2025 PTD 817

[Federal Tax Ombudsman]

Present: Dr. Asif Mahmood Jah, Federal Tax Ombudsman, JJ

FAHAD NAJEEB Versus The SECRETARY, REVENUE DIVISION, ISLAMABAD

Complaint Nos.1488, 1489, 1491, 1493, 1495, 1496, 1502, 1504, 1505, 1506, 1507, 1509, 1510, 1524, 1525, 1526, 1527, 1528, 1529, 1530 and 1531/PWR/IT/2022, decided on 25th May, 2022.

Share on WhatsApp ⭐ Prefer in Google

Summary

This matter concerns complaints filed by lecturers and staff hired on a semester basis by government educational institutions in Khyber Pakhtunkhwa against the Commissioner Inland Revenue, D.I. Khan Zone. The core legal question is whether payments made to these employees, who are hired via a streamlined institutional mechanism, constitute 'salary' taxable under Sections 12 and 149 of the Income Tax Ordinance, 2001, or whether they should be treated as payments for 'services' subject to withholding tax under Section 153(1)(b) of the same Ordinance. The Federal Tax Ombudsman held that the tax department's classification of these payments as service fees is legally incorrect and constitutes maladministration. The Ombudsman determined that tax laws do not distinguish between permanent, ad hoc, or contract employees for salary taxation purposes, provided a master-servant relationship exists. Consequently, the complaints were allowed, and the Federal Board of Revenue was directed to ensure these employees are not subjected to excessive withholding tax and to issue necessary clarifications to withholding agents. The principle established is that all forms of employment, including temporary or semester-based hiring, fall under the ambit of 'salary' for taxation purposes, precluding treatment as service contracts.

Questions settled in this judgment

Does the Income Tax Ordinance, 2001 distinguish between permanent and temporary or ad hoc employees for the purpose of salary taxation?
Can payments made to semester-based lecturers hired by government educational institutions be classified as payments for services under Section 153(1)(b) of the Income Tax Ordinance, 2001?
Does the existence of a master-servant relationship suffice to bring remuneration under the head of 'salary' for tax purposes?

Laws & provisions referred

salary taxationwithholding taxmaladministrationmaster-servant relationshipcontract employeesFederal Tax OmbudsmanIncome Tax Ordinance

FINDINGS/RECOMMENDATIONS

DR. ASIF MAHMOOD JAH, FEDERAL TAX OMBUDSMAN.---This complaint has been filed under Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000 (FTO Ordinance) against Commissioner IR, D.I. Khan Zone.

2.Briefly, the facts of the case are that complainant lecturer, Computer Science Government Degree College Kaki, Bannu is hired by Higher Education Department (HED), previously by Project Management Unit (PMU) Khyber Pakhtunkhwa. The Government Degree College Kaki, Bannu deducted income tax from salary of the complainant. According to complainant his salary is not liable to tax.

3.Identical complaints have been filed by lecturers of education institutions tabulated below:

S. No.

COMPLAINT NO.

NAME OF COMPLAINANT

CNIC NO.

