Section 153 of the Income Tax Ordinance, 2001: Withholding Tax on Goods, Services and Contracts — A Practitioner’s Guide
By H.S. Advocate & Co., Lahore · Updated July 2026 · Reading time: 14 minutes
If your business is a company, or an AOP or individual crossing the turnover threshold, almost every payment you make for goods, services or contract work carries a deduction obligation under Section 153. Get it wrong and the exposure is not the supplier’s — it is yours, personally recoverable under Section 161, with default surcharge and penalty on top. This guide covers the entire section: who must deduct, at what rates, on what amount, the exclusions, the minimum-tax treatment, and what the Finance Act, 2026 has just changed.
Why Section 153 matters more than any other withholding provision
Section 153 of the Income Tax Ordinance, 2001[1] is the workhorse of Pakistan’s withholding regime. Sections 149 (salary) and 155 (rent) touch specific payment types. Section 153 touches commerce itself — every purchase of goods, every services invoice, every contract payment made by a “prescribed person” to a resident.
In our practice before RTO Lahore and RTO Rawalpindi, the single most common enforcement action against SMEs is a show cause notice under Section 161(1A) read with Section 205, alleging failure to deduct tax under Section 153. The department pulls your purchase data from sales tax returns, matches it against your withholding statements filed under Section 165, and confronts you with the gap. Most taxpayers who receive these notices did not even know they were withholding agents.
The statutory scheme
Section 153(1) requires every prescribed person making a payment, in full or in part (including by way of advance), to a resident person or a permanent establishment of a non-resident, to deduct tax at the time of making the payment, for:
| Clause | Payment covered |
|---|---|
| 153(1)(a) | Sale of goods — including toll manufacturing, which the law expressly treats as a sale of goods for this purpose |
| 153(1)(b) | Rendering of or providing services |
| 153(1)(c) | Execution of a contract, other than a contract for the sale of goods or the rendering of services |
Sub-section (2) is a special limb: every exporter or export house making a payment for services of stitching, dyeing, printing, embroidery, washing, sizing and weaving must deduct tax at 1% of the gross amount.
Two definitional points in sub-section (7) trip people up constantly. First, “services” includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers — and, notably, anything otherwise rendered that is not a sale of goods or execution of a contract. It is a residual bucket. Second, “sale of goods” includes cash and credit sales both. Deferring payment does not defer the obligation; the deduction is made when payment is actually made, but the liability attaches to the transaction.
The three-way classification problem
Whether a payment falls under clause (a), (b) or (c) determines the rate, so classification disputes are frequent. The working test we apply: if the dominant object of the arrangement is the transfer of property in goods, it is clause (a). If it is human effort, skill or facility without transfer of goods, it is clause (b). Clause (c) is what remains — typically composite works contracts (construction, installation, turnkey arrangements) where goods and services fuse into a single indivisible obligation. A supplier who delivers bricks is under (a); a mason who lays them for a daily wage is under (b); a contractor who undertakes to build the wall, materials and labour both, for a lump sum is under (c).
Who is a “prescribed person”? — Section 153(7)
The deduction obligation falls only on prescribed persons, defined in sub-section (7) to include:
| Prescribed person | Practice note |
|---|---|
| The Federal Government, a provincial government, a local government | Government departments withhold on virtually everything they procure. |
| A company | Every company, regardless of size or turnover. A newly incorporated private limited company with zero revenue is still a withholding agent from day one. |
| An AOP constituted by or under law, or a non-profit organisation | Registered firms, LLPs (now classified as AOPs under the Finance Act, 2026[6]), trusts, NPOs. |
| A foreign contractor or consultant; a consortium or joint venture | Common in infrastructure and energy projects. |
| An exporter or an export house (for sub-section (2) purposes) | Triggers the 1% deduction on export-oriented processing services. |
| An individual or AOP registered under the Sales Tax Act, 1990 with turnover of Rs. 100 million or more in any preceding tax year | The trap for growing businesses: cross Rs. 100 million once, and the status sticks for subsequent years. The Finance Act, 2026 has raised the threshold for individual traders to Rs. 200 million with effect from 1 July 2026.[6] |
| A person deriving income from the business of construction and sale of residential or commercial buildings, or development and sale of plots | Builders and developers are prescribed persons irrespective of turnover. |
When to deduct, and on what amount
The deduction is made at the time of making the payment, including advances and part payments. This distinguishes Section 153 from provisions such as Section 151, where credit or payment (whichever is earlier) triggers the deduction. Mere accrual of a Section 153 liability in the books does not require deduction — but the moment any amount is actually paid, including through adjustment or set-off, the tax must be deducted.
