The central aim of a country’s tax policy is to establish a just and fair society where the share of taxes is paid by different economic groups commensurate to their financial position.

With the overall tax-to-GDP ratio close to 10pc and huge tax evasion, the policymakers put the burden of higher taxes on the salaried class. Being the largest documented category of taxpayers, the tax collected from the salaried persons amounts to Rs 92.525bn in withholding mode as per FBR year book 2015-16. Similarly, the salaried class provides the highest number of tax filers.

However, the salaried class faces several income tax issues. The first issue is the treatment of gross salary as income as per section 12 of the Income Tax Ordinance 2001.

The salary received by a person in gross terms in the forms of basic remuneration, allowances, perquisites, reimbursements etc. is spent on meeting different economic needs.of life.

The taxation of gross amount of salary without considering amounts spent on necessities of life is unjust and destroys the financial logic of treatment of salary as income because, practically, income is considered as being the difference between revenues and expenses.

The second issue is the treatment of tax credits and general relief measures. The tax credits are available to salaried class on donations, investment in capital markets, getting life insurance policy, making contribution to pension fund and the payment of fees of school of children. However, the issue is with their calculation methodology where the rule of average relief is applied by taking into account the ratio of gross tax and taxable income. Resultantly, the amounts eligible for tax credits become lower to the extent that amount of Rs100,000 eligible for tax credits gets a tax credit of only Rs1000 for an average salaried person.

The third issue is the application of withholding tax on salary that is adjustable. The withholding tax, being the central tool for the collection of income tax, is applied every time a salary is awarded to a worker irrespective of his/her relevant income tax slab. This practice results in collection of more tax from the salaried class as compared to their due share. Further, through an amendment in the budget 2016-17, the withholding tax slabs have been specified for the salaried class which has practically rendered the calculation of tax at the end of tax year a useless exercise.

The fourth area of concern is the delayed refunds claimed by the salaried class. As discussed above, the due tax from the salaried class is collected in withholding mode and the adjustments for tax credits, tax rebates and reductions claimed at the time of filing of tax returns results in refund of excess tax paid during the year.

However, the procedures involved in claiming of tax refunds are complex and involves lot of steps for getting the required refunds. As per section 170 of the Income Tax Ordinance 2001, the refunds are adjusted in the next year’s tax liability in most of the cases and only few salaried persons successfully get their due refunds from the FBR.

The fifth issue is the application of higher rates of taxes on the income of salaried persons as compared to the non-salaried business class. The highest rate of tax on salaried individuals is close to 30pc while the same rate is also applied on the income of non-salaried persons. Since the income of non-salaried persons is calculated on net basis after taking into account the relevant expenses incurred for earning that income, the salaried class is placed at disadvantageous position due to the taxation of salary on gross basis.

The sixth issue is the taxation treatment of various perquisites and facilities provided by employer to the employees. The FBR has drafted the Income Tax Rules 2002 to guide taxpayers in measuring the taxable amounts of various facilities i.e. house facility, car facility, children education facility, stock options, free utilities services etc. These rules use the market value of these benefits as a base for reporting the taxable amounts of an employee. The principle of market value in measuring the value of perquisites is of subjective nature and varies person-to-person. The resulting tax liability for an employee may get higher as a result of provision of different facilities by an employer to the employee.

Lastly, the income tax return form (both in online and hardcopy format) needs to be made simple and concise. The number of filers of income tax returns can be enhanced significantly by adopting a simple form with the use of commonly understandable terminologies. As a first step, a focal person can be appointed in the public and private sector organizations to help salaried class to file their tax returns.

The FBR should seriously take corrective steps and set up a separate committee to engage the salaried class on the above-mentioned issues.

Published in Dawn, Economic & Business, March 27th, 2017