10-15-2011, 08:52 PM
Salary is chargeable to tax on the basis of actually received in a tax year. Accordingly the arrears of salary received in lump sum are also chargeable to tax in the tax year in which received. As a result the income tax payable substantially increases, since the taxable income falls in a higher tax slab.
The taxpayer has an option to notify the concerned Commissioner by the due date of furnishing the return, that he/she has elected for the arrears of salary to be taxed as a separate block of income at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered (fixed tax) [Sub-section (7) and (8) of section 12 of the Income Tax Ordinance, 2001].
Following example will illustrate the effects and calculations
Salary for the year
Excluding arrears. Rs.1,000,000/-
Arrears (of last 2 years) Rs. 200,000 for each year. Rs.400,000/-
Calculation of income tax, if not electing-
Chargeable / total /taxable income (Excluding Arrears) 1000,000 * 9% = 90,000/-
Chargeable / total /taxable income (Including Arrears) 1,400,000 * 11% = 154,000/-
Calculation of fixed tax on arrears, at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered
Preceding Year 1st
Taxable income Excluding arrears 700,000 tax payable 42,000
Taxable income Including arrears 900,000 tax payable 67,500
Difference in Income Tax payable 25,500
Preceding Year 2nd
Taxable income Excluding arrears 600,000 tax payable 27,000
Taxable income Including arrears 800,000 tax payable 60,000
Difference in Income Tax payable 33,000
Total Difference 1st year + 2nd year 58,500
Calculation of tax liability, if electing
Income tax on chargeable /total / taxable income excluding arrears 90,000/-
Fixed tax on arrears calculated at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered 58,500
Total income tax liability 90,000 + 58,500 = 148,500
The taxpayer has an option to notify the concerned Commissioner by the due date of furnishing the return, that he/she has elected for the arrears of salary to be taxed as a separate block of income at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered (fixed tax) [Sub-section (7) and (8) of section 12 of the Income Tax Ordinance, 2001].
Following example will illustrate the effects and calculations
Salary for the year
Excluding arrears. Rs.1,000,000/-
Arrears (of last 2 years) Rs. 200,000 for each year. Rs.400,000/-
Calculation of income tax, if not electing-
Chargeable / total /taxable income (Excluding Arrears) 1000,000 * 9% = 90,000/-
Chargeable / total /taxable income (Including Arrears) 1,400,000 * 11% = 154,000/-
Calculation of fixed tax on arrears, at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered
Preceding Year 1st
Taxable income Excluding arrears 700,000 tax payable 42,000
Taxable income Including arrears 900,000 tax payable 67,500
Difference in Income Tax payable 25,500
Preceding Year 2nd
Taxable income Excluding arrears 600,000 tax payable 27,000
Taxable income Including arrears 800,000 tax payable 60,000
Difference in Income Tax payable 33,000
Total Difference 1st year + 2nd year 58,500
Calculation of tax liability, if electing
Income tax on chargeable /total / taxable income excluding arrears 90,000/-
Fixed tax on arrears calculated at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered 58,500
Total income tax liability 90,000 + 58,500 = 148,500
