Sales tax withholding is one of the most misunderstood areas of Pakistan's tax system. Many businesses either ignore it, or apply the wrong rate — and the cost of getting it wrong can be heavy. The idea is simple: instead of trusting the supplier to deposit the full sales tax, the buyer holds back a portion and deposits it directly with FBR.
This guide explains who must withhold, how much, and what happens if you don't — straight from the law. Based on the Sales Tax Act, 1990 as amended up to the Finance Act 2025.
Key Point: Under Section 3(7) read with the Eleventh Schedule, certain buyers (government, companies and specified registered persons) must withhold part of the sales tax and deposit it directly with FBR. The rate depends on whether the supplier is registered and active — ranging from 1/5th of the tax down to 5% of value for unregistered suppliers.
What is Sales Tax Withholding?
Normally, when you buy goods or services, the supplier charges you sales tax and then deposits that tax with FBR. Withholding flips part of this responsibility: the buyer (the "withholding agent") holds back a portion of the sales tax and deposits it directly with the government — ensuring the tax actually reaches FBR even if the supplier is not fully compliant.
The law (Section 3(7)): tax shall be withheld at the rate specified in the Eleventh Schedule, by any person or class of persons being a purchaser of goods or services (other than services liable to provincial sales tax) acting as a withholding agent for depositing the tax with FBR.
Who is a Withholding Agent?
Not everyone has to withhold. The Eleventh Schedule specifies the categories of withholding agents:
| Withholding Agent | Examples |
|---|---|
| Government & public sector | Federal/provincial departments, autonomous bodies, public sector organisations |
| Companies | Companies as defined in the Income Tax Ordinance, 2001 |
| Specified registered persons | Recipients of advertisement services; purchasers of cane molasses |
| Registered exporters | And other recipients specified in the Schedule |
How Much to Withhold? The Rates
The rate depends on who the buyer is and whether the supplier is registered and on the Active Taxpayer List (ATL):
| Supplier / Situation | Withholding Rate |
|---|---|
| Active, registered supplier | 1/5th (20%) of sales tax |
| Registered wholesaler / distributor (active) | 1/10th (10%) of sales tax |
| Unregistered / non-active supplier | 5% of gross value |
| Advertisement / certain specified services | Whole of the sales tax |
Watch out: When the supplier is unregistered, you withhold a percentage of the total value of supplies — not of the sales tax — because an unregistered supplier does not charge sales tax at all. This is how FBR captures tax from outside the registered net.
Worked Examples
Let's apply these rules. Assume the standard sales tax rate is 18%.
Example 1 — Company buying from an active registered supplier
A company buys goods worth Rs 100,000 from an active, registered supplier, who charges 18% sales tax = Rs 18,000. The withholding is 1/5th of Rs 18,000 = Rs 3,600. The company pays the supplier Rs 100,000 + Rs 18,000 − Rs 3,600 = Rs 114,400, and deposits the Rs 3,600 directly to FBR. The supplier deposits the remaining Rs 14,400.
Example 2 — Company buying from a registered distributor
Same Rs 100,000 purchase and Rs 18,000 sales tax, but the supplier is a registered distributor/wholesaler. Withholding is 1/10th of Rs 18,000 = Rs 1,800. The company pays Rs 118,000 − Rs 1,800 = Rs 116,200, and deposits Rs 1,800 to FBR.
Example 3 — Company buying from an unregistered supplier
The company buys goods worth Rs 100,000 from an unregistered supplier (who charges no sales tax). Withholding = 5% of Rs 100,000 = Rs 5,000. The company pays Rs 95,000 and deposits Rs 5,000 to FBR.
Example 4 — Government buying advertisement services
A government department buys advertising worth Rs 200,000 plus Rs 36,000 sales tax. Withholding = whole of the sales tax = Rs 36,000. The department pays the agency Rs 200,000 and deposits the entire Rs 36,000 to FBR.
Digitally Ordered Goods — A New Addition
The Act now also covers e-commerce. Under Section 3(7A), where a payment intermediary or courier withholds tax on the supply of digitally ordered goods, that withholding is treated as a final discharge of the tax liability on those supplies — bringing online sales into the tax net.
What Happens if You Don't Withhold?
Failing to withhold is not a minor oversight. Under Section 11F ("Failure to withhold sales tax"), where any person required to withhold under Section 3(7) fails to do so, FBR can recover the amount that should have been withheld, along with default surcharge and penalty.
Penalty (Section 11F): the un-withheld amount is recoverable from the withholding agent, with surcharge and penalty. An order under Sections 11D to 11F must generally be issued within five years from the end of the relevant period.
Depositing and Reporting
The withholding agent must:
| Duty | What to do |
|---|---|
| Deposit | Pay the withheld tax to FBR by the due date, in the prescribed manner |
| Report | File the withholding statement / sales tax return showing amounts withheld |
| Verify & record | Check the supplier's ATL status before withholding; keep invoices and records |
Common Mistakes to Avoid
| Mistake | Why it matters |
|---|---|
| Not checking ATL status | Applying the registered rate to an unregistered supplier (or vice versa) |
| Wrong base | Using gross value when it should be the tax amount, or vice versa |
| Withheld but not deposited | Still triggers Section 11F recovery and penalty |
| Missing the statement | Deposit done but not reported in the return |
Frequently Asked Questions
Who must withhold sales tax under the Sales Tax Act 1990?
Withholding agents include government departments, autonomous bodies, public sector organisations, companies as defined in the Income Tax Ordinance 2001, and certain registered persons (such as recipients of advertisement services or purchasers of cane molasses) as specified in the Eleventh Schedule.
How much sales tax must be withheld?
From an active registered supplier, 1/5th (20%) of the sales tax. From a registered distributor or wholesaler, 1/10th (10%). From an unregistered supplier, 5% of the gross value. For advertisement services, the whole of the sales tax.
What is the penalty for failing to withhold?
Under Section 11F, the un-withheld amount is recoverable from the withholding agent, with default surcharge and penalty. An order must generally be issued within five years from the end of the relevant period.
Summary
| Situation | Withholding |
|---|---|
| Active registered supplier | 1/5th of sales tax |
| Registered distributor / wholesaler | 1/10th of sales tax |
| Unregistered supplier | 5% of gross value |
| Advertisement services | Whole of the tax |
Bottom Line: Sales tax withholding under Section 3(7) makes the buyer responsible for holding back part of the tax and depositing it with FBR. The rate hinges on the supplier's status — 1/5th from active registered suppliers, 1/10th from distributors, and 5% of value from unregistered ones. Always check ATL status first, deposit on time, and report it — because failing to withhold triggers recovery and penalty under Section 11F.
Disclaimer: This article is for educational purposes only and reflects the Sales Tax Act, 1990 as amended up to the Finance Act 2025. Withholding rates and the list of agents are amended frequently through Finance Acts and FBR notifications — the Finance Act 2026 may have introduced changes. Always verify the current position at fbr.gov.pk or consult a qualified tax practitioner.
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