In Pakistan, withholding tax is a tax that is deducted at source from the income of an individual or a company. The withholding tax system is designed to ensure that taxes are collected from the source of income, rather than relying on the taxpayer to report and pay the tax themselves. In this article, we will provide a complete guide on withholding tax in Pakistan, including its definitions, examples, and rates.
Definition of Withholding Tax
Withholding tax is a tax that is deducted or withheld from the income of an individual or a company by the person making the payment. The person making the payment deducts the tax and deposits it with the Federal Board of Revenue (FBR) on behalf of the taxpayer. Withholding tax is applicable to a wide range of payments, including salaries, dividends, interest, rent, and fees for professional services.
Types of Withholding Tax
There are several types of withholding tax in Pakistan, including:
Income Tax:
Income tax is deducted from the salaries of employees and the income of self-employed individuals. The rates of income tax vary depending on the income level of the taxpayer.
Withholding Tax on Services:
Withholding tax on services is deducted from the fees paid for professional services, such as legal and accounting services. The rate of withholding tax on services is 5%.
Withholding Tax on Contracts:
Withholding tax on contracts is deducted from the payments made for contracts related to construction, advertising, and other services. The rate of withholding tax on contracts varies depending on the type of contract and the nature of the service.
Withholding Tax on Dividends:
Withholding tax on dividends is deducted from the dividend payments made to shareholders of companies. The rate of withholding tax on dividends is 12.5%.
Withholding Tax on Interest:
Withholding tax on interest is deducted from the interest payments made by banks and financial institutions. The rate of withholding tax on interest varies depending on the type of interest payment and the nature of the transaction.
Withholding Tax on Rent:
Withholding tax on rent is deducted from the rent payments made for properties. The rate of withholding tax on rent varies depending on the rental amount and the location of the property.
Rates of Withholding Tax
The rates of withholding tax in Pakistan vary depending on the type of payment and the nature of the transaction. The following are the current rates of withholding tax in Pakistan:
Income Tax:
The rates of income tax vary depending on the income level of the taxpayer. The maximum rate of income tax for individuals is 35%, while the maximum rate of income tax for companies is 29%.
Withholding Tax on Services:
The rate of withholding tax on services is 5% of the gross amount of the fee paid for professional services.
Withholding Tax on Contracts:
The rate of withholding tax on contracts varies depending on the type of contract and the nature of the service. The rates of withholding tax on contracts range from 5% to 8%.
Withholding Tax on Dividends:
The rate of withholding tax on dividends is 12.5% of the gross amount of the dividend payment.
Withholding Tax on Interest: The rate of withholding tax on interest varies depending on the type of interest payment and the nature of the transaction. The rates of withholding tax on interest range from 10% to 15%.
Withholding Tax on Rent: The rate of withholding tax on rent varies depending on the rental amount and the location of the property. The rates of withholding tax on rent range from 5% to 15%.
Exemptions from Withholding Tax
Some payments are exempt from withholding tax in Pakistan. The following are the payments that are exempt from withholding tax:
Payments to Non-Residents: Payments made to non-residents are exempt from withholding tax in Pakistan, except for payments made for the following:
Fees for technical services
Royalties
Income from property
Income from the sale of goods and services
Payments to Exempted Persons:
Payments made to exempted persons are exempt from withholding tax in Pakistan. Exempted persons include charitable organizations, educational institutions, and government entities.
Payments to Small Taxpayers:
Payments made to small taxpayers are exempt from withholding tax in Pakistan. Small taxpayers are defined as taxpayers whose annual income does not exceed a certain threshold, which varies depending on the type of payment.
Payments to Residents:
Payments made to residents are generally exempt from withholding tax in Pakistan, except for certain types of payments, such as interest on savings accounts and rent on immovable property.
Conclusion
In conclusion, withholding tax is an important component of the tax system in Pakistan. It ensures that taxes are collected from the source of income, rather than relying on the taxpayer to report and pay the tax themselves. Withholding tax is applicable to a wide range of payments, including salaries, dividends, interest, rent, and fees for professional services. The rates of withholding tax vary depending on the type of payment and the nature of the transaction. Exemptions from withholding tax are available for certain types of payments, such as payments to non-residents, exempted persons, and small taxpayers. It is important for taxpayers to understand their withholding tax obligations to ensure compliance with the tax laws of Pakistan.
