How is tax deducted when an IT company pays salaries in dollars or linked to the dollar rate?

Many Pakistani software houses earn in dollars and pay senior developers the same way, either in dollars or in rupees fixed by reference to the dollar rate. The Income Tax Ordinance, 2001 has no separate regime for this. It converts every amount to rupees and then applies the ordinary salary withholding rules.

What does the law say?

Everything is in rupees. Section 71(1) says “Every amount taken into account under this Ordinance shall be in Rupees.” Section 71(2) says a foreign currency amount is converted to rupees at the State Bank of Pakistan rate applying between that currency and the rupee “on the date the amount is taken into account for the purposes of this Ordinance”.

When salary is taken into account. Section 12(1) charges “Any salary received by an employee in a tax year” under the head “Salary”. Section 69 treats an amount as received when it is actually received, applied on the person’s behalf, or made available to the person.

Withholding. Section 149(1) requires the person paying salary, “at the time of payment, deduct tax from the amount paid”, at the employee’s average rate of tax on estimated annual salary under Division I of Part I of the First Schedule.

Source. Section 101(1)(a) makes salary Pakistan-source income to the extent it is received from employment exercised in Pakistan, “wherever paid”.

How does it work in practice?

Two arrangements need to be kept apart.

Salary fixed in dollars. The contract says USD 2,000 a month. Each payment is a foreign currency amount, so section 71(2) converts it to rupees at the State Bank rate on the date it is taken into account. Section 71 does not name that date for salary. Because section 12(1) charges salary when received and section 149 deducts at the time of payment, the payment date is the date that lines up with both. The Ordinance does not say this in terms.

Salary in rupees linked to the dollar. The contract says the rupee salary equals USD 2,000 at a stated rate each month. The amount paid is already in rupees, so section 71 has nothing to convert. The rupee amount paid is the salary, and it changes from month to month.

In both cases the employer’s section 149 estimate of annual salary is a forecast in rupees. The Ordinance does not say which future exchange rate to assume. What it does provide, in section 149(1), is an adjustment for “any excess deduction or deficiency arising out of any previous deduction”, which lets later months correct earlier ones.

Worked example (illustrative figures)

Bilal is a senior engineer at an Islamabad software house, paid USD 2,000 a month with no other income. The exchange rates below are invented for the example and are not State Bank rates. The tax rates are the clause (2) rates for tax year 2027.

July to December 2026, rate Rs. 280 per dollar:

1. Monthly rupee salary: USD 2,000 x Rs. 280 = Rs. 560,000.
2. Estimated annual salary: Rs. 560,000 x 12 = Rs. 6,720,000.
3. Tax under clause (2): Rs. 976,000 + 32% x (Rs. 6,720,000 - Rs. 5,600,000) = Rs. 976,000 + Rs. 358,400 = Rs. 1,334,400.
4. Monthly deduction: Rs. 1,334,400 / 12 = Rs. 111,200.
5. Deducted over six months: 6 x Rs. 111,200 = Rs. 667,200.

January to June 2027, rate Rs. 290 per dollar:

1. Monthly rupee salary: USD 2,000 x Rs. 290 = Rs. 580,000.
2. Revised annual salary: (6 x Rs. 560,000) + (6 x Rs. 580,000) = Rs. 3,360,000 + Rs. 3,480,000 = Rs. 6,840,000.
3. Revised tax: Rs. 976,000 + 32% x (Rs. 6,840,000 - Rs. 5,600,000) = Rs. 976,000 + Rs. 396,800 = Rs. 1,372,800.
4. Still to deduct: Rs. 1,372,800 - Rs. 667,200 = Rs. 705,600.
5. Monthly deduction for the last six months: Rs. 705,600 / 6 = Rs. 117,600.

Even spreading of the balance is one way of making the section 149 adjustment. The section does not prescribe it.

What if the salary is paid by a foreign parent?

Section 12(5)(a) treats an amount as received from employment whether paid by the employer, an associate of the employer, or a third party under an arrangement with the employer. Section 101(1)(a) keeps the salary Pakistan-source if the work is done in Pakistan, wherever paid. Section 149 places the deduction duty on the “person responsible for paying salary”. The Ordinance does not spell out how that duty applies when the payer is a non-resident with no presence in Pakistan, and this page does not resolve that.

What if the employee receives dollars into a foreign currency account?

The account type does not change section 71. The salary is still converted to rupees for tax purposes. Rules on foreign currency accounts under State Bank regulations are outside this corpus.

Common mistakes

• Using the contract rate for tax. For a salary fixed in dollars, section 71(2) uses the State Bank rate, not an internal or contract rate.
• Freezing the estimate in July. A dollar salary changes in rupee terms. Section 149 withholding works on estimated annual salary, which moves with the rupee.
• Treating offshore payment as offshore income. Section 101(1)(a) looks at where the employment is exercised.

What to check in the official text

Read sections 12, 69, 71, 101 and 149, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. The State Bank of Pakistan’s published exchange rates, which section 71 relies on, are not part of this corpus.