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What global businesses need to know about payroll in Pakistan
You might not have thought of Pakistan as an international business destination, but any country in the top five of the global population rankings has to be given some consideration. Home to more than 240 million people, Pakistan still puts a major focus on agriculture and industry, especially in its strong trade in textiles, sugar, cement, tobacco, and food processing. However, 58% of its economy is now services, which is moving it closer towards the service-heavy economies of the West.
One thing that often works against doing business in Pakistan is its economic instability, but if you’re a Western business, this currently works in your favor. As an example, at the end of 2023, one US dollar would get you around 280 Pakistani rupees, whereas it would have only got you around 110 rupees just six years previously. Similar rises have also taken place for the pound sterling and the euro, meaning that Pakistan currently represents great value for money for incoming organizations.
But as with any country, Pakistan has its own unique requirements around payroll and employment, and it’s vital that you stay on top of them – especially as they could change at any time in the future. We’ve set out the basics for you in this guide.
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 £280; $350; €320).
Setting up the business runs along a four-step process, which takes around two to three weeks in total:
- 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. £2.80; $3.50; €3.20) applies for the first 100,000 rupees of start-up capital, and additional fees of 500 rupees (approx. £1.40; $1.80; €1.60) are applied to each further 100,000 rupees of start-up capital, up to a maximum of 10 million rupees (approx. £28,000; $35,000; €32,000).
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. You should bear in mind that not everyone will be able to read and understand complex contract information: literacy rates in Pakistan are around 70% for men and 45% for women. Make sure that all information in contracts is as clear and concise as possible, and that employees get every opportunity to understand what they are signing up to. 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; three-month probationary periods are most common. Collective bargaining is allowed in Pakistan, though the government places strict regulations on the rights of employees to strike.
Working time is generally eight or nine hours per day and 45 hours per week, and there is a maximum of 48 hours per week; employees should also 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. These restrictions also apply to employees under 18, regardless of gender.
Compensation and Severance
The monthly minimum wage in Pakistan has risen substantially in recent years. As of July 2023, the rate is 32,000 rupees a month (approx. £90; $115; €100). This is 83% more than it was as recently as 2019, although the deterioration of the exchange rates means that minimum wages have actually changed very little in pound, dollar, or euro terms.
There will likely be more major rises to come, so make sure you keep abreast of developments in this area – new rates generally take effect on July 1 each year. 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 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% of the profit 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. £1700; $2100; €1900) of annual earnings is exempt, and everything above this is subject to five progressively increasing tax bands. The largest band of 35% is applicable to all earnings above six million rupees (approx. £17,000; $21,000; €19,000). High earners are also subject to an additional super tax, which kicks in on earnings exceeding 150 million rupees a year (approx. £420,000; $530,000; €480,000)
The VAT rate in Pakistan is 18%. The main corporate tax rate is 29%, although a reduced rate of 20% applies to certain small businesses, and a higher rate of 39% applies to banking firms.
Social security contributions are relatively simple in Pakistan. Employers contribute 5% into the pension fund, while employees pay in a further 1%. Employees also make contributions to healthcare, at a flat rate of 40 rupees a month (approx. £0.10; $0.15; €0.15).
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. This leave can be carried over into the following year in its entirety if the employee so wishes. Workers should be paid for the 16 days of public holidays in Pakistan each year. Whether employees get days off in lieu for holidays that fall on weekends is decided annually by local governments.
Paid maternity leave entitlement is a maximum of 12 weeks, six of which must be taken in the first six weeks post-birth. Additionally, one month of paternity leave is granted for each of their first three children. Rules around both maternity and paternity leave are evolving in Pakistan and companies should keep abreast of future developments in this area.
Sick leave entitlement is ten days on full pay, plus a further 16 on half-pay, and medical certification is required. Employees are also granted ten days of paid ‘casual leave’ per year, if they are required to deal with certain personal affairs.
In Summary
As this guide demonstrates, Pakistan can be a complicated place to do business. There are cultural considerations to take into account, various unique payroll and employment characteristics, and also the risk of economic and political instability. To make the most of the opportunities there, we would always recommend working with a global payroll partner who can give you the benefit of their country-specific expertise.
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.