Karachi, October 28, 2024 – The Federal Board of Revenue (FBR) has explained the deduction of tax at source from salary payments, as stipulated under Section 149 of the Income Tax Ordinance, 2001.
This update aims to clarify the rules governing tax obligations for employers who are responsible for withholding tax from employee salaries, as per the latest amendments to the Income Tax Ordinance updated on June 30, 2024.
Section 149 mandates that employers are obligated to withhold tax from an employee’s salary at the time of payment, based on the average tax rate applicable to the individual employee. This average rate is computed in accordance with Division I of Part I of the First Schedule under the Income Tax Ordinance. Employers must consider the total estimated income of the employee under the “Salary” head for the tax year, adjusting for any prior taxes withheld or applicable tax credits under sections 61 and 63, contingent upon submission of relevant documentation. These credits can pertain to, among other things, charitable donations and employee provident fund contributions.
The ordinance further clarifies that the withholding tax should account for the following components:
1. Prior Taxes Withheld: Employers should adjust the tax deducted based on any previous withholding under the ordinance.
2. Adjustment for Previous Errors: Any excessive or deficient deductions from previous salary payments should be corrected within the tax year.
3. Missed Deductions: Employers must account for instances where tax deductions were omitted during the year and adjust accordingly.
To ensure an accurate average tax rate for each employee, the ordinance provides a formula to compute this rate. This formula considers two main components: Component A, the potential tax payable if the employee’s taxable income is assumed to be the estimated salary, and Component B, which includes the employee’s anticipated annual salary and any additional tax liabilities as defined under Section 4AB.
Additionally, specific rules are laid out for directorship fees or fees for attending board meetings. Employers are required to deduct 20 percent of the gross amount paid for these fees at the time of payment, irrespective of the employee’s average tax rate. Notably, the tax deducted under this provision remains adjustable, meaning that any excess amounts withheld may be credited in subsequent calculations.
The FBR’s clarification underscores its commitment to ensuring compliance with tax laws and providing guidance for employers. It emphasizes that failure to correctly apply these deductions can lead to tax discrepancies, penalties, or a need for subsequent tax adjustments. The update reflects FBR’s ongoing efforts to foster transparency and enhance accountability within Pakistan’s tax regime, particularly concerning the withholding tax obligations of employers.