DESIGNATION PLACE OF POSTING

C.No.1488/PWR/IT/2022

Mr. Fawad Khan

11101-6695257-1

Class-IV/Government Post Graduate College No. 1. Bannu

C.No.1489/PWR/IT/2022

Mr. Nekobar Khan

11101-8821770-3

Class-IV/Government Post Graduate College, Bannu

C.No.1491/PWR/IT/2022

Mr. Raqiaz Khan

11101-4327756-5

C.No.1493/PWR/IT/2022

Mr. Atiq Ullah Khan

11101-2224093-3

C.No. 1495/PWR/IT/2022

Mr. Muhammad Idrees Khan

11101-2327447-9

Junior Clerk/Government Post Graduate College, Bannu

C.No. 1996/PWR/IT/2022

Mr. Muhammad Ismail

11101-3085686-1

Class-IV/Government Girls Degree College Mandan, Bannu

C.No.1504/PWR/IT/2022

Mr. Umer Khan

11101-2202000-7

Lecturer/Government Degree College Kakki, Bannu

C. No 1505/PWR/IT/2022

Mr. Jehan Zeb Khan

11101-0208798-5

C. No.1506/PWR/IT/2022

Mr. Zia Ullah Khan

11101-5507599-7

C.No. 1507/PWR/IT/2022

Mr. Sami Ullah Khan

11201-6397026-5

C.No. 1509/PWR/IT/2022

Mr. Wajid Khan

11101-4338148-8

C.No. 1510/PWR/IT/2022

Mr. Muhsen Ullah Khan

11101-6802923-1

C.No.1524/PWR/IT/2022

Mr. Arif Ullah

11101-4201032-3

Lecturer/Government Degree College, SK Bala Bannu

C.No. 1525/PWR/IT/2022

Mr. Umar Saleem

11101-1424658-1

C.No.1526/PWR/IT/2022

Mr. Mahmood Alam

11101-9076753-7

C.No.1527/PWR/IT/2022

Mr. Muhammad Sadiq Khan

11101-7177586-1

C.No. 1528/PWR/IT/2022

Mr. Muhammad Tariq

11101-8669090-5

C.No.1529/PWR/IT/2022

Mr. Zaka Ullah

11101-9915768-9

C.No. 1530/PWR/IT/2022

Mr. Fahim Ullah

11101-6385587-3

C.No.1531/PWR/IT/2022

Mr. Rizwan Ullah

11102-0365297-9

As the issue raised in the above 21 complaints is identical therefore, all cases are being disposed of through single order.

4.The instant complaint was referred to the Secretary, Revenue Division for comments in terms of Section 10(4) of the FTO Ordinance, read with Section 9(1) of the Federal Ombudsmen Institutional Reforms Act, 2013. In response thereto, Chief Commissioner RTO Peshawar forwarded comments vide letter No.CCIR/2021-2022/2535 dated 25.04.2022, reproduced as under:

"Not correct: College authority has hired the subject complainant on semester basis and the taxpayer providing services to the Govt. Degree College Kaki Bannu in private capacity upon which tax is withheld under section 153(1)(b) of the Income Tax Ordinance, 2001 @ 10% in case of filer and @ 20% in case of non filer. As the complainant is neither registered nor filed returns(s), of income therefore, tax deduction @ 20% has rightly been made as per prescribed rates.

As the complainant is paid from college fund, therefore under the Khyber Pakhtunkhwa Employees of the Elementary and Secondary Education Department (Appointment and Regularization of Services) Act, 2017 the complainant is not an employee under Clause 2 (c)(i) of the said Act and under the provision of Section 12 of the Income Tax Ordinance, 2001, the salary has been defined under Section 12(2) that "salary means any amount received by an employee from any employment".

As the complainant is not an employee therefore, the payment made to him falls under the Head "services" from which tax under section 153(1)(b) is rightly deducted".

Under section 153(1)(b) of Income Tax Ordinance, 2001, income tax is deducted at rate of 10% in case of filer and 20% in case of non-filer. The complainant has, however, agitated vide his application dated 03.03.2022, that the tax deducted on monthly pay is unjustified. His salary is not liable to tax. He requested to resolve the matter.

EXAMINATION OF RECORD AND FINDINGS:

5.Contention of the department and submissions by the complainant have been examined at length. There can be two criterions to evaluate merits of both: Legal parameters and material facts in the instant and other similar cases.

I. Legal parameters

Salary taxation is governed through sections 12 and 149 of the Income Tax Ordinance, 2001. Both are reproduced hereunder:

l Section 12. Salary- (2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including-

(a)any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions).

l Section 149. Salary. (1) Every [person responsible for] paying salary to an employee shall, at the time of payment, deduct tax from the amount paid at the employee's average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head "Salary".

