Does a clinic owner or lawyer have to deduct tax from the salaries of staff, clerks and juniors?

A professional who hires staff becomes a withholding agent for their salaries. The Ordinance does not limit this duty to companies or large employers: a sole practitioner running a clinic in Rawalpindi or a chamber in Karachi is covered in the same way.

What does the law say?

Section 149(1) says every person responsible for paying salary to an employee “shall, at the time of payment, deduct tax from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule on the estimated income of the employee chargeable under the head ‘Salary’” for the tax year. The deduction is adjusted for tax withheld from the employee under other heads, the donation and pension fund tax credits the employee is entitled to, supported by documents, and any earlier excess, shortfall or failure to deduct.

Section 149(2) sets the average rate as A/B, where A is the tax on the employee’s estimated annual salary (plus any surcharge) and B is that estimated salary.

Section 165 requires statements. Every person deducting tax under Division III of Part V of Chapter X, which includes section 149, files quarterly statements with each payee’s name, CNIC or NTN and address, payments and tax. Section 165(2) sets the due dates: 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. Section 165(6) adds an annual statement for salary deductions.

Section 21(c) disallows, in computing Income from Business, any expenditure from which tax must be deducted “unless the person has paid or deducted and paid the tax”. Staff salaries are such an expenditure.

Section 161 makes a person who fails to deduct, or deducts but fails to pay, “personally liable to pay the amount of tax to the Commissioner”, after an opportunity of being heard.

How does it work in practice?

The tax year 2027 rates for employees whose salary is more than 75% of taxable income come from clause (2) of Division I:

Taxable income	Tax
Up to Rs. 600,000	0%
Rs. 600,001 to Rs. 1,200,000	1% of the amount over Rs. 600,000
Rs. 1,200,001 to Rs. 2,200,000	Rs. 6,000 + 11% of the amount over Rs. 1,200,000
Rs. 2,200,001 to Rs. 3,200,000	Rs. 116,000 + 20% of the amount over Rs. 2,200,000
Rs. 3,200,001 to Rs. 4,100,000	Rs. 316,000 + 25% of the amount over Rs. 3,200,000
Rs. 4,100,001 to Rs. 5,600,000	Rs. 541,000 + 29% of the amount over Rs. 4,100,000
Rs. 5,600,001 to Rs. 7,000,000	Rs. 976,000 + 32% of the amount over Rs. 5,600,000
Above Rs. 7,000,000	Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000

Worked example (illustrative figures)

Dr. Saima Javed runs a dental clinic in Faisalabad. All salaries are made up.

Receptionist, Rs. 45,000 a month.

1. Estimated annual salary: Rs. 45,000 x 12 = Rs. 540,000.
2. This is below Rs. 600,000, so tax is 0% and nothing is deducted.

Associate dentist on salary, Rs. 150,000 a month.

1. Estimated annual salary: Rs. 150,000 x 12 = Rs. 1,800,000.
2. Tax: Rs. 6,000 + 11% of (Rs. 1,800,000 - Rs. 1,200,000) = Rs. 6,000 + Rs. 66,000 = Rs. 72,000.
3. Average rate: Rs. 72,000 / Rs. 1,800,000 = 4%.
4. Monthly deduction: Rs. 150,000 x 4% = Rs. 6,000.

If she deducts nothing from the associate. Under section 21(c), the Rs. 1,800,000 salary is disallowed in computing her business income. Under section 161 she is personally liable for the Rs. 72,000. Serial 15 of the section 182 Table sets a penalty of the higher of Rs. 40,000 and 10% of the tax (Rs. 7,200), which is Rs. 40,000.

What if …?

What if the associate pays the tax himself later? Section 161(1B) says that where the tax has meanwhile been paid by the employee, no recovery is made from the employer, but default surcharge applies at twelve per cent a year from the date of failure to the date of payment.

What if a junior is not an employee? Section 149 applies to salary paid to an employee. Fees paid to an independent junior or visiting consultant fall under different rules, covered on the visiting consultant page in this category.

What if I file a statement late? Serial 1A of the section 182 Table sets Rs. 50,000 where the tax was paid on time and the statement is filed within ninety days of the due date, and otherwise Rs. 2,500 for each day of default, subject to a minimum of Rs. 10,000. A proviso sets the minimum at Rs. 10,000 where no tax was required to be deducted in the period.

Common mistakes

• Thinking only companies withhold. Section 149 applies to every person responsible for paying salary.
• Deducting a flat percentage. The rate is the employee’s average rate on estimated annual salary under section 149(2).
• Deducting but not depositing. Section 21(c) requires the tax to be deducted and paid, and section 161 applies to both failures.
• Skipping statements in nil months. The proviso to section 165(1) requires statements even where nothing was deducted.

What to check in the official text

Read sections 149, 165, 21(c) and 161, the clause (2) table of Division I, Part I of the First Schedule, and serials 1A and 15 of the Table in section 182. Deposit timing is prescribed in the Income Tax Rules, so check the current rules for the payment date.