Tax Management: Computing Taxable Income and Tax Liability.

Mr. Hussain Ahmad is an officer in a public listed company. He derived the following salary income during the tax year ended June 30, 2010:

Salary Income	Rs. (currency)
Basic Salary	50,000	(per month)
House rent allowance	22,500	(per month)
Utility allowance	5,000	(per month)
Medical allowance	6,000	(per month)
Leave encashment	50,000

1. Company also provides him with a 800CC car valuing Rs. 600,000 as per books of accounts. The car is used for official and personal purposes.
2. He has paid Alms of Rs. 25,000 to an approved institution
3. He paid a donation of Rs. 20,000 to a charitable institution for which a tax credit is allowed under section 61 of Income Tax Ordinance, 2001 (Refer to picture 1 attached below).
4. He paid a donation of Rs. 10,000 to an approved institution as specified in clause (61) of part 1 of second schedule.( Refer to picture 2 attached below)
5. He received a pension amount of Rs. 7,000 p.m. from his past employment in the government.

Required:

Compute the amount of taxable income and tax liability of Mr. Hussain for the tax year 2010.

PICTURE 1:

Income Tax Ordinance, Section 61 states the following:

PICTURE 2:

clause (61) of part 1 of second schedule states the following:

Section 61. Charitable donations.- (1) A person shall be entitled to a tax credit in respect of any sum paid, or any property given by the person in the tax year as a donation to - (a) any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law; (b) any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a Provincial Government or a local authority; or (c) any non-profit organization. Sub-section (1) substituted by Finance Act, 2003 which previously read as follows : "1) A person shall be entitled to a tax credit for a tax year in respect of any amount paid, or property given by the person in the tax year as a donation to a non-profit organisation." (2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely:- (A/B) XC where - A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part; B is the person's taxable income for the tax year; and C is the lesser of - (a) the total amount of the person's donations referred to in subsection (1) in the year, including the fair market value of any property given; or (b) where the person is - (i) an individual or association of persons, thirty per cent of the taxable income of the person for the year; or (ii) a company, fifteen per cent of the taxable income of the person for the year. (3) For the purposes of clause (a) of component of the formula in subsection (2), the fair market value of any property given shall be determined at the time it is given. (4) A cash amount paid by a person as a donation shall be taken into account under clause (a) of component C of sub-section (2) only if it was paid by a crossed cheque drawn on a bank. (5) The Central Board of Revenue may make rules regulating the procedure of the grant of approval under sub-clause (c) of clause (36) of section 2 and any other matter connected with, or incidental to, the operation of this section. SECOND SCHEDULE PART 1: Exemption from total Income Clause (61) (words "Subject to the provisions of section 61" omitted by Finance Act 2005), any amount paid as donation to the following institution, foundations, societies, boards, trusts and funds, namely: - (i) any Sports Board or institution recognised by the Federal Government for the purposes of promoting, controlling or regulating any sport or game; (ii) President's Fund for Afghan Refugees; omitted by Finance Act 2005 (iii) Fund for Promotion of Science and Technology in Pakistan; (iv) Fund for Retarded and Handicapped Children; (v) National Trust Fund for the Disabled; Etc. etc....... Provided that the amount so donated shall not exceed (a) in the case of an individual or association of persons, thirty percent of the taxable income of the person for the year; and (b) in the case of a company, fifteen percent of the taxable income of the person for the year. TAX RATES FOR SALARIED TAXPAYERS FOR TAX YEAR 2010 (EXTRACT) Sr.# Taxable income Tax Rate 1 Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000 4.50% 2 Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000 6.00% 3 Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000 7.50% 4 Where the taxable income exceeds Rs.900,000 but does not exceed Rs. 1,050,000 9.00% 5 Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs. 1,200,000 10.00% 6 Where the taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 1,450,000 11.00% Provided further that where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the Table, the income tax payable shall be the tax payable on the maximum of that slab plus an amount equal to: 0 20% of the amount by which the total income exceeds the said limit where the total income does not exceed Rs. 550,000 @ 30% of the amount by which the total income exceeds in each slab but total income does not exceed Rs. 1,050,000 () 40% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.2,250,000 Section 61. Charitable donations.- (1) A person shall be entitled to a tax credit in respect of any sum paid, or any property given by the person in the tax year as a donation to - (a) any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law; (b) any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a Provincial Government or a local authority; or (c) any non-profit organization. Sub-section (1) substituted by Finance Act, 2003 which previously read as follows : "1) A person shall be entitled to a tax credit for a tax year in respect of any amount paid, or property given by the person in the tax year as a donation to a non-profit organisation." (2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be computed according to the following formula, namely:- (A/B) XC where - A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this Part; B is the person's taxable income for the tax year; and C is the lesser of - (a) the total amount of the person's donations referred to in subsection (1) in the year, including the fair market value of any property given; or (b) where the person is - (i) an individual or association of persons, thirty per cent of the taxable income of the person for the year; or (ii) a company, fifteen per cent of the taxable income of the person for the year. (3) For the purposes of clause (a) of component of the formula in subsection (2), the fair market value of any property given shall be determined at the time it is given. (4) A cash amount paid by a person as a donation shall be taken into account under clause (a) of component C of sub-section (2) only if it was paid by a crossed cheque drawn on a bank. (5) The Central Board of Revenue may make rules regulating the procedure of the grant of approval under sub-clause (c) of clause (36) of section 2 and any other matter connected with, or incidental to, the operation of this section. SECOND SCHEDULE PART 1: Exemption from total Income Clause (61) (words "Subject to the provisions of section 61" omitted by Finance Act 2005), any amount paid as donation to the following institution, foundations, societies, boards, trusts and funds, namely: - (i) any Sports Board or institution recognised by the Federal Government for the purposes of promoting, controlling or regulating any sport or game; (ii) President's Fund for Afghan Refugees; omitted by Finance Act 2005 (iii) Fund for Promotion of Science and Technology in Pakistan; (iv) Fund for Retarded and Handicapped Children; (v) National Trust Fund for the Disabled; Etc. etc....... Provided that the amount so donated shall not exceed (a) in the case of an individual or association of persons, thirty percent of the taxable income of the person for the year; and (b) in the case of a company, fifteen percent of the taxable income of the person for the year. TAX RATES FOR SALARIED TAXPAYERS FOR TAX YEAR 2010 (EXTRACT) Sr.# Taxable income Tax Rate 1 Where the taxable income exceeds Rs.550,000 but does not exceed Rs.650,000 4.50% 2 Where the taxable income exceeds Rs.650,000 but does not exceed Rs.750,000 6.00% 3 Where the taxable income exceeds Rs.750,000 but does not exceed Rs.900,000 7.50% 4 Where the taxable income exceeds Rs.900,000 but does not exceed Rs. 1,050,000 9.00% 5 Where the taxable income exceeds Rs.1,050,000 but does not exceed Rs. 1,200,000 10.00% 6 Where the taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 1,450,000 11.00% Provided further that where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the Table, the income tax payable shall be the tax payable on the maximum of that slab plus an amount equal to: 0 20% of the amount by which the total income exceeds the said limit where the total income does not exceed Rs. 550,000 @ 30% of the amount by which the total income exceeds in each slab but total income does not exceed Rs. 1,050,000 () 40% of the amount by which the total income exceeds in each slab but total income does not exceed Rs.2,250,000