Withholding Tax in Pakistan – A Complete Guide

Withholding tax is a crucial component of Pakistan’s tax system. It refers to the tax deducted at the source by a payer before making a payment to the recipient. The purpose of withholding tax is to ensure that tax is collected in advance and reduces the chances of tax evasion. In Pakistan, withholding tax is not only a revenue generation mechanism but also an enforcement tool used by the Federal Board of Revenue (FBR) to widen the tax net. This guide provides a complete overview of withholding tax in Pakistan, including its legal basis, types, rates, applicable sections, responsibilities of withholding agents, filing requirements, penalties, and recent developments.

Legal Framework for Withholding Tax

The withholding tax regime in Pakistan is governed by the Income Tax Ordinance, 2001. Relevant sections under the ordinance specify different types of transactions on which withholding tax must be deducted. The administrative control lies with the Federal Board of Revenue (FBR), which monitors compliance, verifies deductions, and enforces penalties for non-compliance.

Key provisions include:

• Section 149: Salary

• Section 153: Payments to contractors, suppliers, and service providers

• Section 231A: Cash withdrawals from banks

• Section 236K: Property purchases

• Section 150: Dividends

• Section 151: Profit on debt

• Section 155: Rent

Purpose of Withholding Tax

• Collection of tax at the source of income

• Reduction in tax evasion and avoidance

• Ensuring documentation and audit trail

• Broadening the tax base

• Simplifying compliance for taxpayers with fixed rates

Who Is a Withholding Agent?

A withholding agent is a person or entity responsible for deducting tax before making payments to others. This includes:

• Employers

• Government departments

• Companies and AOPs

• Banks and financial institutions

• Property registrars

• Educational institutions

• Utility companies

Withholding agents are required to:

• Deduct tax at prescribed rates

• Deposit tax into the government treasury

• File monthly or quarterly withholding statements

Types of Withholding Taxes in Pakistan

1. Salary Income – Section 149

• Employers must deduct tax from employees’ monthly salaries based on slab-wise progressive rates

• Tax is calculated after adjustments for:

  • Tax credits

  • Zakat

  • Donations under Section 61

  • Investment rebates

• Employers issue salary certificates and file monthly statements

2. Payments to Contractors and Suppliers – Section 153

• Tax is deducted by companies and AOPs on:

  • Sale of goods: 4% for companies, 4.5% for individuals

  • Services: 8% for companies, 10% for individuals

  • Contracts: 7% for companies, 7.5% for individuals

• Reduced rates apply to ATL (Active Taxpayers List) filers

• Higher rates apply to non-filers

3. Rent – Section 155

• Deduction required on rental payments:

  • Property rent: 15% for individuals

  • Equipment or machinery rent: 10%

• Deducted by tenants if they are registered taxpayers, especially companies and AOPs

4. Dividends – Section 150

• Companies must deduct:

  • 15% withholding tax on dividend payments to individuals

  • 25% for non-filers

• Mutual funds and REITs may apply different rates

5. Profit on Debt – Section 151

• Banks, financial institutions, and companies must deduct tax on:

  • Interest on savings and term deposits: 15% for filers, 30% for non-filers

  • NSS, Behbood certificates: Exempt for certain thresholds

6. Brokerage and Commission – Section 233

• 12% tax on payments to agents, brokers, or advertising agents

• Reduced to 10% for ATL filers

• Applies to commission on sales, property transactions, and consultancy

7. Cash Withdrawal from Bank – Section 231A

• 0.6% withholding tax on aggregate monthly cash withdrawals exceeding Rs. 50,000 by non-filers

• Not applicable to filers and government departments

8. Sale/Purchase of Property – Sections 236C and 236K

• Seller pays 2% tax under Section 236C (non-filers: 4%)

• Buyer pays 3% tax under Section 236K (non-filers: 7%)

• Withholding is done by the property registrar or housing society

9. Electricity Bills – Section 235

• Commercial consumers with bills exceeding Rs. 20,000 per month face 10% tax

• Industrial consumers may be charged based on consumption slabs

• Domestic consumers are usually exempt unless usage is high

10. Imports – Section 148

• Tax is deducted at customs stage

• Manufacturers: 2%

• Commercial importers: 5.5%

• Reduced rates for industrial sectors and raw materials

Withholding Tax Rates for Non-Filers

Non-filers are subject to significantly higher rates under most sections. Being on the Active Taxpayers List (ATL) can reduce tax liability by up to 50% in many cases.

Withholding Tax Statements

Withholding agents must file monthly or quarterly statements detailing all deductions. These include:

• Form 64: Monthly salary tax deductions

• Form 65: Supplier/contractor/service payments

• Form 66: Other deductions such as property, rent, commission

• Statements are filed on the IRIS portal by the 15th of every month

Payment and Deposit of Withholding Tax

• Tax deducted must be deposited via Computerized Payment Receipt (CPR)

• Payments can be made online through 1Link, ATM, or internet banking

• Non-deposit or late deposit may result in fines and additional tax

Record Maintenance

Withholding agents are legally required to:

• Maintain books of accounts and proof of deductions

• Keep copies of CPRs, invoices, and contracts

• Provide certificates to deductees on request

• Preserve records for at least 6 years

Penalties for Non-Compliance

Appeals and Adjustments

Taxpayers who believe excess tax was deducted can:

• Claim adjustment while filing annual tax return

• Apply for refund if tax paid exceeds liability

• File appeal before Commissioner (Appeals) or Appellate Tribunal if dispute arises

Common Errors by Withholding Agents

• Applying incorrect tax rates

• Deducting from exempt entities (e.g., non-profits)

• Not updating filer status using the ATL portal

• Missing deadlines for statement filing

• Incomplete or incorrect CPR references

Recent Reforms in Withholding Tax

• FBR has reduced the number of withholding provisions to simplify compliance

• Introduction of real-time data integration with banks, property registrars, and utility companies

• Use of Track and Trace systems and e-invoicing to enhance documentation

• Mobile app for withholding statement submissions (under development)

• Consolidation of taxpayer profiles through NADRA and SECP data

Tips for Withholding Compliance

• Always verify filer status of recipients before deducting tax

• Maintain updated withholding tax rate charts

• Deposit tax before the due date to avoid penalties

• File accurate withholding statements using the IRIS portal

• Issue deduction certificates to vendors and employees

• Consult tax professionals for complex transactions

Withholding Tax as Final or Adjustable

Some withholding taxes are treated as final tax while others are adjustable against total tax liability.

How Sterling.pk Supports Withholding Tax Compliance

At Sterling.pk, we offer:

• Registration and training for withholding agents

• Calculation of applicable rates and liabilities

• Monthly statement filing (Form 64–66)

• Issuance of tax deduction certificates

• Audit handling and FBR representation

• Advisory on refunds and adjustments

Whether you’re a business, property registrar, government entity, or bank, our tax professionals ensure seamless compliance with Pakistan’s withholding tax laws.

Conclusion

Withholding tax is a vital element of Pakistan’s tax enforcement system, designed to ensure timely and efficient revenue collection. While it places compliance responsibilities on businesses and institutions, it also simplifies the process for the government to track transactions and widen the tax net. Understanding the relevant sections, rates, procedures, and penalties is essential for every taxpayer and withholding agent. With professional guidance from Sterling.pk, your business can navigate the complexities of withholding tax with accuracy and full compliance.