Taxation

Withholding tax obligations in Pakistan: deduction, deposit, statements and liability under section 161

Most Karachi companies are tax collectors before they are taxpayers: every salary run, supplier payment, rent cheque and remittance abroad can carry a duty to deduct income tax, and often Sindh or federal sales tax as well. Anyone searching for the best withholding tax lawyer in Karachi after receiving a section 161 notice usually needs one fact established first: whether the payee has already paid the tax, because that single fact can remove the principal demand. This guide explains the duties, the liability that follows a default and how monitoring proceedings are usually run and answered.

Who is a withholding agent and where the duties sit

The withholding regime sits mainly in Part V of Chapter X of the Income Tax Ordinance, 2001 (the Ordinance), which contains the deduction and collection provisions from section 147 onwards, and in the advance tax provisions of the section 236 series. The person who makes the payment, or who collects tax along with its own receipts, becomes the withholding agent. The payee remains the taxpayer, but the agent is the person the law holds to account if the tax is not deducted and paid over.

Who counts as a “prescribed person” differs from section to section. Companies, associations of persons and individuals above specified turnover thresholds are commonly caught; the precise definition must be read in the section that applies to the payment in question. The Tenth Schedule to the Ordinance (rules for persons not appearing in the Active Taxpayers’ List) increases the rates for many payments to persons who are not on the ATL, so checking the payee’s status at the time of payment is part of the duty, not a courtesy.

The provisions a Karachi business meets most often

The headings below are taken from the Ordinance as amended up to 30 June 2026 (the Finance Act, 2026 text published by the FBR). Rates are deliberately not reproduced: they sit in Parts III and IV of the First Schedule and change in most Finance Acts, so they must be checked for the tax year in which the payment is made.

Section	Heading in the Ordinance	Typical situation
149	Salary	Monthly payroll, bonuses and benefits
151	Profit on debt	Profit paid on loans, deposits or certificates
152	Payments to non-residents	Royalties, fees for technical services and other payments abroad
153	Payments for goods, services and contracts	Payments to resident suppliers, service providers and contractors
155	Rent of immoveable property	Office, warehouse or showroom rent
236G / 236H	Advance tax on sales to distributors, dealers and wholesalers / to retailers	Manufacturers and commercial importers selling through a trade channel

The Finance Act, 2026 text also lists two new headings, section 151B (certain payments by life insurance companies and takaful operators) and section 154B (revenues received from social media platforms). Businesses in those sectors should read the new sections directly rather than rely on older summaries.

Section 153 causes the most disputes in practice because the rate turns on whether a payment is for goods, services or a contract. A single invoice can mix all three. Classifying it correctly at the time of payment, and keeping the reasoning on file, is cheaper than defending it in monitoring proceedings years later.

Deduction, deposit and certificates: the mechanics

Section 158 (time of deduction of tax) ties the deduction to the payment, and section 160 (payment of tax collected or deducted) requires the agent to pay the tax over to the Commissioner. The time for deposit is set by Rule 43 of the Income Tax Rules, 2002: government bodies pay on the same day, and other agents within seven days from the end of each week ending on a Sunday. Late deposit is a default in its own right even where the deduction itself was correct.

Two documents matter at the point of payment:

• The payee’s exemption or lower rate certificate under section 159. If the payee holds one, the agent may deduct at the reduced rate or not at all, but only within the terms and period of the certificate. Keep a copy with the payment voucher.
• The certificate of deduction under section 164. The payee needs it to claim credit for the tax. Failing to issue it does not usually create tax liability for the agent, but it causes disputes with suppliers and staff.

Quarterly withholding statements under section 165

Section 165 requires every person who collects or deducts tax to file statements through the FBR’s IRIS system. The Finance Act, 2020 restored the quarterly cycle after a short period of half-yearly filing, so statements are due by 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December. A statement is required even where no tax was deducted in the quarter. Employers also file an annual statement of salary deductions under the Rules.

The statements are the department’s main monitoring tool. They are matched against the payees’ returns and against the agent’s own accounts. Rule 44(4) of the Income Tax Rules, 2002 expects the agent to reconcile the payments in its statements with those claimed in its return. When the two do not agree, a monitoring notice usually follows. Late or missing statements also attract penalties under section 182, which are separate from any liability for the tax itself.

