1. Dear All,
I would like to take this opportunity to update you that the government has introduced a concept
of marginal tax relief for the salaried persons to cater for the negative impact of taxation under the
present flat tax rate system. Finance Ordinance 2008 proposed that under the new system the
marginal increase in salary income is proposed to be taxed at the rates not exceeding 20% to
50% allowing sufficient relief in tax payable.
Further, it is vital to mention here that until June 2006, salary income was taxable at progressive
tax rates ranging from 3.5% to 30%. Through the Finance Act, 2006, a simplified taxation regime
was introduced whereby salary was taxed on a “flat rate” basis that is to say, the rate applicable
to the income bracket in which the gross salary falls along with rationalization of tax rates from
0.25% to 20%.
While this simplified the computation of tax liability of employees for the employers for purposes
of withholding tax, it created hardship for employees where income brackets changed during the
year due to pay raise or bonuses etc.
The terms quot;marginal tax ratequot; and quot;average tax ratequot; are often confused in discussions of tax
policy. The average tax rate for an individual is simply the total amount of taxes paid relative to
the total amount of income earned. For instance, the average tax rate for an individual who
earned taxable annual income Pak Rs.1,200,000 and paid Pak Rs. 132,000 in taxes would be
11%.
Marginal tax rates, as the name indicates, apply at the margin. That is, marginal tax rates are
relevant on an incremental basis. In other words, the marginal tax rate is the rate that applies to
the next Pak Rupees of income earned. I would like to explain the concept of marginal tax relief
by the following examples:

2. Example No.1
(Pak Rupees) (Pak Rupees)
Where the taxable income is 1,500,000
Working of tax on Normal Basis
Tax on Rs. 1,500,000/- @12.5% 187,500 187,500
Working of tax on Marginal Basis
Tax on Rs.1,450,000/- @ 11% 159,500
Tax on next Rs. 50,000/- @ 40% 20,000
Tax on marginal basis 179,500
8,000
Tax relief worked out
Example No.1
(Pak Rupees) (Pak Rupees)
Where the taxable income is 1,975,000
Working of Tax on Normal Basis
Tax on Rs. 1,975,000 @15% 296,250
Working of tax on Marginal Basis
Tax on Rs.1,950,000/- @14% 273,000
Tax on Rs. 25,000/- @40% 10,000
Tax on marginal basis 283,000
13,250
Tax reflief worked out as
The Finance Bill 2008 seeks to cater to this hardship and provide relief to salaried individuals by
providing “marginal relief” where salary income is in excess of the income threshold of the
immediately preceding income bracket. The relief is proposed to operate as under:
Percentage of quot;incremental
Taxable Income threshold in
Sr.No. incomequot; taxable at next
(Pak Rupees)
applicable tax rate
1 20%
Up to 500,000
2 500,001 to 1,050,000 30%
3 1,050,001 to 2,000,000 40%
4 2,000,001 to 4,450,000 50%
5 4,450,001 and above 60%
In addition to the marginal relief, the Finance Bill 2008 also proposes further rationalization of tax
brackets with a view to reduce the effective rate on income previously taxed at higher rate.
Furthermore, the Bill seeks to enhance the maximum non-taxable threshold of salary to
Rs.180,000 and Rs.240,000 from existing limits of Rs.150,000 and Rs.200,000 in case of male
and female employees, respectively.

3. The proposed new tax brackets and rates effective from “Tax Year 2009” shall be as under:
Rate
Taxable income
Sr. No.
Percentage
1 Up to Rs. 180,000 Nil
2 Rs. 180,001 to 250,000 0.50
3 Rs. 250,001 to 350,000 0.75
4 Rs. 350,001 to 400,000 1.50
5 Rs. 400,001 to 450,000 2.50
6 Rs. 450,001 to 550,000 3.50
7 Rs. 550,001 to 650,000 4.50
8 Rs. 650,001 to 750,000 6.00
9 Rs. 750,001 to 900,000 7.50
10 Rs. 900,001 to 1,050,000 9.00
11 Rs. 1,050,000 to 1,200,000 10.00
12 Rs. 1,200,001 to 1,450,000 11.00
13 Rs. 1,450,001 to 1,700,000 12.50
14 Rs. 1,700,001 to 1,950,000 14.00
15 Rs. 1,950,001 to 2,250,000 15.00
16 Rs. 2,250,001 to 2,850,000 16.00
17 Rs. 2,850,001 to 3,550,000 17.50
18 Rs. 3,550,001 to 4,550,000 18.50
19 Rs.4,550,001 to 8,650,000 19.00
20 Rs.8,650,001 and above 20.00
An analysis showing quantitative impact of the budget proposals for salary taxation as compared
to the existing tax regime is tabulated as under:

