What are a software house's obligations to deduct tax from staff salaries under section 149?

A software house that pays salaries is a withholding agent under the Income Tax Ordinance, 2001. Each time it pays an employee, it must deduct tax from that payment, deposit it, and report it. If it gets this wrong, the Ordinance puts the unpaid tax on the employer.

What does the law say?

Section 149(1) requires every “person responsible for” paying salary to an employee to deduct tax “at the time of payment”. The amount is the employee’s average rate of tax, computed at the rates in Division I of Part I of the First Schedule, applied to the payment. The average rate is based on the employee’s estimated income under the head “Salary” for the tax year in which the payment is made.

Section 149(2) gives the formula: A/B, where A is the tax payable if B were the employee’s taxable income, and B is the employee’s estimated salary income for the year.

“Salary” is broad. Section 12(2) includes pay, wages, leave pay, overtime, bonus, commission, fees, gratuity, “any perquisite, whether convertible to money or not”, and allowances such as rent, utilities, education and travel, other than an allowance solely expended in performing the employee’s duties.

Section 149(1) also lets the employer make adjustments, after obtaining documentary evidence, for tax withheld from the employee under other heads, certain tax credits admissible to the employee, any excess deduction or deficiency from a previous deduction, and a failure to deduct earlier in the year.

Which rate table applies for tax year 2027?

Clause (2) of Division I applies where salary exceeds seventy-five per cent of the individual’s taxable income. For tax year 2027 the table reads:

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

How does it work in practice?

Deposit and statements. Section 165(1) requires every person deducting tax under this Division to furnish a quarterly statement to the Commissioner, showing each payee’s name, CNIC or NTN and address, total payments and total tax deducted. The proviso requires a statement even for a quarter in which nothing was deducted. Section 165(2) sets the due dates: 20 April, 20 July, 20 October and 20 January. Section 165(2A) allows a revised statement within sixty days if an omission or error is found.

Annual statements. Section 165(6) requires every person deducting tax under section 149 to furnish an annual statement in the prescribed form. Sub-sections (7) and (8) require prescribed persons to e-file an annual statement within thirty days of the end of the tax year and a reconciliation with the return and accounts by the return due date.

Directors’ fees. Section 149(3) is separate: a fee for directorship or for attending board meetings is subject to deduction at twenty percent of the gross amount, adjustable under section 149(4).

Worked example (illustrative figures)

Ayesha is a senior developer at a software house in Johar Town, Lahore. Her salary is Rs. 300,000 a month and she has no other income, so salary exceeds seventy-five per cent of taxable income.

1. Estimated salary for tax year 2027 (B): Rs. 300,000 x 12 = Rs. 3,600,000.
2. Tax on Rs. 3,600,000 (A): Rs. 316,000 + 25% x (Rs. 3,600,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 100,000 = Rs. 416,000.
3. Average rate (A/B): Rs. 416,000 / Rs. 3,600,000 = 11.56% (rounded).
4. Monthly deduction: Rs. 416,000 / 12 = Rs. 34,667 (rounded).

Mid-year raise. From January, her salary rises to Rs. 350,000.

1. Revised estimate: (Rs. 300,000 x 6) + (Rs. 350,000 x 6) = Rs. 1,800,000 + Rs. 2,100,000 = Rs. 3,900,000.
2. Revised tax: Rs. 316,000 + 25% x (Rs. 3,900,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 175,000 = Rs. 491,000.
3. Already deducted July to December: Rs. 34,667 x 6 = Rs. 208,002.
4. Remaining: Rs. 491,000 - Rs. 208,002 = Rs. 282,998, spread over six months = Rs. 47,166 a month (rounded).

Step 4 uses the section 149(1) adjustment for a deficiency arising out of previous deductions.

What if an employee also has a second job or other income?

The employer can only estimate the salary it pays and adjust for tax withheld under other heads on documentary evidence. Where salary is not more than seventy-five per cent of taxable income, clause (2) of Division I does not apply and the other rates in Division I govern the employee’s own liability.

What if we fail to deduct?

Section 161(1) makes a person who fails to deduct tax as required, or deducts and fails to pay it, “personally liable to pay the amount of tax to the Commissioner”. Section 161(1A) requires an opportunity of being heard first. Under section 161(1B), if the employee has already paid the tax, no recovery is made from the employer, but default surcharge at twelve per cent per annum runs from the date of failure to the date the tax was paid. Section 161(2) lets the employer recover the tax from the employee.

Common mistakes

• Deducting on basic pay only. Section 12(2) counts allowances and perquisites as salary.
• Skipping nil statements. The proviso to section 165(1) requires a statement even where nothing was withheld.
• Not recalculating after a raise or bonus. The average rate depends on estimated annual salary, which changes when pay changes.

What to check in the official text

Read sections 149, 161 and 165, and the clause (2) table in Division I of Part I of the First Schedule in the official PDF. The prescribed forms for statements are set by rules and Board procedures; the Income Tax Rules held in this corpus are amended only to 24 November 2023.