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The proviso to section 115 sub-section (1) clause (a) of Income Tax Ordinance, 2001, added by Finance Act, 2005 has created much ease for the genuine taxpayer earning taxable income under the salary income by not filing of income tax return where there is no other income than salary, but has also provided even more opportunities to tax thieves.

How CBR is Losing Tax Revenue

The proviso to section 115 sub-section (1) clause (a) of Income Tax Ordinance, 2001, added by Finance Act, 2005 has created much ease for the genuine taxpayer earning taxable income under the salary income by not filing of income tax return where there is no other income than salary, but has also provided even more opportunities to tax thieves. However, this proviso has also created problems for the salaried taxpayers in seeking the tax refundable. However, the result of the opportunity of not paying taxes and problems in seeking refund is not nullified at end – CBR or more appropriately Revenue of Government of Pakistan is the net looser! This article is an endeavor to analyze such opportunities and problems apart from suggesting remedial measures.

PROVISO of SECTION 115(1)(a)

The much appreciated proviso of section 115(1)(a) is read as follows.

Provided that a taxpayer shall not be required to furnish a certificate, if his employer has furnished for the same tax year, annual statement of deduction of Income Tax from Salary as prescribed under the Income Tax Rules, 2002.

Following is an extract from Notes on Clauses of Finance Bill, 2005 for proviso of section 115(1)(a).

Seeks to absolve a salaried taxpayer from the obligation of filing of return if his employer has filed the Annual Statement of Deduction of Income Tax from Salary.

This proviso is explained by Central Board of Revenue in circular number 1 of 2005, dated July 5, 2005 as follows.

Under section 115(1)(a), a taxpayer deriving only salary income is not obliged to furnish a return of income. Instead, he is required to file a prescribed certificate from the employer.

Following the policy of simplification and facilitation for the taxpayers, Income Tax Rules has been reviewed and in this context, an annual statement of deduction of Income Tax from Salary has been prescribed which shall be filed by the employer containing complete details of pay, allowances and tax deducted etc.

In case of taxpayers deriving income from salary only, the prescribed annual statement filed by the employer will be considered as sufficient discharge of liability to file return of income on the part of individual employees.

One can easily conclude over the fact that by inserting this proviso the salaried taxpayer has been absolved from filing of employer certificate. Now let us see how this proviso can be used unintentionally to avoid tax payment.

EXAMPLE 1

Mr. Yousuf has worked for three different organizations during the tax year, 2006. The detail of his salary income is as follows.

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