When a business hires a contractor, construction company, consultant, software developer or service provider, the payment may be subject to withholding tax in Pakistan.
This means the person making the payment may have to deduct income tax before releasing the amount to the contractor. The deducted tax must then be deposited with the Federal Board of Revenue (FBR) according to the applicable rules.
For businesses, getting this calculation wrong can lead to tax demands, penalties and other compliance problems. Contractors also need to understand these deductions because they may affect the amount received and the tax payable when filing an income tax return.
This guide explains withholding tax on contractor payments in Pakistan for Tax Year 2027. It covers Section 153 of the Income Tax Ordinance, 2001, the latest applicable rates, Active Taxpayer List (ATL) status, payment examples and the responsibilities of withholding agents.
1. What is withholding tax on contractor payments?
Withholding tax is an amount deducted from a payment and deposited with the government as income tax.
For example, suppose a company hires a contractor to complete construction work worth Rs. 1,000,000. If the applicable withholding tax rate is 7.5%, the company will deduct Rs. 75,000 and pay the remaining Rs. 925,000 to the contractor.
The company must deposit the deducted Rs. 75,000 with the FBR and report the deduction as required.
The contractor receives less cash at the time of payment, but the deduction is recorded as tax paid on the contractor’s behalf. Its final treatment depends on the applicable legal provisions.
2. Which section of the Income Tax Ordinance applies?
Section 153 of the Income Tax Ordinance, 2001 deals with payments for goods, services and contracts made to resident persons by prescribed persons.
It covers three main types of transactions:
- Section 153(1)(a): Payments for the sale or supply of goods.
- Section 153(1)(b): Payments for rendering or providing services.
- Section 153(1)(c): Payments for the execution of contracts.
The correct category matters because each category may have a different withholding tax rate.
For example, a payment to a construction contractor may fall under the contract category. A payment to an IT service provider may fall under the services category. A business purchasing goods from a supplier may fall under the supplies category.
Do not select a tax rate simply because an invoice uses the word “contractor.” The actual nature of the work and the relevant legal provisions determine the correct treatment.
Read more: Property Tax Rates 2026-27 in Pakistan
3. Who is required to deduct withholding tax?
Section 153 does not require every person making a payment to deduct tax. The responsibility generally applies to persons who fall within the definition of a prescribed person under the law.
These can include:
- Companies.
- Federal and provincial governments.
- Certain statutory bodies and authorities.
- Non-profit organizations covered by the relevant provisions.
- Associations of persons and other persons who meet the applicable legal conditions.
Companies should pay particular attention to this requirement. A company may have withholding tax responsibilities even if it is newly established or has a small business operation.
For individuals and associations of persons, the applicable turnover threshold and any available exemption must be checked under the current law. The Finance Act 2026 also introduced an increase in the turnover threshold for the withholding exemption of small traders from Rs. 100 million to Rs. 200 million, subject to the relevant conditions.
Do not assume that every individual business owner must deduct tax, or that every person below a general turnover threshold is automatically exempt. Check the applicable definition, category and exemption before making a payment.
4. Withholding tax rates on contractor payments for Tax Year 2027
The FBR withholding tax rate card for Tax Year 2027 reflects the changes introduced through the Finance Act 2026.
The rates below show the general ATL and non-ATL rates for payments under Section 153. The applicable rate still depends on the nature of the transaction and any special legal provision.
A. Tax on execution of contracts under Section 153(1)(c)
| Contractor or recipient | ATL rate | Non-ATL rate |
|---|---|---|
| Company | 7.5% | 15% |
| Any other case, including individuals and AOPs | 8% | 16% |
| Sportspersons | 15% | 30% |
For example, if a company receives Rs. 1,000,000 for executing a contract and is on the ATL, the withholding tax at 7.5% will be Rs. 75,000.
If the same company is not on the ATL, the deduction will generally be Rs. 150,000 at the 15% rate.
B. Tax on services under Section 153(1)(b)
Different types of services have different withholding tax rates.
| Type of service | ATL rate | Non-ATL rate |
|---|---|---|
| Certain specified services | 7% | 14% |
| IT and IT-enabled services | 4% | 8% |
| Independent professional services | 15% | 30% |
| Advertising services paid to electronic and print media | 1.5% | 3% |
| Terminal and port operating services by companies | 12% | 24% |
| Other services | 14% | 28% |
Independent professional services can include services provided independently by doctors, lawyers, architects, accountants and software engineers or developers, subject to the legal definition.
