Pakistan operates a progressive tax system where both employers and employees have distinct obligations regarding income tax and social security contributions. Employers play a crucial role in the collection and remittance of taxes on behalf of their employees, as well as contributing to various social security schemes designed to provide benefits such as pensions, healthcare, and welfare. Understanding these responsibilities is essential for compliance and smooth operations within the country's legal framework.
The tax year in Pakistan runs from July 1st to June 30th. Employers are required to register with relevant tax authorities, including the Federal Board of Revenue (FBR) for income tax and provincial social security institutions, as well as the Employees' Old-Age Benefits Institution (EOBI). Compliance involves accurate calculation, timely withholding, and remittance of taxes and contributions, along with filing necessary reports and returns.
Employer Social Security and Payroll Tax Obligations
Employers in Pakistan are responsible for contributing to several social security and welfare funds for their employees. These contributions are mandatory and vary based on the type of fund and, in some cases, the province of employment.
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Employees' Old-Age Benefits Institution (EOBI): This is a federal institution providing pension benefits. Employers are required to contribute a fixed percentage of the minimum wage for each employee. Both employer and employee contribute, though the employer typically handles the total remittance.
- Employer Contribution: 5% of the minimum wage.
- Employee Contribution: 1% of the minimum wage (deducted from salary).
- Contribution is calculated based on the declared minimum wage, not the actual salary if it's higher than the minimum wage.
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Provincial Employees Social Security Institutions (PESSI/SESSI/etc.): These institutions provide healthcare and other social security benefits. Contributions are provincial and apply based on the location of employment. The rates and thresholds can vary slightly by province (e.g., Punjab Employees Social Security Institution - PESSI, Sindh Employees Social Security Institution - SESSI).
- Contribution Rate: Typically a percentage of the employee's wages, up to a certain wage limit.
- Employer Contribution: Usually a higher percentage (e.g., 5%) of the secured employee's wages.
- Employee Contribution: A smaller percentage (e.g., 1%) of the secured employee's wages, deducted from salary.
- Applicability: Applies to employees earning below a certain wage threshold.
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Workers' Welfare Fund (WWF): Employers with total income exceeding a specified threshold are required to contribute to the WWF. This is an annual contribution.
- Contribution Rate: 2% of the total income (as defined by the law).
- Applicability: Applies to industrial establishments meeting the income threshold.
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Workers' Participation Fund (WPF): Similar to WWF, employers meeting certain criteria based on paid-up capital or value of assets are required to contribute a portion of their profits to the WPF. This fund is distributed among eligible employees.
- Contribution Rate: 5% of the net profits.
- Applicability: Applies to companies meeting the capital/asset threshold.
Income Tax Withholding Requirements
Employers are legally obligated to withhold income tax from their employees' salaries under the Pay As You Earn (PAYE) system. The amount of tax to be withheld depends on the employee's annual taxable income, which is calculated after accounting for eligible deductions and allowances.
The income tax rates for individuals are progressive, meaning higher income levels are taxed at higher rates. The tax slabs and rates are announced annually in the Federal Budget. For the tax year 2025, the rates are expected to follow a structure similar to the previous year, subject to any changes introduced in the budget. Below is an illustrative structure based on recent tax years, which should be confirmed for the specific 2025 rates:
| Annual Taxable Income (PKR) | Tax Rate | Tax Payable |
|---|---|---|
| Up to 600,000 | 0% | 0 |
| 600,001 to 1,200,000 | 2.5% of the amount exceeding 600,000 | 0 + 2.5% of the amount exceeding 600,000 |
| 1,200,001 to 1,800,000 | 15,000 + 12.5% of the amount exceeding 1,200,000 | 15,000 + 12.5% of the amount exceeding 1,200,000 |
| 1,800,001 to 2,400,000 | 90,000 + 20% of the amount exceeding 1,800,000 | 90,000 + 20% of the amount exceeding 1,800,000 |
| 2,400,001 to 3,600,000 | 210,000 + 27.5% of the amount exceeding 2,400,000 | 210,000 + 27.5% of the amount exceeding 2,400,000 |
| Above 3,600,000 | 540,000 + 35% of the amount exceeding 3,600,000 | 540,000 + 35% of the amount exceeding 3,600,000 |
Note: These rates are illustrative based on recent tax years and are subject to confirmation for the Tax Year 2025.
