Federal Tax Ombudsman Initiates Investigation into Excess Tax Deductions for Salaried Persons and Teachers
Islamabad 10-09-2024: The Federal Tax Ombudsman (FTO) has taken suo moto notice of complaints raised by public sector teachers regarding excessive tax deductions from their salaries, which were not adjusted in accordance with the available tax credits and rebates under the Income Tax Ordinance, 2001. The investigation revealed systemic issues in the tax withholding process, leading the FTO to call for significant reforms in tax deduction mechanisms.
The investigation was initiated by the FTO Secretariat based on complaints filed by teachers, including Ms. Qurrat-ul-Ain Qadeer, Sumera Sajid, Majida Ahmad, Andleeb Fatima, and Asma Bukhari, who highlighted issues of excess tax deductions. These deductions were made without accounting for a mandatory 25% tax rebate to which they are entitled as full-time public sector teachers under Clause (2), Part III of the Second Schedule of the Income Tax Ordinance, 2001. The failure to implement this rebate led to undue financial stress for these salaried individuals.
The FTO’s investigation found that withholding agents, including the Accountant General of Pakistan Revenues (AGPR) and District Accounts Offices, failed to adjust tax credits such as those available under Sections 61 and 63 of the Income Tax Ordinance, 2001. These sections provide for tax credits related to donations to charitable institutions and contributions to approved pension funds. The FTO observed that these provisions were not factored into monthly salary deductions, despite being required under the law.
In its findings, the FTO criticized the inattention and ineptitude of the Federal Board of Revenue (FBR) and the AGPR. Despite the clear provisions in Section 149 of the Income Tax Ordinance, which governs salary-related tax deductions, the authorities failed to implement proper tax adjustments, causing unnecessary financial hardships for salaried taxpayers.
The FTO found that the SAP system used by the AGPR and other withholding agents did not allow for flexibility in adjusting tax deductions in accordance with tax credits. This inflexibility forced salaried individuals to wait for extended periods to claim refunds, thus exacerbating their financial difficulties.
In response to the findings, the FTO recommended a series of systemic reforms to ensure compliance with the law and prevent future occurrences of excess tax deductions. These include:
The FTO urged the FBR and AGPR to make changes in the SAP module to allow for the timely adjustment of tax deductions and credits. This would eliminate the need for salaried individuals to file for tax refunds after the close of the financial year.
The FBR was instructed to develop a robust monitoring system to ensure that withholding agents correctly apply tax credits and deductions in accordance with Section 149 of the Income Tax Ordinance.
The FTO ordered the FBR to report back within 90 days on the implementation of these recommendations.
This judgment, if implemented effectively, will provide immediate relief to thousands of salaried public sector employees who face unnecessary tax deductions each year. By adjusting tax credits at the withholding stage, the lengthy and cumbersome process of filing for tax refunds will be eliminated, offering much-needed financial stability to employees.
The FTO’s ruling highlights the importance of adhering to statutory tax rebates and credits and holds the FBR accountable for ensuring compliance with tax laws to prevent undue financial hardship for taxpayers.
Legal experts suggest that this ruling may prompt similar complaints from other sectors where employees face tax deduction issues, potentially leading to broader reforms in the country’s tax administration system.
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