Comprehending Payroll in Pakistan

Pakistan is a multi-ethnic country of South Asia and the world's fifth-most populous country, with a population of almost 243 million people. Its capital is Islamabad, in the foothills of the Himalayas in the northern part of the country, and its largest city is Karachi, in the south on the coast of the Arabian Sea. Pakistan encompasses a rich diversity of landscapes, starting in the northwest, from the soaring Pamirs and the Karakoram Range through a maze of mountain ranges, a complex of valleys, and inhospitable plateaus, down to the remarkably even surface of the fertile Indus River plain, which drains southward into the Arabian Sea. Here’s a detailed round up of all payroll compliance requirements and regulations.

Income Tax

Overview and Residential Status

In Pakistan, the Income tax is governed by Income Tax Ordinance, 2001 which has been replaced recently by Income tax ordinance amended up to June 30, 2022 (The Ordinance). In this section, the provisions related to Taxation of Employment Income has been discussed.

The tax year in Pakistan runs from July 01 to June 30 and it is denoted by stating the calendar year in which the end date falls i.e., in case of tax year July 01, 2022 to June 30, 2023 it will be denoted as calendar year 2023.

The Ordinance defines the criteria for considering an individual residential status as follows:

• Any individual present in Pakistan for a period of 183 or more days in the tax year or
• An individual should be employee or official of the Federal Government or a Provincial Government posted abroad in the Tax Year
• An individual being Citizen of Pakistan and is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country

Despite the mention of the criteria to determine the residential status of individuals the tax rates and other provisions for salaried individuals remains the same for both Resident and Non-Resident category.

Taxability of Income earned from employment

Employer is under an obligation to withhold taxes from the employee’s salary income every month based on the average salary earned during the tax year, at the below tax slab rates applicable 2022:

Employees while filing their Personal Income Tax return will need to review the applicable tax slabs depending on whether their employment income constitutes of less than 75% of their total income or not. Different tax rates, as provided in Schedule 1 Part 1 of The Ordinance, will be applicable if they don’t meet the criteria of having employment income above 75% of the total income.

Determination of Employment Income

The employment income in Pakistan comprises of Gross salary, perquisites, deductions, reliefs, and tax credits. The taxable income of an individual is determined by adding the taxable perquisites and deducting the eligible allowances as well as tax credits from gross salary. The details of such components are explained briefly below:

1. Salary & Wages:

The gross salary includes basic 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 for unpleasant or dangerous working conditions.

2. Perquisites:

Any benefits in cash or kind provided by the employer to its employees shall be included as part of the employee’s salary in the tax year.

Some of the taxable perquisites are as follows:

• Company car benefit
• Accommodation
• Utilities
• Employee share scheme or similar schemes
• Interest free or subsidised Loan (on or after July 01, 2002);
• Medical expenditure or allowance, subject to certain conditions.

The following perquisites are exempt from tax:

• Free or subsidized food provided by hotels and restaurants to their employees during duty hours
• free or subsidized education provided by an educational institution to their employee’s children
• free or subsidized medical treatment provided by a hospital or a clinic to its employees; and
• any other perquisite or benefit for which the employer does not have to bear any marginal cost, as notified by the Board.

3. Deductions and relief

The amount paid in a tax year for the list of items below can be claimed as a tax deduction:

• Zakat, no amount is deductible if already claimed under "Income from Other Sources"
• Workers’ Welfare Fund
• Workers’ Participation Fund
• Tuition fee lesser of the below, provided the taxable income of the individual is less than 1.5 million rupees
  • 5% of the total tuition fee paid by the individual in the year
  • 25% of the person’s taxable income for the year; and
  • an amount computed by multiplying 60,000 with number of children of the individual.

4. Tax credits

Employees can claim tax credit for the payments as provided below.

• Charitable donations
• Contribution to an Approved Pension Fund

The eligibility criteria and tax credit amount differ based on nature of payment

5. Professional Tax

All employees engaged in any professional, trade calling or employment are required to pay Professional Tax. Employer withholds professional tax from salary and is remitted to District Excise and Taxation Officer. This varies based on the province and nature of professional work undertaken.

Reporting and Remittance obligation

Every employer is under an obligation to deduct tax before remitting the salary to employees and must deposit the tax deducted under various sections of the Ordinance, within 7 days of the end of the week in which the payment has been made. To deposit the taxes into government treasury, a payment challan i.e., PSID needs to be created.

There is also an obligation to electronically file bi-annual income tax withholding statement on July 31 and January 31 for the period January to June and July to December respectively in Iris Portal. Also, employers must furnish annual employer statement by September 30 every year and issue certificate of collection or deduction of tax within 45 days of the end of the tax year.

Penalty

Social Security

Following labour laws are applicable to provide social protection to employees in different forms:

• Work’s Compensation Act 1923,
• Factories Act 1934,
• Payment of Wages Act 1936,
• West Pakistan Social Security Ordinance 1965 (Ordinance No: X of 1965),
• West Pakistan Industrial and Commercial (Standing Orders) Ordinance 1968,
• Companies Profit (workers’ Participation) Act 1968,
• West Pakistan Shops and Establishment Ordinance 1969,
• Industrial Relation Ordinance 1969, Workers Welfare Fund Ordinance 1971,
• Workers Children (Education) Ordinance 1972

To safeguard the interest of old aged employees further, the Federal government of Pakistan enacted another regulation know as Employees' Old Age Benefits Act, 1976, (Act No XIV of 1976) (‘EOBI Act’).

