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With a population of more than 210 million, Pakistan is the fifth most populous country in the world and is, therefore, a major player on the world stage, especially in terms of goods and materials. It’s a world leader in textiles and also enjoys strong trade in sugar, cement, tobacco and food processing, which has driven constant growth in the Pakistani economy over the last few decades.

Despite political issues in recent years, Pakistan remains a good candidate for foreign investment thanks to its large population and low wages and living costs. However, it remains a developing country, and incoming businesses should be aware of rules and regulations that can vary from one town to another, and can change at short notice on a regular basis. This guide can help you understand the basics of payroll in Pakistan:

Getting Started

Most incoming businesses into Pakistan set up as either private or public limited companies, which have minimum numbers of shareholders of two and three respectively. The minimum start-up capital for each of these is 100,000 Pakistani rupees (approximately £475; $630; €530).

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Setting up the business runs along a four-step process, some of which can be conducted online:

• Obtaining a company registration PIN from the Securities and Exchange Commission
• Registration procedures, including company name, national tax number, and tax and labor registration 
• Opening of a bank account: this is normally straightforward, although businesses may encounter delays depending on the nature of their business or paperwork. Owners will also need a declaration of compliance, the company memorandum (with signatures), and a list of company leaders. 
• Apply for a sales tax registration number at the relevant regional office

The fees for these are generally minimal: the only significant fee comes in the registration procedures, where a fee of 1000 rupees (approx. £4.75; $6.30; €5.30) applies for the first 100,000 rupees of start-up capital, and additional fees of 500 rupees (approx. £2.40; $3.20; €2.60) are applied to each further 100,000 rupees of start-up capital, up to a maximum of 10 million rupees (approx. £47,500; $63,000; €53,000).

Employment Considerations

Companies with 20 employees or more must have formal written business contracts with employees, stating the compensation, bonuses, and working hours of each employee. Information should be as clear as possible, bearing in mind that adult literacy in Pakistan is only around 70% among men and 40% among women. It’s also recommended that contracts have all financial-related information set out in rupees.

Probationary periods are allowed in the private sector but should last no longer than six months. Collective bargaining is allowed in Pakistan, though the government places strict regulations on the rights of employees to strike.

Maximum working time is nine hours per day and 48 hours per week; and employees should be given one hour of break time per day to cover lunch and prayers. Overtime is limited to 12 hours per week and 624 hours per year, and total hours worked in a day must not exceed 12 hours for men or nine hours for women; overtime is paid at double the normal rate.

Additionally, women are not allowed to work later than 10pm, and only if an employer arranges transport to and from work for the female employee. If not, women cannot work later than 7pm.

Compensation and Severance

The monthly minimum wage in Pakistan was raised in July 2019 to 17,500 rupees (approx. £85; $110; €95); this rate may keep rising in years to come. Wages for skilled labor are generally agreed between employee and employer during the contract negotiation. 

Additionally, businesses with 20 employees or more who post a profit are required to share their profit by paying a bonus to employees with at least 90 days of consecutive service. The amount of bonus paid depends on the amount of profit a company has made over a given year: if the profit is less than the total of one month’s wages for the entire workforce, then 15% is paid; if the profit is equal to or greater than this figure, then 30% is paid.

In cases of termination, one month’s notice must be given, or one month’s salary be paid in lieu if the notice is not served. On top of this, severance pay of one month’s salary per year of service; any incomplete year where more than half of it has been worked prior to severance is counted as a full year for the purposes of this calculation.

Tax and Social Security

Income tax is withheld by employers at source. The first 600,000 rupees (approx. £2900; $3800; €3200) of annual earnings is exempt, and everything above this is subject to 11 progressively increasing tax bands. The largest band of 35% is applicable to all earnings above 75 million rupees (approx. £355,000; $475,000; €400,000). The VAT rate in Pakistan is 17%

Social security contributions of 6% must also be deducted by employers. Contributions to the Employees Old Age Benefits Institution (EOBI) run at 5% for employers and 1% for employees.

Holidays and Leave

Paid leave entitlement in Pakistan is 14 calendar days per year and must be taken consecutively in one two-week block; employees only become eligible for this after 12 months of service. Workers should be paid for the 11 days of public holidays in Pakistan each year.

Paid maternity leave entitlement is a maximum of 12 weeks, six of which must be taken in the first six weeks post-birth. However, rules around parental leave are changing: in early 2020, legislators in Karachi approved an extension of maternity leave to six months for a first child, four months for a second child and three months for a third child. Additionally, one month of paternity leave is granted for each of these three births. Companies should keep abreast of future developments in this area in the near future.

Sick leave entitlement is ten days on full pay, plus a further 16 on half-pay, and medical certification is required.

In Summary

Opportunities in Pakistan are plentiful, but it can be a complicated place to do business, especially with regard to payroll and employment legislation. Care should always be exercised in setting up business in Pakistan, and to maintain compliance, a partnership with a global payroll provider should ensure all relevant regulations are met. That way, you can focus on your core business and build towards successful outcomes.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.