Section 153 — Withholding Tax on Goods, Services and Contracts in Pakistan

Introduction

One of the most widely applicable withholding tax provisions in Pakistan's tax law is Section 153 of the Income Tax Ordinance, 2001. If you run a business, provide professional services, or execute contracts for any company or organisation in Pakistan, Section 153 directly affects the payments you receive — because the payer is legally required to deduct advance tax from those payments before handing them over to you.

Section 153 covers three distinct categories of transactions, each governed by a separate clause under sub-section (1). Understanding which clause applies to your business activity is essential for knowing the correct withholding tax rate, how the tax is treated in your annual return, and what obligations your clients have when paying you.

Legal Basis — Section 153, Income Tax Ordinance, 2001

Section 153(1) of the Income Tax Ordinance, 2001 requires every prescribed person making a payment to another person for goods, services, or contracts to deduct advance income tax at the applicable rate at the time of making the payment. The deducted amount is then deposited with FBR on behalf of the recipient.

A prescribed person under Section 153(7)(i) is defined as any of the following fourteen categories:

Section 153(1)(a) — Sale of Goods

Clause (a) of Section 153(1) applies to payments made for the sale or supply of goods. When a prescribed person purchases goods from a supplier and makes payment, they must deduct advance tax at the applicable rate.

What Counts as Goods?

Goods under Section 153(1)(a) refers to movable, tangible items — raw materials, finished products, merchandise, commodities, and any other physical goods that are bought and sold. It does not include services or contracts.

Rate of Withholding Tax — Section 153(1)(a)

Practical Example — Sale of Goods

A trading company (prescribed person) purchases goods worth Rs. 500,000 from a supplier.

The deducted tax (Rs. 20,000 or Rs. 40,000) is deposited with FBR by the buyer and is an adjustable advance tax — credited against the supplier's annual income tax liability.

Section 153(1)(b) — Services Rendered

Clause (b) of Section 153(1) applies to payments made for services rendered. This is one of the broadest categories under Section 153 — covering virtually every type of professional, technical, or commercial service provided under a service agreement.

What Counts as Services?

Services under Section 153(1)(b) include any work performed or service provided that does not involve the supply of a physical good or the execution of a specific construction or engineering contract. Common examples include:

• Professional services — legal, accounting, tax consultancy, audit
• IT and software services — software development, web design, IT support
• Marketing and advertising services
• Security guard and cleaning services
• Courier and logistics services
• Training and education services
• Repair and maintenance services
• Medical and healthcare services (in certain contexts)
• Management consultancy and business advisory services

Rate of Withholding Tax — Section 153(1)(b)

Practical Example — Services Rendered

A company pays Rs. 200,000 to a software development firm for IT services.

Section 153(1)(c) — Execution of Contracts

Clause (c) of Section 153(1) applies to payments made for the execution of contracts. This clause specifically targets construction contracts, engineering projects, and other contract-based work where the contractor executes a specific scope of work for a fixed price.

What Counts as Execution of Contracts?

Contract execution under Section 153(1)(c) typically includes:

• Construction contracts — building, civil engineering, road construction
• Infrastructure development projects
• Installation and commissioning contracts
• Government contracts for public works
• Supply and installation contracts where both goods and labour are involved
• Any other contract for the execution of a specific work or project

Rate of Withholding Tax — Section 153(1)(c)

Practical Example — Execution of Contract

A company awards a construction contract worth Rs. 1,000,000 to a contractor for office renovation.

Complete Rate Comparison — All Three Clauses

Source: Withholding Income Tax Rate Card — Updated up to June 30, 2025 as per Finance Act, 2025

All three categories result in adjustable advance tax — the deducted amount is credited against the recipient's annual income tax liability and any excess is refundable.