The tax is computed on the gross amount payable, inclusive of sales tax. This has been the settled departmental position for years and is reflected in the definition of “gross amount” used for the section. So on an invoice of Rs. 1,000,000 plus Rs. 180,000 sales tax, the withholding base is Rs. 1,180,000, not Rs. 1,000,000. We still see taxpayers computing on the ex-tax amount and building a shortfall month after month.
Rates for Tax Year 2026 (1st July 2025 to 30th June 2026)
The rates sit in Division III of Part III of the First Schedule, as amended by the Finance Act, 2025.[2] For persons not appearing on the Active Taxpayers List, the Tenth Schedule doubles the applicable rate.[3]
Sale of goods — Section 153(1)(a)
| Category | ATL (filer) | Non-ATL |
|---|---|---|
| Sale of rice, cotton seed or edible oils | 1.5% | 3% |
| Other goods — supplied by a company | 5% | 10% |
| Other goods — supplied by an individual or AOP | 5.5% | 11% |
| Toll manufacturing — by a company | 9% | 18% |
| Toll manufacturing — by an individual or AOP | 11% | 22% |
| Sale of pharmaceutical products by distributors | 1% | 2% |
| Sale of cigarettes by distributors | 2.5% | 5% |
| Distributors, dealers, sub-dealers, wholesalers and integrated Tier-1 retailers of FMCG, fertilizer, electronics (excluding mobile phones), sugar, cement, steel and edible oil — subject to appearing on the sales tax ATL and integration conditions | 0.25% | 0.5% |
| Sales, supplies and services within the textile, carpets, leather, artificial leather footwear, surgical goods and sports goods chains | 1% | 2% |
| Sale of gold, silver and articles thereof | 1% | 2% |
Services — Sections 153(1)(b) and 153(2)
| Category | ATL (filer) | Non-ATL |
|---|---|---|
| Specified services: transport, freight forwarding, air cargo, courier, manpower outsourcing, hotel, security guard, software development, tracking, advertising (other than print/electronic media), share registrar, engineering, architectural, warehousing, asset management, data services, telecom infrastructure (tower), car rental, building maintenance, PSX/PMEX services, inspection/certification/testing, training, oilfield services, telecommunication, collateral management, travel and tour, REIT management, NCCPL services | 6% | 12% |
| IT services and IT-enabled services | 4% | 8% |
| Advertising services (electronic and print media) | 1.5% | 3% |
| All other services — including legal, accountancy, medical and consultancy | 15% | 30% |
| Stitching, dyeing, printing, embroidery, washing, sizing and weaving rendered to exporters — s.153(2) | 1% | 2% |
Execution of contracts — Section 153(1)(c)
| Category | ATL (filer) | Non-ATL |
|---|---|---|
| Contracts executed by companies | 7.5% | 15% |
| Contracts executed by individuals and AOPs | 8% | 16% |
| Contracts by sportspersons | 15% | 30% |
Minimum tax, adjustable tax, or final tax? — Section 153(3)
This is where the real money is decided, because it determines whether the deduction is merely an advance against the recipient’s final liability or a floor below which the liability cannot fall.
