THE Finance Act 2012 has brought two unique changes, one positive and the other negative. While taxation of capital gain on sale of immovable property is a positive step, taxation of salary income at a rate higher than that applied to business income is deplorable.

Further, taxation of different salary bands is defective, making them confiscatory, discriminatory and irrational.

The income tax on salary income shall be deducted from July 1 according the rates in the following table:

While there is no problem with the first three slabs, slab Nos. 4 to 6 have been structured in a manner to convert these slabs into slaps on the salaried person. These slabs should have been as below based upon the tax liability on the last band of income.

Since there was an obvious error of computation in the table given in the Finance Act, 2012, the FBR was expected to issue an SRO to rectify the mistake and clarify the same through its circular routinely issued every year to give departmental explanation of the amendments brought about in a Finance Act. While no SRO has been issued to rectify the mistake; astonishingly, Circular No.2 of 2012 issued on July 27 has tried to justify the erroneous taxation in the Finance Act, 2012 by giving the following faulty reasoning:

“Instead of applying tax rate on gross amount of salary, computation of tax is to be made through progressive tax rates. However, maximum relief has been provided to low salary income and the relief gradually decreases with the increase in salary. For taxpayers in the highest tax rate slab only basic exemption of Rs400,00 is provided and the benefit of lower rates of the intermediate slabs has not been passed on to taxpayers in this slab. This is apparent from the fact that for this slab, the rate is 20 per cent plus Rs420,000 (instead of Rs255,000 which would have been     the case if benefit of lower rate of previous slabs was provided to taxpayers in this slab). Similarly, relief in other slabs also decreases with increase in salary. In     slab(5),tax rate is 17.5 per cent plus 175,000 (instead of 167,500) and in slab (4), the rate is     15 per cent plus 95,000 (instead of 92,500). However, for first three slabs, benefit of the previous slab rate has been passed on.”

The above explanation is not correct:

* In the budget document while highlighting salient features of the Finance Act, 2012, the Parliament (as well the public) were informed of the effect of the amended tax rates for salaried persons in the following words:

“These concessionary measures will exempt 64,420 taxpayers besides reducing the effective tax rates and providing relief to the entire salaried and business communities”.

If explanation given by the FBR is correct (which it is not), then the effective rate for many salaried persons have increased. For example, a salaried person having annual salary of Rs2,600,000 will have to pay a tax of Rs440,000 in the tax year 2013 while his tax liability for the tax year 2012 was Rs416,000 which is against the intention of the legislature as pointed out earlier.

* If the explanation given by the FBR is accepted, instead of being progressive, the tax rates become confiscatory , unconstitutional, unethical and unjust.

For example, if a salaried person has a salary of Rs2,450,000, his tax liability will be Rs 253,750 leaving for him a take-home salary of Rs.2,196,250.

If he works hard and gets promotion and his salary is raised to Rs2,600,000, his tax liability will escalate to Rs 440,000 reducing his take-home salary to Rs2,160,000, causing a net loss of Rs36,250. So he will be just earning for the government.

Is it not confiscation? Legislature never intends to discourage progress, higher productivity, higher education and skills resulting in higher wages.

Taxation of salary income has historically been at a lower rate than business income. This pattern is not exclusive to Pakistan. It has many valid reasons, one being documentation of the source of salary income.

The mistakes in the table-1 pointed out above and unsuccessfully justified by the FBR lead to the inevitable conclusion that salaried person shall be taxed at a higher rate than the businessmen. For example a person having salary of Rs2,500,000 will pay Rs420,000 while his counterpart in business will pay tax of Rs347,500.

The laws are framed to remove ambiguities and bring clarity and certainty. Unconstitutional vagueness in a piece of legislation renders it unconstitutional and liable to be struck down by the competent courts of law. The amended serial number 4, 5 and 6 of the above discussed table are vague and ambiguous. If the explanation offered by the FBR is accepted, it leads to extreme vagueness.

Suppose, a person has annual taxable salary income of Rs2,000,000. What will be his tax liability? If tax liability is worked out according to serial no. 4, it will work out to Rs170,000. However, this taxable income can also be said to fall in serial no. 5, then its tax will be Rs 175,000. Similarly, if tax on salary income of Rs2,500,000 is worked out according to serial No.5, tax payable will be Rs262,500 [taking the figures given in the table] and if tax liability is worked out according to serial no. 6, it will be as high as Rs420,000.

This defect can only be removed if serial number 4 to 6 of the existing table -1 are substituted by the serial numbers 4 to 6 of the table-2 suggested above. The suggested table is in line with the table given in the Finance Act, 2012 for non-salaried persons. Salaried persons deserve same form of progressive taxation.

It is proposed that the FBR amends its circular to clarify the correct position of law and issue an SRO to the above effect to avoid undue litigation.

The writer is an advocate , High Court.