Tax on Tax Calculation

[ArsalanYousuf]

main tax accountant hoon. yaha kuch employees ka tax company borne ker rahe hai. Mujhe ek baat sey problem hori hai k Tax on Tax kase compute kiya jaey.
For Example annual salary ek bandey ki hai Rs. 2,800,000. Is per Tax on Tax kiss thera compute kerengey q k jab main gross up kerta hoon salary toh slab change hojata hai. or mujhe marginal relief ka bhi impact laina. Mainey KPMG sey bhi consult kiya but unho ney bhi sahe jawab nae diya.
Mainey Petiwala ki book keregi for Tax Year 2011
Usmain bari achi tarekey sey samjhaya huwa hai but usmain slab change honey per tax on tax ki koi example nae. Ager kisi bandey ney petiwala ki book perhi toh woh ziyada behter samaj sekta hai tax on tax ki computation.

your prompt reply will be appreciated.

[LapTop]

Arsalan Bhai,,,
Sada sa rule hay k agar employee ki income par employer tax dayna chahta hay to pahly employee ki income par tax calculate karyn gay, jo tax amount bany ga usy employee ki taxable income may add kar k dobara say tax calculate karyn gay or dosri bar jo tax bany ga wo tax employeer ada kary ga.

Ab chahy ap tax marginal relief k sath nikalyn ya us k baghar ye ap par depend karta hay k aap ko kis tarhan say saholat ho.

Agar employee ki taxable income 2800000 hay
To tax rate 16% k hisab say us ka tax 448000 banta hay.
Ab agar employer tax ada karna chahta hay to ap 448000 ko employee ki taxable income may add kar dayn, to employee ki taxable income 3248000 ho jaye gi,
Is par tax rate 17.5 k hisab say 568400 tax bany ga ab ye tax employeer jama karwaye ga.

[ArsalanYousuf]

App ney ek impt baat miss kerdi..

daikey abb

Salary Paid by Employer to employee Rs. 2,800,000
Salary Paid by Employer to FBR in form of Tax Rs. 568,400 (as per your calculation)

total taxable income (2,800,000 + 568,400) Rs. 3,368,400

is taxable income per ab rate lagega 17.5% = Rs. 589,470 (wapis change hogiya tax) actully we paid tax 568,000

ab main calculation kerta hoon based on my knowledge

Taxable income before Tax on tax = Rs. 2,800,000
Tax as per 17.5% (not 16% coz humey pata hai slab change hojaiga toh hum 17.5% laingey rather den 16%)
Tax banega Rs. 490,000 (2,800,000 x 0.175)
Ab hum tax on tax ki calculation keregney (490,000 / 0.825) Rs. 593,939
Toh ab Taxable income inclusive Tax on Tax (2,800,000 + 593,939) Rs. 3,393,939
Ab is taxable income pey tax rate lagae (3,393,939 x 0.175) Rs. 593,939 (yeh wohi amount hai jo humney tax authority ko pay kiya hai)

Hum ney (490,000 / 0.825) yeah formula laga k gross up kerdiya.. or yehe ITO kheta hai.

Yeah actually ager itna simple hota toh main kabhi is forum mian yeah topic nae rekhtha.. ek or baat app petiwala ki Tax Year 2011 ki book karedey us main ek chapter hai Tax on Tax woh perhey toh clarify or hojaiga.

Mujhe bus yeah confirm kerna hai How to incorporate Marginal Relief on it.

ager koi or tax ki behter knowledge rekhta hai please comment

[faisal_desperado]

Dear Arsalan,

Laptop is correct and he has correctly mentioned that remaining tax of Rs. 120,400 will have to be paid by the employee, if you have some doubts then go through the ordinance.

Your calculation is altogether wrong.

Furthermore, Marginal relief will not be favourable in your case, so you will have to pay tax without using marginal approach.

Best Regards,

Faisal.

[olympia]

As per Laptop,
"Is par tax rate 17.5 k hisab say 568400 tax bany ga ab ye tax employeer jama karwaye ga."

As per Faisal,
Laptop is correct and he has correctly mentioned that remaining tax of Rs. 120,400 will have to be paid by the employee,

i think emplyer has to pay an increased amount of tax which is 568400 instead of 448000.
Thori confusion he please clear the statements.

[faisal_desperado]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by olympia</i>
<br />As per Laptop,
"Is par tax rate 17.5 k hisab say 568400 tax bany ga ab ye tax employeer jama karwaye ga."

As per Faisal,
Laptop is correct and he has correctly mentioned that remaining tax of Rs. 120,400 will have to be paid by the employee,

i think emplyer has to pay an increased amount of tax which is 568400 instead of 448000.
Thori confusion he please clear the statements.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Which confusion is required to be clarified? you should have mentioned!

To my apprehension, Laptop meant "employee" and not "employeer" (which is incorrect) and i considered employee while replied.

Rs. 120,400 has been arrived at by deducting pre amount of tax from proposed tax (i.e. 568,400 - 448,000).

If we assume that Rs. 120,400 will be paid by the employer, then this amount of Rs. 120,400 will again be added into the taxable income of employee, since it would again be considered as perquisite from employer to the employee, and then resultant effect will be as follows;

Taxable income -------------------- 3,248,000
Add proposed perquisite ----------- 120,400
Revised Taxable income ------------ 3,368,400

Tax on revised income ------------- 589,470 (3,368,400*17.5%)
Less Tax Already paid ------------- 568,400
Excess to be paid by Employee ----- 21,070

Rs. 21,070 will have to be paid by employee, however, if Rs. 21,070 is paid by the employer again, then taxable income will have to be calculated again by adding Rs. 21,070 into the taxable income of the employee, since it will be treated as perquisite to employee.

