12 Withholding Tax Exemptions in Pakistan You Must Know

In Pakistan, the Federal Board of Revenue (FBR) oversees tax regulations, including the application of withholding tax under the Income Tax Ordinance. Withholding tax plays a critical role in ensuring tax compliance, but certain transactions are exempt from this requirement. This article explores into the key concepts, legal foundations, and 12 specific scenarios where withholding tax does not apply,

What Is Withholding Tax and How Does It Differ from Advance Tax?

Before exploring exemptions, it’s essential to understand two fundamental concepts: withholding tax and advance tax.

• Withholding Tax: This is an amount deducted at the source by the payer (e.g., a buyer or employer) from a payment made to a recipient (e.g., a seller or service provider). The deducted tax is then deposited with the FBR on behalf of the recipient. For instance, if Mr. B pays Mr. A for goods or services, Mr. B withholds a percentage (e.g., 5%) as income tax and submits it to the FBR.
• Advance Tax: From the recipient’s perspective (Mr. A), the withheld amount becomes an advance payment toward their total income tax liability. At year-end, when filing their tax return, Mr. A can claim this amount as a credit.

The rationale behind withholding tax is simple yet effective: it ensures the FBR has a mechanism to track income and enforce accurate reporting. By deducting tax upfront, sellers are incentivized to declare their earnings fully, as the tax is already recorded against their name.

The legal foundation for withholding tax lies in Section 153 of the Income Tax Ordinance, which outlines applicable rates based on the recipient’s status—whether an individual, an Association of Persons (AOP), or a company.

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12 Transactions Exempt from Withholding Tax in Pakistan

The FBR has outlined specific scenarios where payers are not required to withhold tax, allowing recipients to receive 100% of the payment. Below are the 12 key exemptions, along with their conditions and practical implications:

1. Payments to Commercial Importers

When the seller is a commercial importer—someone importing goods and selling them in the same condition—no withholding tax applies. However, the payer must:

• Obtain a copy of the Goods Declaration (GD).
• Secure a written undertaking from the seller confirming their status.
• Verify the seller’s status via their National Tax Number (NTN) on the FBR website.

If the NTN inquiry fails to confirm their activity, the payer must withhold tax or risk penalties during an FBR audit.

2. Cash Payments to Hotels and Restaurants

Cash payments for accommodation or food services at hotels and restaurants are exempt. Whether you’re staying at a hotel during travel or dining out, no tax needs to be withheld on these cash transactions.

3. Payments for Utilities

Utility bills—such as gas (SNGPL), electricity (LESCO), or property tax—are not subject to withholding tax. This exemption simplifies payments for essential services.

4. Payments for Goods Up to PKR 25,000 Annually

If total annual payments to a single vendor for goods do not exceed PKR 25,000, no withholding tax applies. However, if cumulative payments surpass this threshold, tax must be withheld on the entire amount, retroactively including earlier transactions.

5. Payments for Services Up to PKR 30,000 Annually

For services, the annual threshold is PKR 30,000 per vendor. Payments below this limit are exempt, but exceeding it triggers withholding on the full amount.

6. Purchase of Used Motor Vehicles from the General Public

Buying a used vehicle from an individual (not a registered dealer) bypasses withholding tax. Whether purchased from a showroom, online platform, or directly, this exemption applies to general public sellers.

7. Payments for Agricultural Produce

Transactions involving agricultural products—like fresh milk, fish, live poultry, eggs, or unpackaged meat—are exempt. This supports farmers and small-scale producers by reducing tax burdens.

8. Payments to Petroleum Agents

Payments to petroleum agents (e.g., for diesel) are exempt if the agent is registered for both sales tax and income tax and listed as an active taxpayer with the FBR.

9. Payments to Air Travel Agents (Commission)

When buying tickets, the payer doesn’t withhold tax on the agent’s commission, as the agent is responsible for settling their tax liability with airlines like PIA.

10. Payments to Construction Industry Service Providers

Artisans such as plumbers, electricians, carpenters, painters, and daily wage laborers in the construction sector (e.g., building roads or bridges) are exempt, provided:

• They lack an active NTN, in which case the payer must collect CNIC details, fill out forms, and maintain records.
• If they have an NTN, withholding tax applies.

11. Payments to Recipients with Exemption Certificates

Sellers with a valid FBR-issued exemption certificate may receive full payment or a reduced withholding rate (e.g., 1% instead of 5%). Post-July 2024, full exemptions are rare, with reduced rates now standard.

12. Payments to AOPs or Individuals with Turnover Below PKR 100 Million

If the recipient (an AOP or individual) had an annual turnover below PKR 100 million in prior tax years, no withholding tax is required. This eases compliance for smaller businesses.

If you want to learn more about tax savings you can explore our detailed article How to Get a Tax Rebate from FBR (Income Tax) in Pakistan – Complete Guide

Why These Exemptions Matter

Understanding these exemptions is crucial for:

• Cash Flow Management: Avoiding unnecessary tax deductions preserves liquidity for both payers and recipients.
• Compliance: Misapplying withholding tax can lead to FBR penalties or disputes with vendors demanding gross payments.
• Cost Savings: Businesses can save money by leveraging exemptions where applicable.

For example, if a vendor insists on full payment despite a legal withholding requirement, the payer remains liable for the tax. Knowing the exemptions helps navigate such situations confidently.

Practical Tips for Businesses

1. Due Diligence: Verify vendor status (e.g., NTN, exemption certificates) before processing payments.
2. Documentation: Maintain detailed records, especially for exemptions like construction services or commercial importers, to satisfy FBR audits.
3. Stay Updated: Tax rules evolve—post-July 2024 changes to exemption certificates highlight the need for vigilance.

The FBR’s withholding tax exemptions reflect a balance between revenue collection and support for specific sectors, small businesses, and unique transactions. By mastering these rules, taxpayers can optimize cash flow, ensure compliance, and avoid overpaying taxes. Whether you’re a commercial importer, a small vendor, or a construction contractor, these exemptions offer practical benefits—provided you meet the conditions and maintain proper records.

Have questions or need clarification on a specific exemption? Drop your thoughts in the comments below, and let’s explore this topic further together!