3. 1- What is Payroll
A payroll is a company's list of its employees, but the
term is commonly used refer to:
• the total amount of money that a company pays to its
employees,
• a company's records of its employees’ salaries and
wages, bonuses, compensation and benefits and
deduction applicable (taxes etc.)
• the company's department that calculates and pays
these.
4. 1.1 Responsibility of payroll preparation
It varies according to size and policies of the company
or organization.
Payroll may be dealt by:
a separate payroll department.
Human Resource department.
Finance department but directed by Human
Resource Department
6. 1.3 Components of salary
Basic Salary
House Rent Allowance
Medical Allowance
Provident Fund
Leave encashment
Utility Allowance
Vehicle Allowance
Fuel Allowance
7. 1.4 Laws for employees and workers
Minimum Wage
Working Hours
Holidays
8. 1.4.1 Minimum Wage
Minimum wages should be Rs. 13000/- per month as
per budget 2015-16.
It varies according to Federal and Provincial laws.
9. 1.4.2 Working Hours
According to Industrial Laws as applicable in Pakistan:
Daily Hours (9:00 a.m. to 5:30 a.m.)
Weekly Hours (5 days)
Saturdays as per bank requirement
11. 2.0 What is Tax
Definition
Tax is a charge or levy imposed by a state upon a tax
payer for no consideration and if fail to comply will be
punishable by law.
Economical benefits and Importance
12. 2.1 Types of Taxes
Direct taxes
Tax imposed directly on person.
Example: income tax, property tax etc.
Indirect taxes
Tax imposed indirectly
Example: Sales Tax, FED, etc.
14. 3.1 Taxable and Exempt Salary
Taxable Salary
Means total salary as reduced by deductible allowances.
Some allowances are wholly or partially exempted.
Exempt Salary
Means Salary on which tax is not applicable.
Total Salary
It includes both the taxable and exempt portion of the
salary.
15. 3.2 Provident Fund
PF is composed of the equal contribution of both the
employer and employee which cumulate up to the
conclusion of employment.
Types of fund are
Recognized PF (deduction and benefits allowed)
Unrecognized PF (deduction and benefits not-
allowed)
16. 3.2.1 Investment of Provident Fund
The fund is required to be invested in a prescribed
investment by SECP in Sec 227 of C.O.1984
Deposit of amount within 15 days in
(i) in a National Savings Scheme;
(ii) in a special account to be opened by the
company for the purpose
in a scheduled bank; or
(iii) where the company itself is a scheduled bank,
in a special
17. account to be opened by the company for the
purpose either in
itself or in any other scheduled bank; or
be invested in Government securities; or
in bonds, redeemable capital, debt securities or
instruments issued by the
Pakistan Water and Power Development Authority
and in listed
securities subject to the conditions as may be
prescribed by the
Commission.]
3.2.1.1 Investment of Provident Fund
18. 3.2.2 Exemption from tax
Provident fund Contribution of employer
Exempt up to 1/10th or Rs. 100,000 of the salary amount
which ever is lower.
Profit or Interest:
Exempt up to 1/3rd of salary amount.
20. 4.1 Salary Laws by Income Tax
Ordinance, 2001
According to Section 12(2) salary includes following:
Basic pay (Normally 1.55 of the gross pay or defined by the
company policy)
Other Remuneration includes:
Leave pay
Payment in lieu of leaves
Bonus commission
Fees
Gratuity
Work condition supplements
Any perquisite whether convertible to money or not
21. 4.1 Salary Laws by Income Tax
Ordinance, 2001
According to Section 12(2) salary includes following:
Allowances includes:
Cost of living
Subsistence
Rent
Utilities
Education
Entertainment
Travel allowance except that are solely incurred for
performance of employee’s duties of employment.
22. 4.1 Salary Laws by Income Tax
Ordinance, 2001
According to Section 12 salary includes following:
Reimbursement includes:
The amount of any expenditure incurred by an
employee that is paid or reimbursed by the employer
but these expenditure are other than expenditure
incurred on behalf of employer in the performance of
employee’s duties of performance.