| Limb | Treatment of tax deducted |
|---|---|
| Goods — 153(1)(a) | Minimum tax for the recipient, except where the recipient is a company that manufactured the goods sold, or a public company listed on the stock exchange — for whom it is adjustable advance tax. |
| Services — 153(1)(b) | Minimum tax across the board, including for the reduced-rate specified services and IT/IT-enabled services. |
| Contracts — 153(1)(c) | Minimum tax, except for public listed companies, for whom it is adjustable. |
| Export-oriented services — 153(2) | Minimum tax, following the migration of exporter regimes away from final taxation by the Finance Act, 2024.[4] |
The practical consequence: a trading concern (non-manufacturer) supplying goods at thin margins can end up with an effective tax rate far above its actual profitability, because the 5%/5.5% suffered on gross receipts cannot be refunded even if the normal computation produces a lower liability. This is the structural complaint the Finance Act, 2026 has partially answered — more on that below.
Exclusions and exemptions
Not every payment attracts deduction. The main carve-outs:
| Exclusion | Source |
|---|---|
| Sale of imported goods by an importer who paid tax under Section 148 at import stage and sells the goods in the same condition as imported | s.153(5)(a) |
| Refund of any security deposit | s.153(5) |
| Payment by the Federal or a provincial government for purchase of immovable property | s.153(5) |
| Payments to a special purpose vehicle on behalf of a securitisation originator | s.153(5) |
| Aggregate annual payments below Rs. 75,000 for goods, and Rs. 30,000 for services, to a single supplier in a financial year | De minimis thresholds under the withholding framework[5] |
| Payments against a valid exemption or reduced-rate certificate | s.153(4) |
Exemption and reduced-rate certificates under Section 153(4)
The Commissioner may, on application, issue a certificate directing that no deduction be made, or that deduction be made at a reduced rate. Following the amendments made in recent Finance Acts, full exemption certificates are, broadly, the preserve of public listed companies and persons whose tax is otherwise fully discharged (advance tax paid, exempt income, and similar situations); most other taxpayers are limited to reduced-rate certificates. The certificate is transaction-forward: it protects payments made after its issuance, not before. Every prescribed person should verify a supplier’s certificate on IRIS before honouring it — we have handled Section 161 proceedings where the “certificate” on the supplier’s letterhead never existed on the FBR system.
Worked examples
Example 1 — Supply of goods by an AOP
M/s Alpha (Pvt.) Ltd., Lahore, purchases packing material worth Rs. 2,000,000 plus 18% sales tax (Rs. 360,000) from M/s Beta Traders, an AOP appearing on the ATL. Beta is not the manufacturer.
Withholding base: Rs. 2,360,000 (gross, inclusive of sales tax). Rate: 5.5% (goods, non-company supplier). Tax to deduct: Rs. 129,800. Beta receives Rs. 2,230,200. For Beta, the Rs. 129,800 is minimum tax — if its proportionate normal tax on this income works out lower, the excess is not refundable.
Example 2 — Professional services from a non-filer
The same company engages a consultant, not on the ATL, for a market study at a fee of Rs. 500,000. Consultancy falls in “other services” at 15%, doubled to 30% under the Tenth Schedule for non-ATL recipients. Tax to deduct: Rs. 150,000. The consultant receives Rs. 350,000. This is precisely why suppliers and service providers plead with customers to be treated as filers — and why verifying ATL status on the date of payment (not the invoice date) matters.
Example 3 — Composite contract
A rice mill (an AOP with turnover above Rs. 100 million, sales-tax registered — hence a prescribed person) awards a Rs. 10,000,000 contract to a private limited company for civil works on a new godown, materials and labour included. This is execution of a contract under 153(1)(c). Tax at 7.5%: Rs. 750,000, deducted proportionately from each running bill as paid. Had the mill bought cement itself and hired labour separately, the cement supplier would suffer 5%/5.5% under clause (a) and the labour contractor 8% under clause (c) or the applicable services rate under clause (b) — the structure of the arrangement changes the withholding outcome.
