TAX PLANNING AND EMPLOYEE BENEFITS AT FABR

Abstract

Kamran Omar, Director Research at FABR - a non-profit NGO, had to decide whether to give his employees a raise by increasing their basic salaries, or by giving them some reimbursable allowances. The problem was that income tax was calculated on the basis of basic salary, so any increase in it would be undermined by taxes. But at the same time the employee provident and pension fund benefits were also linked to the basic salary. The main objective of the case is to provide a different value problem than what the text books normally provide. The case also highlights the importance of making assumptions and the role of sensitivity analysis in typical real world problems. The relationship between the discount rate and inflation rate can also be discussed in the context of the case.