23. 4.1 Salary Laws by Income Tax
Ordinance, 2001
According to Section 12 salary includes following:
Amount other than salary received for:
for entering into employment relationship,
for condition to employment or change to employee’s
condition for employment e.g. change in working hours or
relocation,
for termination of employment e.g. golden handshake,
from provident or other fund for which employee is not
entitled for deduction, e.g. interest on PF,
restrictive covenant in respect of any past, present or
prospective employment, e.g. not to join previous employer
for two years,
24. 4.1 Salary Laws by Income Tax
Ordinance, 2001
According to Section 12 salary includes following:
Amount other than salary received for:
for termination of employment e.g. golden handshake,
Calculated as per following formula
A/B%
WHERE;
A is tax amount in the preceding tax year, and
B is taxable amount in the preceding tax year.
Refer calculation.
25. 4.1 Salary Laws by Income Tax
Ordinance, 2001
According to Section 12 salary includes following:
tax amount which is paid by the employer in order to
benefit employee is also added to the employee’s
taxable salary,
Refer Calculation.
27. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Motor vehicles
a motor vehicle is provided by an employer to an
employee wholly or partly for the private use of the
employee, the amount chargeable to tax to the
employee under the head ―Salary for that year shall
include an amount computed as
Fully personal use 10% of the cost,
Partially personal and partly official use 5%
Fully office use 0%
28. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Housekeeper, driver, gardener or other domestic
assistant:
Where, in a tax year, the services of a housekeeper, driver,
gardener or other domestic assistant is provided by an
employer to an employee, the amount chargeable to tax to
the employee under the head ―Salary for that year shall
include the total salary paid to house keeper, driver, gardener
or other domestic assistant in that year for services rendered
to the employee, as reduced by any payment made to the
employer by employee for such services.
29. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Utilities:
Where, in a tax year, the services of a housekeeper, driver,
gardener or other domestic assistant is provided by an
employer to an employee, the amount chargeable to tax to
the employee under the head Salary for that year shall
include the total salary paid to house keeper, driver, gardener
or other domestic assistant in that year for services rendered
to the employee, as reduced by any payment made to the
employer by employee for such services.
“Utilities include Electricity, gas, water and telephone.”
30. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Loan:
If loan is given to employees at a rate lower than
benchmark rate than the differential mark up if loan is
given on benchmark rate shall be added to taxable salary
of the employee.
“Benchmark Rate is defined by income tax ordinance, 2001 and it is
10% for the current tax year.”
31. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Loan:
If loan is given to employees at a rate lower than benchmark
rate than the differential mark up if loan is given on
benchmark rate shall be added to taxable salary of the
employee. (Loan should not exceed Rs. 500,000)
“Benchmark Rate is defined by income tax ordinance, 2001 and it is 10%
for the current tax year.”
Provided if the above said loan is used wholly or partly for any asset or
property generating income that the mark up will not be added to taxable
salary income.
32. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Waiver:
If employees is liable to pay any amount to the employer
is waived than such amount is also added to taxable
salary.
Owed amount paid by employer:
If employees is liable to pay any amount to third person
that is paid by the employer, than such amount is also
added to taxable salary.
33. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Transfer of Property or services provided by the
employer:
If any is transferred in the name of employee by
employer than the fair market value of the property or
service will be added to taxable salary of the employee.
34. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Accommodation:
If any accommodation is provided to employee by
employer such amount will also be added employee’s
taxable salary.
35. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Any other perquisite:
If any other perquisite as not mentioned, than the fair
market value of such perquisite will be added to the
taxable salary of the employee.
36. 5.1 Salary Laws by Income Tax
Ordinance, 2001 (Value of perquisites)
According to Section 13 perquisites includes following:
Any other perquisite:
If any other perquisite as not mentioned, than the fair
market value of such perquisite will be added to the
taxable salary of the employee.
38. 6.1 Employee Share Scheme
According to Section 14
If any share of the bank is issued to an employee at
value lesser than its fair value than the differential is
liable to be taxed but if it is allowed to disposed it off
at that time, and if it is restricted to be disposed on
some future date than it will taxable on that future
date.
40. Current Tax Rates TY 2016
S.N
o.