Example 4 — The de minimis threshold
A company buys stationery from the same vendor four times a year, Rs. 15,000 each time. Aggregate annual payments of Rs. 60,000 remain below the Rs. 75,000 goods threshold: no deduction. If a fifth purchase takes the aggregate to Rs. 80,000, the threshold is breached and the deduction obligation applies.
Compliance mechanics: deposit, statements, certificates
Deducting is half the job. The prescribed person must then:
| Obligation | Requirement |
|---|---|
| Deposit of tax deducted | Rule 43 of the Income Tax Rules, 2002: within seven days from the end of each week ending on a Sunday, through a computerised payment receipt (CPR) on IRIS. |
| Withholding statements | Quarterly statements under Section 165 read with Rule 44, due by the 20th of the month following each quarter (20 October, 20 January, 20 April, 20 July), reconciling every payee, CNIC/NTN, payment and tax deducted. |
| Certificate of deduction | On the payee’s request, a certificate under Section 164 within the prescribed time, enabling the payee to claim credit under the same section. |
| Reconciliation | Commissioners routinely require reconciliation of Section 165 statements with the annual return, sales tax returns and audited accounts under Section 161(1A) proceedings. Keep the three data sets aligned before the department does it for you. |
What happens on default: Sections 161, 205, 182 and 21(c)
Failure to deduct, or failure to deposit after deducting, exposes the prescribed person on four fronts simultaneously:
Personal liability under Section 161. The withholding agent is treated as personally liable for the tax not deducted or not deposited, recoverable from the agent as if it were tax due from him. The saving grace is Section 161(1B): where the recipient has already paid tax on the relevant income, recovery of the principal amount from the withholding agent is not made — but default surcharge for the intervening period remains recoverable. In defending Section 161(1A) show cause notices, obtaining payment evidence and return extracts from payees is usually the decisive exercise.
Default surcharge under Section 205, computed at KIBOR plus 3% per annum for the period of default.
Penalty under Section 182. The penalty for failure to deduct or deposit stood at Rs. 40,000 or 10% of the tax involved, whichever is higher. The Finance Act, 2026 has raised this dramatically to Rs. 500,000 or 10% of the tax involved, whichever is higher, and where the defaulter is a company, its principal officer is now personally liable to an additional penalty of Rs. 500,000.[6] Directors and CFOs should read that twice.
Disallowance of the expenditure under Section 21(c). Expenditure on which tax was deductible but not deducted or paid is disallowed in computing business income — subject to the proviso capping the disallowance for purchases of raw materials and finished goods at 20% of such purchases, and subject to recomputation where the recipient has discharged the tax.
What the Finance Act, 2026 changed
Effective 1 July 2026 — that is, for Tax Year 2027 (1st July 2026 to 30th June 2027) — the following amendments touch Section 153 directly or in its immediate neighbourhood:[6]
| Change | Detail |
|---|---|
| Specified services rate raised | The reduced rate for the specified services list under 153(1)(b) goes from 6% to 7%. |
| General services rate cut — with a carve-out | The general 15% rate is reduced to 14%, except for independent professional services — doctors, lawyers, architects, accountants, and software engineers and developers working independently — who remain at 15%. |
| Terminal and port services | Reduced from 15% to 12%. |
| IT and IT-enabled services | Unchanged at 4%. |
| Power to rationalise minimum-tax withholding | The Federal Government is empowered to reduce any withholding tax that operates as minimum tax (other than Section 113 turnover tax) down to a floor of 1%, on economic-viability grounds, for notified persons or classes — with all such changes to be laid before the National Assembly. For sectors crushed by minimum-tax withholding on gross receipts, this is the first structural relief valve in years. |
| Individual traders’ threshold | The turnover threshold for individuals to be treated as prescribed persons rises from Rs. 100 million to Rs. 200 million. |
| Trading houses | The exemption from withholding on receipts from sale of goods, and the reduced 1% turnover tax, previously available to qualifying trading houses stand withdrawn. |
| Iron and steel manufacturers | Withholding suffered by non-corporate manufacturers of iron and steel products on the sale of such products will now be treated as minimum tax. |
| Small retailers | Retailers opting into the new fixed tax regime (turnover up to Rs. 200 million, 1% of sales) are relieved of the obligation to act as withholding agents. |
| Penalty enhancement | As noted above — Rs. 500,000 or 10%, plus principal-officer liability for companies. |
One reading of these amendments taken together: the legislature is narrowing the withholding-agent net at the bottom (small traders and retailers out) while sharpening enforcement against those who remain in it (five-fold penalty increase, personal officer liability). If your business stays within the net, the cost of casual compliance just went up considerably.
