Do I deduct tax from my restaurant staff's salaries, and are free staff meals taxable?

A restaurant that pays salaries is responsible for deducting income tax from them. Section 149 of the Income Tax Ordinance, 2001 puts that duty on every person responsible for paying salary, whether the employer is a hotel chain or a single cafe. Staff meals are a separate question, and the Ordinance answers it with a specific exemption for hotels and restaurants.

What does the law say about deducting tax from salaries?

Section 149(1) requires every person responsible for paying salary to deduct tax at the time of payment. The tax is worked out at the employee’s average rate of tax, using the rates in Division I of Part I of the First Schedule, on the employee’s estimated salary income for the tax year. Before deducting, the employer adjusts for tax already withheld from the employee under other heads and for admissible tax credits, on documentary evidence. Section 149(2) gives the formula: the average rate is A divided by B, where A is the tax on the estimated salary and B is the estimated salary.

Section 12 defines salary widely. It includes pay, wages, overtime, bonus and commission, “any perquisite, whether convertible to money or not”, and any allowance the employer provides.

What are the salary rates for tax year 2027?

The Ordinance as amended to 30 June 2026 carries the rates for tax year 2027, which covers salary paid from 1 July 2026 to 30 June 2027. Clause (2) of Division I applies where salary is more than seventy-five per cent of the person’s taxable income, which is the usual position for restaurant staff.

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

Are free staff meals taxable?

Not when they meet the conditions of clause (53A) of Part I of the Second Schedule. Part I lists incomes that are exempt from tax, and section 53 gives the Second Schedule its effect. Clause (53A) exempts certain perquisites received by an employee by virtue of employment. Sub-clause (ii) covers “free or subsidized food provided by hotels and restaurants to its employees during duty hours”.

Three conditions are built into those words:

1. The food is provided by a hotel or restaurant to its own employees.
2. It is food, free or subsidised, not money.
3. It is given during duty hours.

A meal that meets all three is not added to the employee’s salary when working out the tax under section 149.

Worked example (illustrative figures)

Spice Route, a restaurant in Gulberg, Lahore, pays three staff members the same amount every month of tax year 2027 and gives all staff a free lunch on shift. The salaries are invented; the rates are from the table above.

Waiter, Rs. 45,000 a month

• Annual salary: Rs. 45,000 x 12 = Rs. 540,000.
• Rs. 540,000 does not exceed Rs. 600,000, so tax is 0%. Nothing is deducted.

Head chef, Rs. 150,000 a month

• Annual salary: Rs. 150,000 x 12 = Rs. 1,800,000.
• Amount above Rs. 1,200,000: Rs. 1,800,000 - Rs. 1,200,000 = Rs. 600,000.
• Tax: Rs. 6,000 + 11% x Rs. 600,000 = Rs. 6,000 + Rs. 66,000 = Rs. 72,000.
• Average rate: Rs. 72,000 / Rs. 1,800,000 = 4%.
• Monthly deduction: 4% x Rs. 150,000 = Rs. 6,000.

Manager, Rs. 300,000 a month

• Annual salary: Rs. 300,000 x 12 = Rs. 3,600,000.
• Amount above Rs. 3,200,000: Rs. 400,000.
• Tax: Rs. 316,000 + 25% x Rs. 400,000 = Rs. 316,000 + Rs. 100,000 = Rs. 416,000.
• Monthly deduction: Rs. 416,000 / 12 = Rs. 34,666.67.

The free shift lunches do not change any of these figures, because clause (53A)(ii) exempts them.

What if the employer is a bakery or a cafe, not a restaurant?

Clause (53A)(ii) names “hotels and restaurants”. The Ordinance, as held in this corpus, does not define “restaurant” for this clause, and it does not say whether a cafe, bakery or sweet shop that serves food counts. The law does not settle this, and this page does not fill that gap.

What if the restaurant pays a food allowance instead?

The exemption speaks of food provided. A cash food allowance is an allowance provided by the employer, and section 12(2)(c) includes such allowances in salary. The clause says nothing about cash in place of meals.

What if staff take meals home or eat on a day off?

The clause is limited to food given during duty hours. Meals outside duty hours, or food for family members, are not described by sub-clause (ii). How such a perquisite would be valued is not covered on this page.

Common mistakes

• Treating only large restaurants as employers who must deduct. Section 149 applies to every person responsible for paying salary.
• Deducting a flat percentage. Section 149 requires the employee’s average rate on estimated annual salary, not a fixed rate.
• Ignoring salary changes during the year. Section 149(1) allows adjustment for any excess or shortfall from earlier deductions, so the estimate should follow pay rises and bonuses.
• Assuming all benefits are exempt. Clause (53A) lists specific perquisites. Other perquisites remain part of salary under section 12.

What to check in the official text

Read section 149 and section 12 in the Income Tax Ordinance as amended to 30 June 2026, and the salary table in clause (2) of Division I of Part I of the First Schedule. For meals, read clause (53A) of Part I of the Second Schedule; sub-clause (v) also lets the Board notify other no-cost perquisites, and any such notification is not held in this corpus.