Special Cases Under Section 153

Clause 24(A) — Pharmaceutical and Cigarette Products

Section 153 also incorporates special rates under Clause 24(A) of the Second Schedule for specific sectors:

• Pharmaceutical products sold to distributors — Filer: 1%, Non-Filer: 2% (Minimum Tax)
• Cigarette products sold to distributors — Filer: 2.5%, Non-Filer: 5% (Minimum Tax)

These special rates result in minimum tax — non-adjustable and non-refundable — which is different from the general Section 153 rates above.

Nature of Tax — Adjustable for All Three Clauses

A critical feature of Section 153(1)(a), (b), and (c) is that the advance tax deducted under all three clauses is adjustable. This means:

• The deducted amount appears as a tax credit in the recipient's annual income tax return
• It reduces the final income tax payable for the year
• If the total adjustable advance taxes exceed the final tax liability, the excess is refundable under Section 170
• Correct declaration in the IRIS return ensures the credit is properly applied

Obligations of the Prescribed Person (Payer)

1. Verify ATL status of the supplier, service provider, or contractor before each payment to determine the correct rate
2. Deduct the correct advance tax at the time of payment — not before or after
3. Deposit with FBR by the 15th of the following month through the designated payment channels
4. Issue withholding tax certificate to the recipient confirming amount deducted, section applied, and period
5. File monthly withholding statement on IRIS listing all deductions made during the month
6. File annual withholding statement by September 30 covering all deductions for the full tax year

Frequently Asked Questions (FAQs)

Q1: My client deducted 8% from my service payment but I am a filer. Is this correct?
The correct filer rate for services under Section 153(1)(b) depends on the type of service — 6% for general services, 4% for IT services, 1.5% for media advertising. If your client deducted a higher rate, they may have treated you as a non-filer or applied the wrong sub-category. Provide your NTN and ATL verification to your client — if they deducted the wrong rate, the excess deduction should be corrected or you can claim the credit in your annual return since all Section 153 tax is adjustable.

Q2: I provide both goods and services in the same contract. Which clause applies?
When a single contract involves both goods and services, the classification depends on which element is dominant. If the primary obligation is the supply of goods with incidental services, Section 153(1)(a) applies. If the primary obligation is the service with incidental supply of materials, Section 153(1)(b) applies. For combined supply-and-install contracts, Section 153(1)(c) may apply. Consult a tax professional for contracts that straddle multiple categories.

Q3: Is there a minimum payment threshold below which Section 153 does not apply?
Section 153 does not specify a minimum payment threshold for services and contracts. However, for goods under Section 153(1)(a), there may be a prescribed threshold. Always verify the current threshold from FBR's latest rules as these can change through Finance Acts and SROs.

Q4: If I am a freelancer working for a foreign client, does Section 153 apply?
Section 153 applies when a prescribed person in Pakistan makes a payment. Foreign clients making payments from abroad are generally not Pakistani prescribed persons, so Section 153 withholding typically does not apply to direct foreign remittances. However, Section 154A (export of services) may apply to such income when received through banking channels.

Q5: Can I claim a refund of Section 153 tax deducted if it exceeds my annual tax liability?
Yes. Since all Section 153 tax under clauses (a), (b), and (c) is adjustable, any excess over your final tax liability is refundable under Section 170 of the ITO 2001. File your annual income tax return, declare all Section 153 deductions, and claim the credit — the system will compute the refund due.

Conclusion

Section 153 of the Income Tax Ordinance, 2001 is the primary withholding tax mechanism for business-to-business transactions in Pakistan. Its three clauses — (a) sale of goods (rates vary by category: 1.5% to 11% for ATL, 3% to 22% for non-ATL), (b) services rendered (1.5% to 15% for ATL, 3% to 30% for non-ATL), and (c) execution of contracts (7.5% to 15% for ATL, 15% to 30% for non-ATL) — cover the full spectrum of commercial activity. All three result in adjustable advance tax, ensuring that taxpayers receive full credit for deductions in their annual returns.

For businesses receiving payments, maintaining filer status and understanding which clause applies to your activity ensures you pay the lower filer rate and receive full credit in your annual return. For businesses making payments, correctly identifying the applicable clause and deducting the right rate protects against personal liability under Section 161.