Withholding tax on services in Pakistan is an important part of the country’s tax system, designed to ensure that taxes are collected at the source of income. This Tax Calculator Pakistan is deducted from payments made for various services before they reach the service provider, and the amount withheld is then deposited with the Federal Board of Revenue (FBR). Understanding how withholding tax on services is calculated is crucial for businesses and individuals to comply with tax laws and avoid penalties.
What is Withholding Tax on Services?
Withholding tax on services is a type of income tax that is deducted from payments made to service providers by the person or entity making the payment. The payer acts as a withholding agent, meaning they are responsible for deducting the tax from the total payment and depositing it with the government.
The duty applies to a large number of administrations, including however not restricted to proficient administrations, consultancy, legitimate administrations, the executives administrations, and legally binding administrations. It is regulated under the Income Tax Ordinance, 2001.
The withholding tax is not an additional tax; rather, it is a form of advance tax payment. The service provider can adjust this amount against their overall tax liability at the end of the tax year.
Categories of Services Subject to Withholding Tax
In Pakistan, the rate of withholding tax varies depending on the type of service provided. Common categories subject to withholding tax include:
Professional services (e.g., legal, medical, engineering, or consultancy services)
Contractual services (e.g., construction, supply, or any work undertaken under a contract)
Technical services (e.g., IT services, software development, technical consultancy)
Renting of equipment or property
Advertising services (media, digital marketing)
The rates of withholding tax for these services are predefined by the FBR and may vary over time.
How is Withholding Tax Calculated?
The calculation of withholding tax on services is straightforward but varies depending on the nature of the service and the filer status of the service provider. In general, the withholding tax is applied as a percentage of the total payment made for the service.
Here are the key steps to calculate withholding tax on services in Pakistan:
1. Identify the Applicable Withholding Tax Rate
The rate of withholding tax depends on whether the service provider is a filer or a non-filer. A filer is someone who regularly files income tax returns, while a non-filer does not. FBR maintains a list of filers in the Active Taxpayer List (ATL), which is publicly available.
For filers, the withholding tax rate is generally lower.
For non-filers, the rate is higher to incentivize tax compliance.
Here are some examples of withholding tax rates (which can vary):
Professional services: 8% for filers, 15% for non-filers.
Specialized administrations: 8% for filers, 15% for non-filers.
Contracts: 7% for filers, 10% for non-filers.
2. Calculate the Taxable Amount
The taxable amount is the gross payment made for the services. For example, if a business hires a legal consultant for a project and the agreed payment is PKR 100,000, this will be the base amount on which the withholding tax is calculated.
Once the gross payment is determined, apply the applicable withholding tax rate. For instance, if the service provider is a filer and the withholding tax rate is 8%, the tax would be:
Withholding Tax=1008×100,000=8,000 PKR
Therefore, the business will deduct PKR 8,000 from the payment and deposit it with the FBR. The service provider will receive PKR 92,000, with PKR 8,000 credited towards their tax liability.
If the service provider is a non-filer, the withholding Tax Calculator Pakistan rate may be higher, for example, 15%, resulting in:
Withholding Tax=10015×100,000=15,000 PKR
In this case, the service provider would receive PKR 85,000, with PKR 15,000 deducted and paid to the FBR.
4. Deposit the Withholding Tax
The withholding agent (the payer) is responsible for depositing the tax with the FBR. The amount withheld must be deposited by the 15th of the following month in which the payment was made. The withholding agent must also issue a withholding tax certificate to the service provider, indicating the amount deducted and paid.
Adjustment and Filing
Service providers can adjust the amount of withholding tax deducted against their total income tax liability when filing their annual income tax returns. If the total amount of tax deducted exceeds their final tax liability, they may claim a refund from the FBR.
Conclusion
Withholding tax on services in Pakistan is calculated as a percentage of the total payment made for services. The rate depends on the type of service and whether the service provider is a filer or non-filer. Hamza & Hamza Law Associates is responsible for deducting the tax and depositing it with the FBR. Understanding how to calculate and manage withholding tax is essential for businesses to ensure compliance with tax regulations.