A business should not automatically apply the 4% IT rate to every payment involving software or technology. The service must qualify under the relevant definition of IT and IT-enabled services.
C. Tax on supplies under Section 153(1)(a)
The following rates apply to the listed categories of supplies:
| Type of supply | ATL rate | Non-ATL rate |
|---|---|---|
| Rice, cotton seed or edible oils | 1.5% | 3% |
| Supplies by companies, other than toll manufacturing | 5% | 10% |
| Supplies by persons other than companies, excluding toll manufacturing | 5.5% | 11% |
| Toll manufacturing by companies | 9% | 18% |
| Toll manufacturing by persons other than companies | 11% | 22% |
These rates are included because businesses often confuse payments for supplies with payments for contracts. The correct classification can change the amount of tax deducted.
D. Special categories
Certain transactions have separate withholding provisions and should not be treated as ordinary contractor payments.
For example, Section 153(2) covers specified services provided to exporters or export houses. Section 153(2A) deals with payments for digitally ordered goods or services through e-commerce platforms.
The rate and conditions for these transactions should be checked separately before applying the general rates in this article.
5. What changed under the Finance Act 2026?
The Finance Act 2026 revised the withholding tax structure for several services from 1 July 2026.
Some important changes include:
- The rate for certain specified services increased to 7% for ATL taxpayers.
- Independent professional services were separately categorized at 15% for ATL taxpayers.
- Terminal and port operating services provided by companies carry a 12% ATL rate.
- Other services carry a 14% ATL rate.
The contract withholding rates shown in the Tax Year 2027 rate card are 7.5% for companies and 8% for other cases for ATL taxpayers.
Businesses should use the current Tax Year 2027 rate card rather than relying on older tax-year tables or previous payment calculations.
6. How does ATL status affect contractor withholding tax?
The Active Taxpayer List (ATL) status of the recipient can significantly affect the amount deducted.
In many Section 153 categories, the non-ATL rate is twice the ATL rate. This means a contractor who is not on the ATL may receive considerably less money after tax deduction.
For example, consider a company receiving a contract payment of Rs. 1,000,000.
| Particulars | ATL company | Non-ATL company |
|---|---|---|
| Gross contract payment | Rs. 1,000,000 | Rs. 1,000,000 |
| Withholding tax rate | 7.5% | 15% |
| Tax deducted | Rs. 75,000 | Rs. 150,000 |
| Net payment | Rs. 925,000 | Rs. 850,000 |
The difference in the deduction is Rs. 75,000.
Before making a payment, the withholding agent should verify the recipient’s ATL status using the FBR’s official system and retain evidence of the check.
Do not rely only on an old screenshot or a contractor’s verbal confirmation. The relevant status should be checked for the payment date.
7. How to calculate withholding tax on contractor payments
The basic calculation is:
Withholding Tax = Gross Amount Payable × Applicable Tax Rate
Here are some practical examples.
Example 1: Payment to an ATL company contractor
A company receives a contract payment of Rs. 2,000,000. The applicable rate is 7.5%.
- Gross payment: Rs. 2,000,000
- Tax rate: 7.5%
- Tax deduction: Rs. 150,000
- Net payment: Rs. 1,850,000
The withholding agent deducts Rs. 150,000 and deposits it with the FBR.
Example 2: Payment to a non-ATL company contractor
Suppose the same contractor is not on the ATL.
- Gross payment: Rs. 2,000,000
- Tax rate: 15%
- Tax deduction: Rs. 300,000
- Net payment: Rs. 1,700,000
The higher non-ATL rate increases the tax deduction by Rs. 150,000.
Example 3: Payment to an individual contractor
An individual contractor receives Rs. 500,000 for executing a contract. Assuming the applicable ATL rate is 8%:
- Gross payment: Rs. 500,000
- Tax rate: 8%
- Tax deduction: Rs. 40,000
- Net payment: Rs. 460,000
Example 4: Payment for services
A business pays Rs. 500,000 to a service provider. The correct rate depends on the type of service.
| Service category | Rate | Tax deduction |
|---|---|---|
| Certain specified services | 7% | Rs. 35,000 |
| Other services | 14% | Rs. 70,000 |
| Independent professional services | 15% | Rs. 75,000 |
These examples assume the recipient is on the ATL and no special exemption or adjustment applies.