4. Tax liability
Gross Salary Tax Saving
Exisiting Proposed
(Pak Rupees) (Pak Rupees) (Pak Rupees) (Pak Rupees)
180,000 450 - 450
200,000 500 20 480
270,000 2,025 1,280 745
370,000 9,250 2,685 6,565
420,000 14,700 6,100 8,600
470,000 16,450 11,390 5,060
570,000 25,650 19,520 6,130
670,000 40,200 29,610 10,590
770,000 57,750 45,450 12,300
920,000 82,800 68,040 14,760
1,070,000 117,700 95,300 22,400
1,220,000 152,500 120,880 31,620
1,470,000 183,750 160,500 23,250
1,720,000 258,000 213,620 44,380
1,970,000 295,500 274,200 21,300
2,270,000 363,200 339,100 24,100
2,870,000 459,200 457,750 1,450
3,570,000 624,750 623,100 1,650
4,570,000 868,300 844,030 24,270
8,670,000 1,734,000 1,645,900 88,100
8,720,000 1,744,000 1,651,900 92,100
15,000,000 3,000,000 2,405,500 594,500
30,000,000 6,000,000 4,205,500 1,794,500
Following are the some other important proposed changes for the salaried individuals
through Finance Bill 2008:
• Salaried individuals having salary income of Rs. 500,000 or more required to file
Wealth Statement
Under section 116(2), every resident individual is liable to file “Wealth Statement” along
with his return of total income where his last declared or assessed income or declared
income for the year exceeds Rs.500,000. Whereas, proviso to section 115(1) states that
salaried individual shall not be required to file the return of total income, if his employer
has filed the annual statement of salary. Therefore salaried individuals were not filing the
wealth statement on the plea that wealth statement can only be filed along with the return
of total income and since return is not required to be filed, therefore wealth statement is
not necessary.
The Finance Bill 2008 seeks to substitute the sub-section 1of section 115, whereby
annual statement of salary filed by the employer would be considered as return of total
income furnished by the salaried individual. The proviso to substituted sub section (1)
makes salaried individual liable to file “Wealth Statement” as required under section 116
of the Income Tax Ordinance.
• Threshold of salary payable in cash increased to Rs. 15,000 per month

5. Presently any salary exceeding Rs. 10,000 per month that is not paid by a cross cheque
or direct transfer of funds to the employee’s salary bank account is not allowed as an
admissible deduction for tax purpose. It is now proposed that the limit of Rs. 10,000 per
month be enhanced to Rs. 15,000 per month.
• Value of accommodation provided to the salaried person in small cities
The value of accommodation provided to the salaried persons in small cities is proposed
to be taken at 30 per cent instead of 45 per cent of the minimum time scale of the
employees for the purpose of taxation.
• A return is not required to file if annual statement of deduction of income tax from salary
has filed y the employer of such taxpayer stands exist
This is the first effort of a series of explanation of proposed Federal Budget 2008 for salaried
individuals for Tax year 2008-2009, alongwith the salary’s tax calculator that I'll be sharing with
you over the next month or so. This one focuses on some of the major federal income tax key
numbers. I'll do future ones for salary tax planning, retirement planning and business tax planning
in the not too distant future so stay tuned.
Since federal income taxes are such a large part of most people’s life or expenditures, I thought
that you might like a summary or reference sheet for some of the important figures for 2008-2009.
To conclude lastly, I must say here that one of the important functions of a financial advisor(s) is
to help reduce taxes to your legal minimum due by using all appropriate deductions, methods and
strategies. A good tax advisor is worth their weight in gold! So go find a pro-active tax advisor,
not someone who just files tax returns.