Withholding tax in Pakistan is a form of advance tax collected at the source of income, transactions, or services. It is deducted at various stages, including bank transactions, vehicle registration, property transactions, and utility bills. The Federal Board of Revenue (FBR) is responsible for the collection of withholding tax under different sections of the Income Tax Ordinance, 2001.
Understanding Withholding Tax in Pakistan
Withholding tax applies to both filers and non-filers, with higher rates imposed on non-filers. This taxation method helps the government track income sources and improve tax compliance.
Categories of Withholding Tax in Pakistan
1. Withholding Tax on Banking Transactions
- Profit on Debt (Section 151): A 15% tax is deducted on profit earned from debt instruments, savings accounts, and fixed deposits.
- Cash Withdrawal from Bank (Section 231A): A tax is deducted when an individual withdraws cash exceeding a certain threshold from a bank account.
- Certain Banking Transactions (Section 231AA): Non-cash banking transactions above a specified limit incur a withholding tax.
- Banking Transactions Otherwise than through Cash (Section 236P): A withholding tax is levied on banking transactions made through instruments such as demand drafts, pay orders, and online transfers.
2. Withholding Tax on Motor Vehicles
- Motor Vehicle Registration Fee (Section 231B(1)): Tax is deducted at the time of vehicle registration.
- Motor Vehicle Transfer Fee (Section 231B(2)): Tax is applicable upon transfer of vehicle ownership.
- Motor Vehicle Sale (Section 231B(3)): Tax is deducted when selling a registered vehicle.
- Motor Vehicle Leasing (Section 231B(1A)): A 4% tax is deducted at the time of leasing a vehicle.
- Goods Transport Public Vehicle Tax (Section 234): Public transport vehicles pay advance tax annually.
- Private Vehicle Tax (Section 234): Owners of private vehicles pay withholding tax based on engine capacity.
3. Withholding Tax on Utility and Communication Services
- Electricity Bill for Domestic Consumers (Section 235): A withholding tax is charged on electricity bills above a certain consumption limit.
- Telephone Bill (Section 236(1)(a)): Tax is deducted from landline telephone bills.
- Cellphone Bill (Section 236(1)(a)): Mobile phone postpaid users are charged withholding tax on their bills.
- Prepaid Telephone Card (Section 236(1)(b)): Tax is deducted on prepaid mobile and landline cards.
- Phone Unit (Section 236(1)(c)): A per-unit tax is applied to mobile calls.
- Internet Bill (Section 236(1)(d)): Internet service providers collect withholding tax on consumer bills.
4. Withholding Tax on Property Transactions
- Sale/Transfer of Immovable Property (Section 236C): Tax is deducted when selling or transferring property.
- Tax Deducted u/s 236C (Same Year & Prior Year): Tax obligations remain applicable even if the property was held for different durations.
- Purchase/Transfer of Immovable Property (Section 236K): Tax is deducted at the time of property purchase or transfer.
5. Withholding Tax on Travel and Transportation
- Purchase by Auction (Section 236A): A withholding tax is applied to purchases made via public auctions.
- Domestic Air Ticket Charges (Section 236B): Tax is deducted on the purchase of domestic flight tickets.
- Purchase of International Air Ticket (Section 236L): A withholding tax is levied on the purchase of international flight tickets.
6. Withholding Tax on Education and Professional Fees
- Educational Institution Fee (Section 236I): A withholding tax is charged on the tuition fees paid to educational institutions.
7. Withholding Tax on Foreign Transactions
- Persons Remitting Amount Abroad (Section 236Y): Tax is deducted when remitting money abroad through banking channels.
8. Withholding Tax on Pension and Investments
- Advance Tax on Pension Fund Withdrawal: When withdrawing pension funds, a withholding tax is deducted based on the withdrawal amount.
- Advance Tax on On-Money (Section 231B(2A)): Tax is applicable on on-money payments made for purchasing vehicles before delivery.
Impact of Withholding Tax on Taxpayers
Withholding tax significantly affects individuals and businesses, leading to higher financial costs, especially for non-filers. However, filers can claim adjustments and refunds when filing their annual income tax returns.
How to Reduce Withholding Tax Burden
- File Income Tax Returns: Register as a tax filer with the FBR to enjoy lower withholding tax rates, if you are wondering how much tax i can save use our updated income calculator to calcuate your witholding taxes.
- Maintain Banking Transactions Record: Keeping a proper record of financial transactions can help in claiming tax adjustments.
- Claim Refunds and Adjustments: If withholding tax has been deducted in excess, taxpayers can apply for refunds through FBR’s tax return filing system.
Withholding tax in Pakistan serves as a key revenue source for the government while encouraging tax compliance. Individuals and businesses should stay informed about applicable tax deductions to manage their financial obligations efficiently.
If you want to read more information about how to save the income taxes just checkout our details article on Comprehensive Guide to Claiming an FBR Income Tax Refund in Pakistan
FAQ for Withholding Tax in Pakistan
1. Is withholding tax applicable to all banking transactions in Pakistan?
Yes, withholding tax applies to certain banking transactions in Pakistan. For example, cash withdrawals exceeding a specific limit are taxed under Section 231A, while non-cash transactions may be subject to tax under Section 231AA and 236P.
2. Do I need to pay withholding tax when purchasing or selling a vehicle in Pakistan?
Yes, vehicle transactions are subject to withholding tax. Motor vehicle registration, transfer, sale, and leasing are taxed under Section 231B, with rates varying based on the vehicle’s engine capacity and transaction type.
3. Is there withholding tax on electricity and phone bills in Pakistan?
Yes, withholding tax is deducted from electricity bills (Section 235), telephone bills (Section 236(1)(a)), and internet bills (Section 236(1)(d)) if they exceed the specified threshold.
4. Do property transactions in Pakistan involve withholding tax?
Yes, buying, selling, or transferring immovable property incurs withholding tax. The tax is deducted under Section 236C for sellers and Section 236K for buyers, with rates differing for filers and non-filers.
5. Are international and domestic flight tickets subject to withholding tax?
Yes, domestic and international air ticket purchases include withholding tax. Domestic tickets are taxed under Section 236B, while international tickets fall under Section 236L.
6. Is withholding tax deducted on auction purchases in Pakistan?
Yes, purchases made through public auctions are subject to withholding tax under Section 236A. The applicable tax rate varies depending on the nature of the auctioned goods.
7. How can I reduce my withholding tax liability in Pakistan?
You can lower your withholding tax by filing tax returns with the FBR. Filers benefit from reduced tax rates compared to non-filers, and they can also claim tax adjustments and refunds.
