What must a software house do as an employer to deduct and deposit tax on staff salaries?

When a software house hires its first salaried developer, it becomes a withholding agent under the Income Tax Ordinance, 2001. The duty has four parts: work out and deduct tax at each salary payment, pay that tax to the Commissioner, report it in statements, and carry the liability if any step is missed.

What does the law say?

Deduct at payment. 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 employee’s estimated salary income for the tax year. The employer adjusts for tax already withheld from the employee under other heads, for admissible tax credits where documentary evidence is obtained, and for any excess or shortfall from earlier deductions.

How the rate is found. Section 149(2) sets the average rate as A/B. A is the tax that would be payable if B were the employee’s taxable income. B is the employee’s estimated income under the head “Salary” for the year.

What salary includes. Section 12(2) covers “any pay, wages or other remuneration provided to an employee”, including bonus, commission, overtime and leave pay, as well as perquisites, most allowances and reimbursed personal expenses.

Pay it over. Section 160 says tax deducted under Division III of Part V of Chapter X, which includes section 149, “shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed”. The time and manner are set in the rules, not in the section.

Report it. Section 165(1) requires a quarterly statement listing each employee’s name, CNIC or NTN, address, payments made and tax deducted. Section 165(2) sets the due dates. Section 165(6) adds an annual statement for employers deducting under section 149.

Carry the risk. Section 161(1) says that where a person fails to deduct tax as required, or deducts it but fails to pay it under section 160, “the person shall be personally liable to pay the amount of tax to the Commissioner”.

Which rates apply for tax year 2027?

Where salary is more than 75% of an employee’s taxable income, clause (2) of Division I of Part I of the First Schedule applies. 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 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)

A Lahore software house employs Ayesha, a QA engineer, at Rs. 250,000 a month from July 2026. She has no other income. The figures are invented. The rates are the clause (2) rates above.

1. Estimated annual salary: Rs. 250,000 x 12 = Rs. 3,000,000.
2. Tax: Rs. 116,000 + 20% x (Rs. 3,000,000 - Rs. 2,200,000) = Rs. 116,000 + Rs. 160,000 = Rs. 276,000.
3. Average rate: Rs. 276,000 / Rs. 3,000,000 = 9.2%.
4. Monthly deduction: Rs. 250,000 x 9.2% = Rs. 23,000.
5. The company pays Rs. 23,000 to the Commissioner under section 160 and reports it in the quarterly statement under section 165.

What if the salary changes during the year?

Section 149(1) lets the employer adjust for “any excess deduction or deficiency arising out of any previous deduction”. Suppose Ayesha is promoted from November 2026 to Rs. 300,000 a month.

1. Four months at Rs. 250,000 = Rs. 1,000,000. Tax deducted so far: 4 x Rs. 23,000 = Rs. 92,000.
2. Eight months at Rs. 300,000 = Rs. 2,400,000.
3. Revised estimated salary: Rs. 1,000,000 + Rs. 2,400,000 = Rs. 3,400,000.
4. Tax: Rs. 316,000 + 25% x (Rs. 3,400,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 50,000 = Rs. 366,000.
5. Still to deduct: Rs. 366,000 - Rs. 92,000 = Rs. 274,000.
6. Spread over eight months: Rs. 274,000 / 8 = Rs. 34,250 a month.

Section 149 does not prescribe spreading the shortfall evenly. Even spreading is one way of making the adjustment the section allows.

What if the company misses a deduction?

Section 161(1)(a) makes the company personally liable for tax it failed to deduct. Under section 161(1A) no recovery is made without an opportunity of being heard. Under section 161(1B), if the employee has since paid the tax, the company is not charged the tax again but pays default surcharge at twelve per cent a year from the date it failed to deduct until the date the tax was paid. Section 161(2) lets the company recover the tax from the employee.

Common mistakes

• Deducting on basic pay only. Section 12(2) brings allowances, bonus and perquisites into salary.
• Treating each month separately. Section 149 works on the estimated annual salary, not on one month in isolation.
• Skipping nil statements. The first proviso to section 165(1) requires a statement even where no tax is deducted in the period.
• Assuming deduction ends the duty. Section 161(1)(b) covers tax deducted but not paid over.

What to check in the official text

Read sections 12, 149, 160, 161 and 165, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. The payment deadline and statement forms are prescribed in the Income Tax Rules, 2002, which should be checked for the current form and time.