Taxable Income Rate of tax
1 Where the taxable income does
not exceed Rs.400,000
0%
2 Where the taxable income
exceeds Rs.400,000 but does not
exceed Rs.500,000
2% of the amount exceeding
Rs.400,000
3 Where the taxable income
exceeds Rs.500,000 but does not
exceed Rs.750,000
Rs. 2000 + 5% of the amount
exceeding Rs.500,000
4 Where the taxable income
exceeds Rs.750,000 but does not
exceed Rs.1,400,000
Rs.14,500 + 10% of the amount
exceeding Rs.750,000
5 Where the taxable income
exceeds Rs.1,400,000 but does
not exceed Rs.1,500,000
Rs. 79,500 + 12.5% of the amount
exceeding Rs.1,400,000
6 Where the taxable income
exceeds Rs.1,500,000 but does
not exceed Rs.1,800,000
Rs. 92,000 + 15% of the amount
exceeding Rs.1,500,000
41. S.N
o.
Taxable Income Rate of tax
7 Where the taxable income exceeds
Rs.1,800,000 but does not exceed
Rs.2,500,000
Rs.137,000 + 17.5% of the amount
exceeding Rs.1,800,000
8 Where the taxable income exceeds
Rs.2,500,000 but does not exceed
Rs.3,000,000
Rs. 259,500 + 20% of the amount
exceeding Rs.2,500,000
9 Where the taxable income exceeds
Rs.3,000,000 but does not exceed
Rs.3,500,000
Rs. 359,500 + 22.5% of the amount
exceeding Rs.3,000,000
10 Where the taxable income exceeds
Rs.3,500,000 but does not exceed
Rs.4,000,000
Rs.472,000 + 25% of the amount
exceeding Rs.3,500,000
11 Where the taxable income exceeds
Rs.4,000,000 but does not exceed
Rs.7,000,000
Rs.597,000 + 27.5% of the amount
exceeding Rs.4,000,000
12 Where the taxable income exceeds
Rs.7,000,000
Rs.1,422,000 + 30% of the amount
exceeding Rs.7,000,000]
Current Tax Rates TY 2016
42. 7.1 Reduced Tax Rates
According to second schedule of the Income Tax
Ordinance, 2001
43. 7.2 Calculation of Taxable Salary
Case Study on excel sheet according to Income Tax
Ordinance, 2001 and Income Tax Rules, 2002
45. 8.1 Tax Credits
Salaried person is allowed a tax credit for following:
For donations
For investment in shares and insurance
For Contribution to an Approved Pension Fund
46. 8.1.1 Formula and guidelines for
calculation of tax credits
Excel Sheet attached.
48. 8.1 Tax Adjustments
Adjustable taxes that deducted at sources or withheld
by the withholding agent are available to be adjusted
against the tax liability on salary income. For example:
Adjustable taxes on bank profits, any service income,
any interest income, on vehicle registration, taxes on
electricity or telephone mobile phone bills or on
internet bills payments.
50. 9.1 Other Withholding Taxes as per
Income Tax Ordinance, 2001
Document Provided including list of withholding
taxes their rates (filer and non-filer) and their rules.
51. 9.2 Withholding Tax payment
A tax deducted or collected at source, especially one
levied by some countries on interest or dividends paid
to a person resident outside that country.
In Pakistan withholding tax is levied by Federal Board
of Revenue on Salaries, dividend, profit on debt,
commission, payment for contract, payment for goods
or services, advertising and others.
52. 9.3 Withholding Tax on Salaries
According to Section 149 of the income tax ordinance,
2001, every person acting as a withholding agent
making payment of salary at the time of payment shall
deduct tax at the rate prescribed in the ordinance.
The amount deducted shall be deposited in the
Government Treasury within fifteen (15) days by the
withholding agent.
53. 9.4 Withholding Agent
Definition:
A person required by law to deduct or collect tax for
tax authorities and than deposit such amount in
Government Treasury within specified time period.
54. 9.5 Withholding Tax Payment
To generate PSID on FBR Portal
Separate guidance manual.
55. 9.6 Withholding tax statements
Annually u/s 165 of the Income Tax Ordinance, 2001
Format In excel workbook
56. 9.7 Withholding Tax Certificate
Prescribed Format as per Income Tax Rules
Annexure 2
58. 10.1 Final Settlement
Notice period salary
Provident fund
Gratuity fund payment
Interest on Provident fund payment if applicable
Leave encashment
Assets if given to employees e.g Car, mobile etc
60. 10.3 Gratuity Fund
Gratuity fund:
Gratuity fund payment is exempt from tax if it is
approved.
