In Pakistan, all employers are required to deduct income tax from employee salaries before payout. The rate of this Tax Deduction at Source (TDS) varies based on the employee's income tax bracket. Employers can refer to the latest tax tables published by the Federal Board of Revenue (FBR) for specific rates. Employees earning less than PKR 600,000 annually are exempt from this tax. The deducted tax is calculated based on these tax tables and applied to the employee's taxable income, which is their gross salary minus exempt allowances. Employers must deposit the deducted tax within 7 days of the end of the week the salary was paid.

Employee Social Security Institution (ESSI) Contributions

Employers with more than five employees are required to make contributions to the Employee Social Security Institution (ESSI). The employer rate is 5% of the employee's wages as notified under the Minimum Wages Ordinance, 1962, although rates may vary by province. The contribution is calculated by multiplying the contribution rate by the employee's wages as notified under the Minimum Wages Ordinance. The deadline for payment varies by province, so employers should consult the relevant provincial social security institute for specific deadlines.

Additional Considerations

Employers must register with the FBR to obtain a National Tax Number (NTN) for tax filing and remittance purposes. Additionally, employers are required to electronically file bi-annual income tax withholding statements with the FBR by July 31st and January 31st for the respective tax periods.

Income tax is a direct tax on salaried income. All employees with a taxable income exceeding PKR 600,000 annually are eligible for this tax. The employer withholds tax based on the tax tables published by the Federal Board of Revenue (FBR). These tables consider the employee's taxable income (gross salary minus exempt allowances) and determine the applicable tax bracket and deduction amount.

Employee Social Security Institution (ESSI) Contributions

ESSI contributions are a type of social security contribution for employee benefits. This applies to employees working for establishments with more than five employees. Contribution rates may vary by province. The employer contributes 5% and the employee contributes 1% of the employee's wages notified under the Minimum Wages Ordinance, 1962. Specific rates and calculation methods can vary by province, so it's advisable to consult the relevant provincial social security institute for details.

Additional Considerations

Certain allowances are exempt from income tax calculations, reducing the taxable income base. These may include house rent allowance, conveyance allowance, and medical allowance (up to a specific limit).

Important Notes

The responsibility lies with the employee to understand these taxes. Tax rules and regulations in Pakistan are subject to change.

In Pakistan, the standard VAT rate is 17% on most taxable services. However, certain specific services have a reduced VAT rate, typically 14%.

VAT Exemptions

A range of services are entirely exempt from VAT in Pakistan. These include basic necessities like educational services, healthcare services, financial services, and public transport.

Eligibility for VAT Registration

Businesses supplying taxable goods and services with an annual turnover exceeding PKR 30 million must register for VAT.

VAT Filing Procedures

VAT-registered businesses must file monthly or quarterly VAT returns electronically with the Federal Board of Revenue (FBR). The specific filing frequency depends on the business's taxable turnover.

Tax incentives are a significant part of the economic policy in many countries, including Pakistan. They are designed to encourage businesses to invest in specific sectors or regions, or to undertake certain activities, such as research and development. Here are some of the key tax incentives available in Pakistan.

Tax Holiday for Special Economic Zones (SEZs)

This is an income tax exemption for a set period. Businesses operating within designated SEZs focused on specific industries like textiles, information technology, and engineering are eligible. To qualify, businesses must meet specific investment thresholds and adhere to SEZ regulations. The application process involves contacting the relevant SEZ management authority for application details and procedures. Each SEZ may have its own application process.

Tax Credits for Research & Development (R&D)

This is a tax credit for a portion of R&D expenses. Businesses engaged in qualified R&D activities are eligible. To qualify, businesses must meet the Federal Board of Revenue's (FBR) definition of R&D and obtain approval from the Pakistan Council for Scientific and Industrial Research (PCSIR). The application process involves submitting an application to FBR with supporting documentation demonstrating R&D activities and PCSIR approval.

Tax Relief for Setting Up New Businesses

This incentive involves reduced income tax rates or tax exemptions for the initial years of a new business. New businesses in specific sectors, such as agriculture, manufacturing, and IT, are eligible. To qualify, businesses must meet FBR's defined criteria for new businesses and operate in qualifying sectors. Consultation with an FBR representative or tax advisor is recommended for specific details as automatic application may apply in some cases.

Special Tax Treatment for Export-Oriented Businesses

This incentive includes reduced customs duty on imports, income tax exemptions, and other benefits. Businesses registered as exporters with the Federal Board of Revenue are eligible. To qualify, businesses must meet export turnover thresholds and adhere to FBR regulations for export-oriented businesses. The application process involves registering as an exporter with FBR. Specific benefits and application processes may vary depending on the incentive program.

Please note that tax incentives in Pakistan are subject to change.