Frequently asked questions
We are a private limited company with no revenue yet. Must we withhold on our office renovation bills?
Yes. A company is a prescribed person from incorporation, irrespective of turnover. The renovation contractor’s bills fall under 153(1)(c) at 7.5%/8% depending on the contractor’s status, subject to the ATL doubling.
Our supplier says he has an exemption certificate. Can we rely on his word?
No. Verify the certificate on IRIS, note its validity period and the transactions it covers, and retain a copy. If the certificate is invalid, Section 161 liability is yours.
We deducted but deposited late. Is that a lesser default?
The principal exposure differs — the tax was eventually deposited — but default surcharge under Section 205 runs for the delay, and the Section 182 penalty applies to failure to deposit within the prescribed time. Late deposit also draws scrutiny in future withholding audits.
Is the deduction made on the amount including sales tax?
Yes. The withholding base is the gross amount payable inclusive of sales tax.
Our recipient already paid his tax. Can the department still recover from us under Section 161?
Not the principal amount — Section 161(1B) bars recovery where the recipient has discharged the tax — but default surcharge for the period between the due date of deduction and the recipient’s payment remains recoverable, and the evidentiary burden of proving the recipient’s payment sits on you.
References
- Section 153, Income Tax Ordinance, 2001 (XLIX of 2001), as amended up to the Finance Act, 2026.
- Division III, Part III, First Schedule to the Income Tax Ordinance, 2001, as substituted/amended by the Finance Act, 2025 (rates applicable for Tax Year 2026 (1st July 2025 to 30th June 2026)).
- Tenth Schedule to the Income Tax Ordinance, 2001 (rate enhancement for persons not appearing on the Active Taxpayers List).
- Finance Act, 2024 (migration of exporter and related regimes from final to minimum taxation).
- De minimis exclusions for aggregate annual payments (Rs. 75,000 for goods; Rs. 30,000 for services) under the withholding framework of the Ordinance.
- Finance Act, 2026 (effective 1 July 2026) — amendments to service withholding rates under s.153(1)(b), prescribed-person thresholds, penalty provisions under s.182, and the Federal Government’s power to rationalise minimum-tax withholding rates; see also the Finance Bill 2026 commentary of A.F. Ferguson & Co. / PwC Pakistan (13 June 2026).
- Sections 21(c), 161, 162, 164, 165 and 205, Income Tax Ordinance, 2001; Rules 43 and 44, Income Tax Rules, 2002.
This article is general commentary, not legal advice. Rates and treatments stated for Tax Year 2027 (1st July 2026 to 30th June 2027) should be confirmed against the enacted text of the Finance Act, 2026 and any SROs issued thereunder before being applied to a specific transaction.
H.S. Advocate & Co. represents taxpayers in withholding tax audits and enforcement proceedings before RTOs across Punjab, and advises on withholding compliance systems. Office No. 72, 5th Floor, Rajpoot Heights, Begum Road, Mozang, Lahore · 0344-4444703 · hsadvocate.com