Withholding tax, often referred to as “tax at source,” is a crucial component of Pakistan’s taxation system. This tax is deducted directly from an individual’s or a company’s income when earned or received. The significance of tax in Pakistan cannot be overstated; it serves as both an effective mechanism for revenue collection and a timely source of income for the government.
The responsibility for collecting tax lies with the Federal Board of Revenue (FBR), the apex tax collection authority in the country. To ensure transparency and compliance, the FBR regularly updates the withholding tax rates, which are current up to June 30, 2023, and can be readily accessed on their official website.
This comprehensive guide will explain the various aspects of withholding tax in Pakistan, shedding light on its types, rates, compliance procedures, and impact on individuals and businesses.
You can also read our guide about the types of taxes in Pakistan, where we explain different types of taxes in Pakistan.
Rates Of Withholding Tax In Pakistan
In Pakistan, withholding tax rates can fluctuate based on the type of payment and the nature of the transaction. Taxpayers must understand these rates and comply with the requirements to avoid penalties. The maximum income tax rate for individuals in Pakistan is 35%, while companies may be subject to a maximum income tax rate of 29%. Staying informed about these tax regulations is essential for individuals and businesses operating in Pakistan to ensure smooth financial transactions and contribute to the nation’s revenue collection efforts.
You may also like to read our detailed guide about online NTN verification.
Withholding Tax on Cash Withdrawal in Pakistan
The government of Pakistan imposes a 0.6% withholding tax on cash withdrawals exceeding Rs. 50,000 per day to encourage electronic payments and expand the tax base. This tax applies to various banking services and differs for filers and non-filers. It ensures a steady income source for the government, contributes to financial health forecasting, and plays a significant role in total direct tax revenues. Stay updated on the latest tax regulations for cash withdrawals in 2023.
Withholding Tax In Pakistan On Services
As per the guidelines provided by the Federal Board of Revenue in the Government of Pakistan, the rates applicable to various service categories are as follows:
- For services provided by companies, a withholding tax of 6% is levied on the total fee paid for professional services.
- In the case of services rendered by non-residents, a withholding tax rate of 15% is applied to the gross amount of the fee paid for professional services.
- For services provided by individuals, a withholding tax rate of 5% is imposed on the gross amount of the fee paid for professional services.
These rates are designed to ensure the timely collection of taxes from different service providers, contributing to the government’s revenue collection efforts while varying based on the nature of the service and the entity providing it. Taxpayers must be aware of these rates to fulfill their tax obligations accurately.
If you’re not a filer, you can read our step-by-step guide about how you can become in Pakistan.
Withholding Tax In Pakistan On Motor Vehicle Registration
In Pakistan, the motor vehicle registration authority collects tax on new locally manufactured motor vehicles at the time of registration. The withheld tax is adjustable against tax liability. However, individuals not on the Active Taxpayers List (ATL) face a 100% increase in the tax rate.
Leasing companies, banks, and financial institutions also collect a 4% withholding tax on the value of leased motor vehicles from lessees who are not on the ATL.
This mechanism ensures efficient tax collection and incentivizes ATL inclusion for reduced tax rates.
Here’s a chart that displays the engine capacity along with the withholding tax rates for ATL (Annual Taxpayer List) and Non-ATL (Non-Annual Taxpayer List):
| Engine Capacity | For ATL (Rs) | For Non-ATL (Rs) |
| Up to 850CC | Rs 7,500 | Rs 15,000 |
| 851CC to 1000CC | Rs 15,000 | Rs 30,000 |
| 1001CC to 1300CC | Rs 25,000 | Rs 50,000 |
| 1301CC to 1600CC | Rs 50,000 | Rs 100,000 |
| 1601CC to 1800CC | Rs 75,000 | Rs 150,000 |
| 1801CC to 2000CC | Rs 100,000 | Rs 200,000 |
| 2001CC to 2500CC | Rs 150,000 | Rs 300,000 |
| 2501CC to 3000CC | Rs 200,000 | Rs 400,000 |
| Above 3000CC | Rs 250,000 | Rs 500,000 |
Income Tax Calculator Results And Procedure
How Do You Calculate Net Withholding Tax?
Calculating the net withholding tax in Pakistan is a straightforward process that involves two key factors: the gross income subject to withholding tax and the applicable tax rate. The formula for determining the rate:
Net Withholding Tax = Gross Income x Applicable Tax Rate
Let’s break down the components of this formula:
- Gross Income: This represents the total income or payment. It could be salary, interest income, service fees, or any other type of income that falls.
- Applicable Tax Rate: The tax rate varies based on the type of income and the specific withholding tax category. In Pakistan, different rates apply to various types of income, such as salaries, dividends, services, etc. Tax laws and rates may change, so it’s essential to refer to the most current tax regulations or consult a tax professional to determine the accurate tax rate.
Example Calculation
Let’s consider an example where an individual receives a gross income of Rs. 100,000, and the applicable tax rate is 10%. To calculate the net withholding tax:
Net Withholding Tax = Rs. 100,000 x 10% = Rs. 10,000
In this example, the net withholding tax amounts to Rs. 10,000, the portion deducted from the gross income to comply with the requirement.
It’s important to note that the specific formula and rates may vary depending on the withholding tax, so it’s crucial to refer to the relevant tax laws and regulations for precise calculations. Consulting a tax professional or referring to official tax resources is recommended to ensure accurate compliance with tax obligations in Pakistan.
In this digital era, where everything is moving towards digitalization, we have developed an online tax calculator for you for effortless and accurate tax calculation.
What Is Exempt From Withholding Tax In Pakistan?
In Pakistan, certain entities and payments are exempt from withholding tax. These exemptions encompass charitable organizations, educational institutions, government entities, and payments made to small taxpayers. These exemptions are designed to support the activities of charitable and educational organizations and reduce the tax burden on small taxpayers, promoting economic growth and social welfare in the country.
Winding Up
Withholding tax is a fundamental part of Pakistan’s taxation system, ensuring timely revenue collection while reducing the risk of tax evasion. Various sectors are subject to varying rates from income to services, contracts, dividends, interest, and rent. This mechanism promotes transparency, accountability, and economic stability, contributing significantly to the country’s financial landscape. Understanding and complying with these tax obligations is essential for individuals and businesses operating in Pakistan.