EOBI Act social Insurance scheme is administered at Federal level, which is mandatory for all industry or commercial establishment with 5 or more employees and voluntary in other cases. It extends following benefits to insured persons:

• Old-Age Pension, an employee is eligible for full pension if contributions are made for at least 15 years and reduced pension if an employee retires before five years of retirement age (60 years for men and 55 years for women).
• Survivor's Pension to dependents of deceased workers
• Invalidity Pension in case of employment injury or disease resulting into permanent invalidity
• Old-Age Grant if contributions are made for lesser than 15 years.

The rate of contribution applicable is 6% i.e., 5% for employer and 1% for employee on the wages notified under the Minimum Wages for Unskilled Workers Ordinance, 1962 and will vary from province to province.

Apart from the above there is Employee’s Social Security Contribution (ESSI) that is applicable as per the Provincial Employees Social Security Ordinance, 1965 and is administered by autonomous provincial bodies called Employee’s Social Security Institute of a particular province. The rate of contribution, minimum and maximum contribution capping also varies based on each province.

Reporting and Remittance

Every employer has an obligation to declare EOBI return i.e., Form PR-02 to the Institution quarterly in respect of each month of the relevant quarter, within 15 days of the end of the quarter to which it relates with full particulars of every person in his insurable employment accompanied by receipted copies of the Contribution Payment Slips in Form PR-03.

ESSI payments should be remitted on last day of every month for salaries paid in the previous month and monthly returns should be declared by 30^th of the following month.

Penalty

Employment laws

Employment laws considerations are quite crucial for the smooth functioning of an organisation. It provides for all the necessary obligations and guidelines from both employer and employee perspective right from entering into an employment contract till departure. Below are some of the noteworthy labour law compliances for Pakistan.

• Employment contract

The Standing Orders Ordinance 1968 requires all the employers to provide every worker an employment contract before the beginning of work and be made as clear as possible by standardizing all the contracts to reflect official currency, the Pakistani Rupee (PKR).

Companies with 20 employees or more must have formal written business contracts with employees, stating the compensation, bonuses, and working hours of each employee.

• Probation and Notice period

Probationary periods are allowed in the private sector but should last no longer than six months. Collective bargaining is also allowed in Pakistan, though the government places strict regulations on the rights of employees to strike. There is an obligation for both the employer and employee to provide one month notice before terminating the employment contract.

• Working Hours and Overtime

The standard working hours for a full-time employee are 48 hours i.e., 6 days a week for 8 hours per day, any time worked beyond that qualifies as overtime and is compensated at 200% of the regular wage.

• Minimum remuneration

The minimum wages are set as per Minimum Wages Ordinance, 1961 by the Minimum Wage Boards and applies to all the industries wherein the employees are categorized as Highly skilled, Semi-skilled, unskilled, apprentice and domestic workers. As it varies province wise detailed notifications and circulars will be issued by the respective provincial labour departments.

• Severance Pay

In the case of termination for any reason besides misconduct on the part of the employee, employers will need to provide written notice of termination as well as severance pay. Employees receive one-month wages for every year they have served the company.

• Statutory leaves:

Employees are eligible for below mentioned statutory leaves and it may vary based on nature of work and Acts of respective province:

1. Annual leave:14 consecutive days of paid annual leave after completing one year of continuous service. Any unused vacation days are expected to carry over to the following year.
2. Casual leave: 10 days of paid casual leave and they cannot be carried forward if not availed during the year.
3. Sick leave: 8 days with full pay per annum and additional 16 days with 50% pay per annum. The extra days are typically not taken except in the case of extreme illness with official documentation.
4. Maternity leave: 12 full weeks of paid leave and usually take 50% before giving birth and 50% later.

Other Benefits

In addition to social security and leave benefits discussed above there are other benefits namely retirement benefits i.e., gratuity and provident fund provided to employees under Standing Orders Ordinance 1968. Legally there are no provisions to insist on if the employer has to provide either of these benefits or both the benefits simultaneously. It depends on employer's discretion to decide either to grant provident fund or gratuity or both the benefits voluntarily at the end of employment. The taxability aspects of the benefits are as follows:

1. Provident fund (PF)

Any amount received by an employee from a recognised PF shall be treated as exempt from tax.

However, annual contribution of the employer made to the approved/recognised pension fund shall be treated as income received by the employee during the year if

(a) contributions made by the employer are more than one-tenth of the salary or Rs.150,000 of the employee, whichever is low; and

(b) interest earned on the balance of PF that exceeds one-third of the salary of employee.

2. Gratuity

An employee is eligible for Gratuity in case of retirement or death for the services rendered previously during employment. Such income is exempt as follows

• Fully exempt in case of Government employees
• Fully exempt if amount is received from gratuity fund approved by commissioner
• Exempt up to 3,00,000 for all the employees if received form gratuity scheme approved by Board
• Exempt up to 75,000 or 50% of the amount receivable whichever is lower for all the employees in case of unapproved fund subject to exceptions

Concluding remarks

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