Islamic Republic of Pakistan

Pakistan’s income tax structure is based on a progressive system, where individuals are taxed at increasing rates as their income rises. Non-residents are taxed on income earned in Pakistan, while residents are taxed on their global income. Income tax is levied on various sources, including salaries, business income, property, capital gains and other sources. The income tax system is governed by the Income Tax Ordinance, 2001 and the Federal Board of Revenue (FBR) administers tax collection and enforcement. Salaried individuals are taxed under specific slabs, based on annual income thresholds set out each year in the Finance Act. Employers are responsible for withholding and remitting taxes on behalf of employees. For tax year 2027, the surcharge previously imposed under section 4AB has been abolished. The separate super tax under section 4C may apply to very high-income individuals at progressive rates ranging from 1% to 10%, generally applicable where income exceeds PKR 150 million. Super tax is not restricted to individuals and can also apply to associations of persons and companies.

Employers must manage several mandatory payroll tax deductions and contributions. Besides income tax withholding, employers contribute 5% and employees 1% of wages, (subject to the statutory minimum wage base) to the Employees’ Old-Age Benefits Institution (EOBI), which supports pensions and related benefits. Employers must also contribute to Provincial Social Security Institutions (such as PESSI in Punjab or SESSI in Sindh), which provide healthcare and injury-related benefits. The total contribution is typically approximately 6% of wages or the applicable insured threshold and is generally employer-funded, with limited or no employee contribution depending on provincial regulations. There is no single national minimum wage. Each province has its own minimum wage, which is used as the contribution base for certain statutory schemes and is revised periodically. Minimum wages across major provinces generally fall within the high PKR 30,000s to low PKR 40,000s per month, depending on the province and applicable wage notifications. Additionally, a covered industrial establishment may be required to contribute 2% of its taxable income to the Workers Welfare Fund (WWF) if the prescribed threshold is met, which is used to fund housing and welfare initiatives for workers. Companies or establishments covered by the applicable Workers’ Profit Participation Fund legislation must also allocate 5% of their profits before tax to the Workers Profit Participation Fund (WPPF), which distributes profit sharing to eligible employees.

Employers must adhere to strict reporting and payment deadlines for payroll taxes. Income tax withheld from employees’ salaries must be deposited with the FBR by the 15th of the following month. Employers are also required to submit monthly withholding tax statements by the 15th of the following month, and an annual salary statement detailing all employee payments and deductions by 30 September following the end of the tax year. Social security and EOBI contributions are also due by the 15th of the following month, with payments made to the respective provincial or federal institutions. Employers must file regular statements and returns detailing these deductions and payments. Applicable WWF contributions must be reported and paid along with the annual corporate income tax return, which is typically due by 30 September for companies with a fiscal year ending on 30 June. WPPF funds must be established and maintained within nine months after the end of the financial year, together with the submission of audited financial statements.

Employers in Pakistan must comply with various tax and labour law obligations related to payroll and employee record-keeping. This includes all employee payments, tax deductions and statutory contributions for a minimum of six years. These records include salary registers, tax deduction certificates, attendance records and proof of EOBI and social security contributions. Compliance with tax laws and labour regulations is enforced by both federal and provincial authorities, and the FBR may conduct audits to ensure adherence. Employers who fail to deduct or deposit income tax on time may face penalties, including fixed fines, percentage-based penalties and default surcharges, depending on the nature and severity of the non-compliance. Additional penalties may apply for late filing of returns, under-reporting income or providing false information, with fines potentially escalating up to 100% of the tax due. Labour law violations, such as failure to maintain statutory employment records or contribute to EOBI or social security, can also result in separate penalties or prosecution by provincial labour departments.