If it is unapproved than amount above Rs.200,000 is
taxable.
Relief:
Only relief available is that it may be taxed on the
average tax rate of preceding three year if permitted by
income tax commissioner.
62. 11.1 Payroll Preparation and
Management
Payroll preparation is supposed to be a highly
confidential process and its document and
information required to be keep confidential.
It involves primarily HR and finance department and
secondarily head of each department.
63. 11.2 Elements of payroll system
Characteristics of population
Number of employees
Nature of employment
Permanent
Temporary
Contractual
Third party relationship
64. 11.2 Elements of payroll system
Gross salaries of the employees
Basic Salaries
Allowances
Deductions (Taxes, unpaid leaves, EOBI and others)
Other remuneration.
65. 11.2 Elements of payroll system
Employees involve in payroll preparation, their
designation, their remuneration and other facilities
available to them.
Accounting systems used for payroll preparation and
data management.
Approval and authorization of payroll.
Payment of salaries to employees.
67. 12.1 Internal Controls over payroll
management
Five Element of internal control:
The control environment
Risk Assessment Process
The information system
Control Activities
Monitoring of controls
68. 12.2 Internal Controls
General payroll controls
Audit.
Have either internal or external auditors conduct a
periodic audit of the payroll function to verify whether
payroll payments are being calculated correctly,
employees being paid are still working for the
company, time records are being accumulated
properly, and so forth.
69. 12.2 Internal Controls
General payroll controls
Change authorizations.
Only allow a change to an employee’s marital status,
withholding allowances, or deductions if the employee
has submitted a written and signed request for the
company to do so. Otherwise, there is no proof that
the employee wanted a change to be made. The same
control applies for any pay rate changes requested by a
manager.
70. 12.2 Internal Controls
General payroll controls
Change tracking log.
If you are processing payroll in-house with a
computerized payroll module, activate the change
tracking log and make sure that access to it is only
available through a password-protected interface. This
log will track all changes made to the payroll system,
which is very useful for tracking down erroneous or
fraudulent entries.
71. 12.2 Internal Controls
General payroll controls
Error-checking reports.
Some types of payroll errors can be spotted by running
reports that only show items that fall outside of the
normal distribution of payroll results. These may not
all indicate certain errors, but the probability of
underlying errors is higher for the reported items. The
payroll manager or a third party not involved in payroll
activities should run and review these reports.
72. 12.2 Internal Controls
General payroll controls
Expense trend lines.
Look for fluctuations in payroll-related expenses in
the financial statements, and then investigate the
reasons for the fluctuations.
73. 12.2 Internal Controls
General payroll controls
Issue payment report to supervisors.
Send a list of payments to employees to each
department supervisor, with a request to review it for
correct payment amounts and unfamiliar names. They
may identify payments being made to employees who
no longer work for the company.
74. 12.2 Internal Controls
General payroll controls
Restrict access to records.
Lock up employee files and payroll records at all times
when they are not in use, to prevent unauthorized
access. Use password protection if these records are
stored on line. This precaution is not just to keep
someone from accessing the records of another
employee, but also to prevent unauthorized changes to
records (such as a pay rate).
75. 12.2 Internal Controls
General payroll controls
Separation of duties.
Have one person prepare the payroll, another
authorize it, and another create payments, thereby
reducing the risk of fraud unless multiple people
collude in doing so. In smaller companies where there
are not enough personnel for a proper separation of
duties, at least insist on having someone review and
authorize the payroll before payments are sent to
employees.
76. 12.2 Internal Controls
Payroll Calculation Controls
• Automated timekeeping systems.
Depending on the circumstances, consider installing a
computerized time clock. These clocks have a number
of built-in controls, such as only allowing employees to
clock in or out for their designated shifts, not allowing
overtime without a supervisory override, and (for
biometric clocks) eliminating the risk of buddy
punching. Also, you should send any exception reports
generated by these clocks to supervisors for review.
77. 12.2 Internal Controls
Payroll Calculation Controls
• Calculation verification.
If you are manually calculating payroll, then have a
second person verify all calculations, including hours
worked, pay rates used, tax deductions, and
withholdings. A second person is more likely to
conduct a careful examination than the person who
originated the calculations.