Employers calculate the annual tax liability for each employee based on their estimated annual income and the applicable tax slabs. This annual tax amount is then divided by 12 to determine the monthly tax to be withheld from the salary. Adjustments may be made during the year if the employee's income changes or if they provide documentation for eligible deductions.
Employee Tax Deductions and Allowances
Employees can benefit from certain deductions and allowances that reduce their taxable income, thereby lowering their overall tax liability. Employers need to consider these when calculating the monthly withholding tax, provided the employee submits the required documentation.
- Zakat: Compulsory deduction for Muslim employees on specific assets held on the 1st of Ramadan. This amount is deductible from total income.
- Approved Donations: Donations made to certain approved charitable institutions are eligible for a tax credit or deduction, depending on the nature of the donation and the recipient organization.
- Investments: Certain investments, such as contributions to approved pension funds or investments in approved shares, may be eligible for a tax credit.
- Educational Expenses: While not a universal deduction, there are specific provisions allowing deductions for educational expenses under certain conditions, often related to income levels and the number of children.
Employees must provide their employer with proof of these deductions or investments to have them considered in the monthly tax withholding calculation.
Tax Compliance and Reporting Deadlines
Employers must adhere to strict deadlines for the payment of withheld taxes and social security contributions, as well as for filing required statements and returns.
- Monthly Withholding Tax Payment: Tax withheld from employee salaries must be deposited with the FBR by the 15th of the following month.
- Monthly Withholding Statement (PRA-10): A monthly statement detailing the tax withheld from employees must be filed electronically with the FBR by the 15th of the following month.
- Annual Withholding Statement: An annual statement summarizing all tax withheld during the financial year must be filed electronically with the FBR by the 31st of July following the end of the financial year (June 30th).
- Monthly Social Security Contributions (EOBI, PESSI/SESSI): Contributions are typically due by the 15th of the following month.
- Annual WWF/WPF Contributions: These are annual payments, usually linked to the filing of the company's income tax return.
Failure to comply with these deadlines can result in penalties, interest, and other legal consequences.
Special Tax Considerations for Foreign Workers and Companies
Tax obligations for foreign workers and companies in Pakistan depend largely on their residency status and the nature of their activities.
- Tax Residency: An individual is generally considered a resident in Pakistan for a tax year if they are present in the country for a period of 183 days or more in that tax year.
- Taxation of Residents: Resident individuals are taxed on their worldwide income. This means income earned both within and outside Pakistan is subject to Pakistani income tax.
- Taxation of Non-Residents: Non-resident individuals are taxed only on their Pakistan-source income. Salary received for services rendered in Pakistan is considered Pakistan-source income, regardless of where the salary is paid.
- Tax Treaties: Pakistan has entered into Double Taxation Treaties (DTTs) with numerous countries. These treaties can provide relief from double taxation and may affect the taxability of foreign workers depending on the specific treaty provisions and the individual's circumstances (e.g., duration of stay, employer's residency). Employers of foreign workers should consider applicable DTTs.
- Foreign Companies: Foreign companies employing staff in Pakistan may establish a permanent establishment (PE). If a PE exists, the company is subject to corporate income tax in Pakistan. Even without a PE, the foreign company has employer obligations (withholding tax, social security) for employees working in Pakistan. Utilizing an Employer of Record can help foreign companies manage these obligations without establishing a local entity or PE.
Navigating the complexities of Pakistani tax law requires careful attention to detail and timely action. Employers, whether local or foreign, must ensure they are fully compliant with all withholding, contribution, and reporting requirements to avoid penalties and maintain good standing with the authorities.
