coming months within the tax year. No adjustment shall, however, be made after the end of the tax year [See circular No. 18 of 2004 above].