78. 12.2 Internal Controls
Payroll Calculation Controls
• Hours worked verification.
Always have a supervisor approve hours worked by
employees, to prevent employees from charging more
time than they actually worked.
79. 12.2 Internal Controls
Payroll Calculation Controls
• Match payroll register to supporting documents.
The payroll register shows gross wages, deductions,
and net pay, and so is a good summary document from
which to trace back to the supporting documents for
verification purposes.
80. 12.2 Internal Controls
Payroll Calculation Controls
• Match timecards to employee list.
There is a considerable risk that an employee will not
turn in a timesheet in a timely manner, and so will not
be paid. To avoid this problem, print a list of active
employees at the beginning of payroll processing, and
check off the names on the list when you receive their
timesheets.
81. 12.2 Internal Controls
Payroll Calculation Controls
Overtime worked verification. Even if you do not require
supervisors to approve the hours worked by
employees, at least have supervisors approve overtime
hours worked. There is a pay premium associated with
these hours, so the cost to the company is higher, as is
the temptation for employees to claim them.
82. 12.2 Internal Controls
Payroll Calculation Controls
Pay change approval. Consider requiring not just one
approval signature for an employee pay change, but
two signatures – one by the employee’s supervisor, and
another by the next-higher level of supervisor. Doing
so reduces the risk of collusion in altering pay rates.
83. 12.2 Internal Controls
Payroll Payment Controls
• Update signature authorizations.
When check signers leave the company, remove them
from the authorized check signer list and forward this
information to the bank. Otherwise, they could still
sign company checks.
84. 12.2 Internal Controls
Payroll Payment Controls
• Hand checks to employees.
Where possible, hand checks directly to employees.
Doing so prevents a type of fraud where a payroll clerk
creates a check for a ghost employee, and pockets the
check. If this is too inefficient a control, consider
distributing checks manually on an occasional basis.
85. 12.2 Internal Controls
Payroll Payment Controls
• Lock up undistributed paychecks.
If you are issuing paychecks directly to employees and
someone is not present, then lock up their check in a
secure location. Such a check might otherwise be
stolen and cashed.
86. 12.2 Internal Controls
Payroll Payment Controls
• Match addresses.
If the company mails checks to its employees, match
the addresses on the checks to employee addresses. If
more than one check is going to the same address, it
may be because a payroll clerk is routing illicit
payments for fake employees to his or her address.
87. 12.2 Internal Controls
Payroll Payment Controls
• Payroll checking account.
You should pay employees from a separate checking
account, and fund this account only in the amount of
the checks paid out. Doing so prevents someone from
fraudulently increasing the amount on an existing
paycheck or creating an entirely new one, since the
funds in the account will not be sufficient to pay for
the altered check.
89. 13.1 Risk in payroll preparation
Duplication of employees.
Salary paid after termination of employment.
Doubling of salary payment.
Dummy employees.
Excess or short payment.
Excess or short deductions.
Wrong bank account details of the employee.
Not duly approved or authorized.
Segregation of duties not followed.
93. 15.1 Increments
Types of increments
1. Merit Increase
2. Promotions
3. Market Adjustment
4. One time Incentive
5. Pay for performance
6. Competitive positioning
94. 15.2 Changes that justify increments
An employee's characteristics change in a way that
affects his/her market price
The market price for the employee's skills has changed
The value of the employee's work to the company has
changed
98. 17.1 Recording of payroll
Basic general entries
Date Account Codes Particulars Debit Credit
29-Feb-16 1122 Salaries Expense xxx
2211 Salaries payable xxx
1221 EOBI payable xxx
2112 Income Tax payable xxx
Total xxx xxx
To Record Salaries Expense for the period ended
99. 17.2 Recording of payroll
Basic general entries
Date Account Codes Particulars Debit Credit
29-Feb-16 2211 Salaries payable xxx
2112 EOBI payable xxx
2112 Income Tax payable xxx
2222 Bank xxx
Total xxx xxx
To Record Salaries Payment for the period ended
100. 17.3 Year End adjustment
Date Account Codes Particulars Debit Credit
30-Jun-16 3333 Profit and Loss Account xxx
1122 Salaries Expense xxx
Total Xxx xxx
To Record Salaries Expense closing entry