FBR's reply dated 25.04.2022, has been examined in depth but it fails to rebut the following:

i.If Appointment and Regularization of services Act, 2017 creates any distinction between regular and temporarily hired/ad hoc employees how the status of employment can be denied under tax laws. Salary taxation is governed under tax laws and not under the act referred by RTO Peshawar.

ii.Nowhere in the tax laws or in the case law has any distinction been created between a permanent employee, and an ad hoc/temporary/contract/hired employee.

iii.RTO Peshawar while responding has not quoted any legal provision or any decision by the superior judiciary which lays down any specific criteria other than Legal provisions governing "Salary Taxation" i.e. Sections 12 and 149 of Income Tax Ordinance, 2001.

iv.Nowhere requirement of any valid contract of employment has been mandated for a case to be qualified under salary taxation.

v. While law treats hired employee's wages at par with PAY, while defining salary, how hired lecturer's salary can be excluded from the ambit of salary taxation?

Thus plain reading of aforesaid legal provisions merely indicate employer-employee equation based on "Master-Servant Relationship". This criterion alone forms the basic parameter for any employment. Regular / Ad hoc / Temporary / Hired / Daily Wages, all are the different shades and forms of employment and law doesn't create any distinction among all the above forms.

II. Material facts in the instant cases

Complete details obtained from Directorate of Higher Education, Government of KPK, Peshawar suggest the following:

a.In view of prolonged recruitment proceedings at Provincial Public Service Commission the said Directorate has evolved a separate and streamlined mechanism for hiring and appointment of lecturers on semester to semester basis.

b.Project Management Unit, Higher Education Department KPK has developed, circulated and enforced detailed guidelines on hiring of lecturers under the instant stream.

c.Hiring procedure has been developed and enforced across the board.

d.Composition of Selection Committees has also been developed and notified.

e.Hiring and selection criterion includes:

l Institutional workload l Advertisement l Selection Committee Notification/Minutes of the meeting l Merit List l Credentials of the selected candidates l Office Order of the selected Candidates: the said office order enlists detailed "Terms and Conditions" of hiring as well.

l The above hiring policy is being implemented across the board at all institutions in KPK.

FINDINGS:

6.In view of above discussions;

a.In the face of a streamlined, transparent and well documented hiring mechanism RTO Peshawar is not justified in alleging that "College authority has hired the subject complainant on semester basis and the taxpayer providing services to the Govt. Degree College, Kaki, Bannu in private capacity upon which tax is withheld under section 153 (1)(b) of the Income Tax Ordinance, 2001 @ 10% in case of filer and @ 20% in case of non filer."

b.FBR's treatment of the instant cases under section 153(1)(b) of the Ordinance is against the dictates of law and excessive tax deductions from the pay / wages of a hired employee of educational institution tantamount to maladministration in terms of FTO Ordinance, 2000.

The above discriminatory and unjust and extra legal treatment of salary cases tantamounts to maladministration in terms of section 2(3)(i) and (ii) of FTO Ordinance, 2000.

This office has already issued recommendations in a similar Complaint No. 2538/ISB/IT/2021 filed by an employee of Pakistan Broadcasting Corporations, wherein during Investigation and Review proceedings, the FBR conceding the wrong being done in such cases has not only implemented the recommendations rather widely circulated the same among all concerned.

RECOMMENDATIONS:

7.FBR is directed to:-

i.ensure that hired lecturers, of Government Degree College Kaki, Bannu or other such educational institutions are not burdened with excessive tax deductions at withholding stage;

ii.direct RTO Peshawar to process the instant cases on priority basis and under relevant legal provisions, so as to save the complainants from grave hardship they are suffering ever since hired by the concerned institution;

iii.issue necessary clarification for all withholding agents to safeguard such employees against excessive deductions; and;

iv.report compliance within 30 days.

MQ/19/FTO Complaints allowed.

Judges on this bench

Dr. Asif Mahmood Jah23 judgments
Federal Tax Ombudsman30 judgments