The aforementioned process will be continued till employee pays the final(least) contribution, before it preponderates due to upper slab.


Best Regards,

Faisal.

[Anfal Shabbir]

Dear Arsalan your calculation is correct, while faisal bhai and laptop are missing the point in thier earlier replies that the whole tax liability of the employee will be paid by the employer

As per laptop calculation RS.120,400 will be added in the income and the new tax liability will be derived, then again some liability will arise and will be added back in salary and this process will continue, to make the calculation simple, the gross-up method will be used and the same has been correctly produced by Arsalan, I am surprised to see that his calculation has been quoted wrong I totally agree with Arsalan and laptop this calculation is not so simple as u had explained

Faisal bhai the results of your long method and gross up method will be the same, you can check it

Best REgards

Anfal

[olympia]

Laptop & Faisal have a look on this file & tell me either i m correct in calculation or not

http//www.2shared.com/file/wJ4Zyx71/Tax_on_Tax_Calulation.html

[faisal_desperado]

Dear Anfal,

In my first post, i said that Laptop is correct and in my next post i clarified in which case he is correct and where incorrect, i.e. i assumed that Laptop is of the view that final payment will be paid by employee him self, so i agreed to his post.

As far as my statement regarding Arsalan's calculation to be incorrect in concerned, i still stand on the same view, since rate of subsequent slab has been used in earlier slab where it should not have been used, and the same is technically/conceptually incorrect.

The professional approach is to treat the employer's share of employee's tax as perquisite, and then change the rate if such necessity is arisen.

However, this is solely based on personal choice, and similarly i do have certain reservations to treat step wise approach to be correct, notwithstanding the fact that answer will be same in both cases.


Best Regards,

Faisal.

[faisal_desperado]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by olympia</i>
<br />Laptop & Faisal have a look on this file & tell me either i m correct in calculation or not

http//www.2shared.com/file/wJ4Zyx71/Tax_on_Tax_Calulation.html
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Olympia,

Your steps are correct however at Rs. 900,000, threshold will be changed and according rate will be changed.

At cell B37, you need to mention 9% instead of 7.5%, then calculation will automatically be changed due to formulae.

However, using marginal approach will surely help(in this particular case) to reduce the tax from the current level.

Let me know, if confusion is yet to be resolved.

Best Regards,

Faisal.

[olympia]

thanks faisal ) i just did as u said now our tax amoun is Rs 83,967 instead of Rs 68,837. am i right

[ArsalanYousuf]

Dear Faisal
"i still stand on the same view, since rate of subsequent slab has been used in earlier slab where it should not have been used,"

yes u r ryt but i need to clarify that i used next slab rate intentionally coz i knew that slab change hojaiga or ultimately mujhe next slab hi laina parega. however, mainey apney calculator main check kerliya tha k slab change hoga iseliye mianey 17.5per liya rather den 16per

furthermore, haan us case main marginal relief apply naey hora hai but ager hoo toh den hum kase takle karengey..

For Eg ager Taxable Income hai 2,400,000 or employer is paying whole tax.. ab compute kerey tax ki figure is main marginal relief ka impact aaiga...



Dear

[Anfal Shabbir]

Dear Faisal bhai

it is still not understandable that why Arsalan's calculation is technically and conceptually wrong, it is obvious that the tax slab is changing therefore the next slab is used

will u please guide us with some exmaple which can prove that the calculaiton is technically and conceptually wrong

Best Regards

Anfal

[LapTop]

Tax On Tax Calculator 2010-11 With marginal relief.

http//www.2shared.com/document/0u05pWSd/Tax_on_Salary_Tax_calculator_2.html

[ArsalanYousuf]

Dear Faisal

Example 1 #

Taxable Income ------------- 2,800,000
Tax on Tax (2.8m x 0.16)---- 448,000



Taxable Income before Tax ------------ 2,800,000
Perquisite (Tax Paid by Employer) ---- 448,000
Taxable income after tax ------------- 3,248,000
Tax Rate ----------------------------- 17.5%



Ab 2,800,000 ager taxable income ho toh humey phele sey pata chal giya k tax on tax ka jab impact aaiga toh automatically slab change hoga. Toh iseliye mainey 17.5% lailiya from beginning.

However, Tumhare tareeqey sey bhi answer wohi aaiga but mera tareeqa short hai.


Example 2 #


Taxable Income (Before Tax on Tax) ----------------- 2,400,000
Tax (16%) ------------------------------------------ 384,000
Tax on Tax (384,000/0.84) -------------------------- 457,143
Taxable Income inclusive of Tax on Tax ------------- 2,857,143

Ab slab change hogiya wapis (2,857,143 > 2,850,000) so ab humey shuru sey apni calculation kerni paregi but now on 17.5 % not on 16%

Taxable Income (before Tax on Tax) ---------A------- 2,400,000
Tax (17.5%) --------------------------------C------- 420,000
Tax on Tax (408,000 / 0.825) ---------------B------- 509,091
Taxable Income (after tax on tax) -------(A+B)------ 2,909,091
Tax paid by employer (2,894,545 x 0.175)----D------- 509,091
Thus, B = D

Ab hum tax authority ko batainey k Taxable Income is 2,909,091 and we paid tax to 'tax authority' is 509,091 which is equal to employer amount.

This same calculation is also approved by Tax partner KPMG

Conclusion
Tax on Tax k do step hotey hai

Phela first identify Tax Rate jo may be change hosekta hai
Second 'Gross up kerna' with same rate jo step one main calculate kiya.

may be it will clarify u.

warmest regards