What section 161 does when tax is not deducted or not paid over

Section 161 (failure to pay tax collected or deducted) is the core liability provision. In outline:

• A person who fails to collect or deduct tax as required, or who collects or deducts it but does not pay it to the Commissioner under section 160, becomes personally liable to pay the amount, and the Commissioner may make an order for its recovery.
• The Commissioner must give the person an opportunity of being heard before making that order (section 161(1A)).
• Where it is shown that the payee has meanwhile paid the tax, no recovery of the principal is made from the agent. The agent remains liable for default surcharge for the period from the date of the failure until the tax was paid (section 161(1B)). Secondary commentaries on the 2026 text state the rate under this subsection as 12 per cent per annum.
• An agent that pays under section 161 may recover the amount from the payee (section 161(2)). Separately, section 162 allows the Commissioner to recover the tax directly from the person from whom it was not deducted.

There is a second, quieter consequence. Under section 21(c), an expense on which tax was required to be deducted is not deductible in computing business income unless the tax was deducted and paid. The provisos, in the text reviewed (as amended to 2021), cap the disallowance for purchases of raw materials and finished goods at a fraction of those purchases and treat tax recovered under section 161 or 162 as tax paid. Check the current wording for the tax year concerned: the same default can be pursued as a withholding demand and as an addition to income, and the two need to be answered together.

Default surcharge: compensation, but not automatic

Default surcharge under section 205 compensates the revenue for late payment. The department’s position is that once a default is shown, surcharge follows as a matter of course. The High Court of Sindh has taken a more careful line on how it may be imposed:

• In Commissioner Inland Revenue v. Tianshi International Pakistan Co. (Pvt) Ltd, I.T.R.A. No. 80 of 2015, decided 07.12.2017, the Court upheld the Tribunal’s deletion of surcharge levied under sections 161 and 205 without fixing the period of default or establishing a wilful default. It applied the Supreme Court’s reasoning in Deputy Collector, Central Excise and Sales Tax v. ICI Pakistan Limited, 2006 SCMR 626, that such liability is not automatic and the authority must consider whether the default was wilful.
• In China Power Hub Generation Company (Pvt.) Limited v. Pakistan, C.P. No. D-3532 of 2020, decided 11.02.2021, the Court held that surcharge must be dealt with in the same proceedings as the section 161 demand, through a notice under section 161 read with section 205. Where the final section 161 order did not impose surcharge, a later separate notice for it could not be sustained.

These are Sindh decisions and they bind officers in Karachi. They do not mean surcharge can never be charged: where the default period is properly worked out and the agent had no reasonable explanation, the department is entitled to it. Penalties under section 182, and the separate question whether penalties need a guilty mind, are discussed in our guide to tax penalties and default surcharge.

Monitoring proceedings and how to answer a section 161 notice

Monitoring usually starts with a letter asking for payment ledgers, the general ledger expense heads and the withholding statements for a tax year. The officer compares expenses in the return with payments reported in the statements and treats the gap as payments on which tax was not deducted. A show-cause notice under section 161, often read with section 205, follows.

A sound response is built on evidence, not argument alone:

1. Reconcile the gap. Much of the difference is usually non-cash entries, provisions, payments below thresholds, payments to exempt persons, or amounts that were deducted and reported under a different head.
2. Prove payment by the payee where you can. Returns or tax payment evidence of major suppliers can bring section 161(1B) into play and remove the principal.
3. Produce certificates. Section 159 certificates valid on the payment date answer the default directly for those payments.
4. Challenge the period and basis of any surcharge and insist that it is decided in the same order, following the Sindh decisions above.

Our general guide on answering an FBR show-cause notice covers drafting and hearings. An order under section 161 can be appealed through the usual tax appeal route; the demand that follows is recoverable unless stayed, which is covered in our guide to tax recovery, bank attachment and stay.

Common traps for Karachi businesses

• Three withholding regimes, not one. Income tax withholding under the Ordinance is separate from federal sales tax withholding under section 3(7) and the Eleventh Schedule to the Sales Tax Act, 1990, and from Sindh sales tax withholding under the Sindh Sales Tax Special Procedure (Withholding) Rules, 2014. A single service invoice in Karachi can trigger income tax and Sindh sales tax withholding at the same time. See our guide to Sindh sales tax on services.
• Not checking the ATL on the payment date. A supplier’s status can change during the year, and the Tenth Schedule rate applies when the payee is off the list.
• Payments abroad treated as purchases. Software licences, cloud subscriptions and technical support from non-residents may fall under section 152 rather than outside the regime altogether; tax treaties can reduce the rate but the analysis must be done before payment.
• Nil statements skipped. A quarter with no deductions still needs a statement.
• Statements that do not match the accounts. Reclassifications made at year-end audit often leave the statements out of line with the return, which is what monitoring software flags.
• Deposit made under the wrong section or tax year. Correcting a mis-coded payment later is possible but slow, and in the meantime the system shows a default.

Common questions

This article is general information about Pakistani law and procedure, not legal advice for any specific matter. If this touches on something you're currently facing, get in touch and we'll advise on your facts directly.