8. Is withholding tax deducted on the gross amount or net profit?
Section 153 generally requires deduction from the gross amount payable, not the contractor’s net profit.
For example, if a contractor issues an invoice for Rs. 1,000,000 and has business expenses of Rs. 700,000, the withholding tax is not normally calculated on the Rs. 300,000 profit.
The applicable rate is generally applied to the gross amount payable under the relevant provision.
This is important because contractors sometimes calculate their tax based on their profit margin. However, withholding tax is a separate deduction mechanism and follows the rules prescribed by the Ordinance.
Where an invoice includes different components, reimbursements or sales tax, the withholding base should be checked against the relevant legal provision and the facts of the transaction. Do not automatically exclude an amount without a legal basis.
9. What happens when a contractor receives an advance payment?
Withholding tax is not limited to the final payment after completion of a project.
Section 153 covers payments made in full or in part, including advances. Therefore, an advance payment to a contractor may also trigger withholding tax.
For example, a business awards a contract worth Rs. 5,000,000 and pays an advance of Rs. 1,000,000.
If the applicable rate is 7.5%, the withholding tax on that payment would generally be Rs. 75,000.
The withholding agent should maintain a record of the advance, tax deduction and subsequent adjustments against the contractor’s bills.
10. What about running bills, milestones and retention money?
Construction and service contracts are often paid in stages. A contractor may submit running bills, receive milestone payments or have a portion of the amount retained until the work is completed.
The withholding agent should review each payment when it is made and apply the relevant tax treatment.
For example, if a contractor receives three separate payments under a contract, the tax deduction should be recorded against each payment.
Retention money also needs attention. When the retained amount is released, the withholding treatment should be determined according to the applicable provision and the timing of the payment.
A proper payment-wise record helps prevent duplicate deductions or missed withholding tax.
11. When should the withholding agent deposit the deducted tax?
Deducting tax from a contractor’s payment is only one part of the responsibility. The withholding agent must also deposit the deducted amount with the government within the applicable time.
The deposit deadline depends on the legal category of the withholding agent and the applicable rules.
Rule 43 of the Income Tax Rules, 2002 contains the relevant deposit requirements. Government withholding agents and other withholding agents may have different timelines.
For this reason, businesses should not assume that every withholding agent has the same deadline. Check the current rule applicable to your organization and maintain the payment receipt or Computerized Payment Receipt (CPR).
The tax can generally be deposited through the FBR’s prescribed payment process using the relevant payment slip or PSID.
12. How to deposit withholding tax through IRIS
A withholding agent should follow the current FBR payment procedure to deposit the deducted tax.
The general process is:
- Log in to the FBR IRIS portal.
- Open the relevant payment or tax payment option.
- Select the correct tax head and applicable withholding category.
- Enter the required details and amount.
- Generate the PSID.
- Pay through an available banking channel.
- Download and save the CPR after successful payment.
The exact menu labels and available options may change as the FBR updates IRIS. Always verify that the payment has been deposited under the correct tax head and section.
13. Is a quarterly withholding tax statement required?
Withholding agents have reporting responsibilities under Section 165 of the Income Tax Ordinance, 2001.
The relevant withholding statement must be submitted through the prescribed FBR system within the applicable deadline.
For ordinary quarterly reporting, the commonly applicable due dates fall on the 20th day of the month following the relevant quarter:
| Quarter ending | General filing date |
|---|---|
| 31 March | 20 April |
| 30 June | 20 July |
| 30 September | 20 October |
| 31 December | 20 January |
The withholding agent should confirm the current filing requirements, applicable statement period and any special instructions issued by the FBR.
A business should not ignore its reporting obligation merely because it has made only a few payments. Keep payment records and file the statements required by law.
14. What is a withholding tax certificate?
A withholding tax certificate is evidence that tax has been deducted from a payment received by a contractor or service provider.
Under Section 164, a withholding agent may be required to provide a certificate containing the relevant payment and deduction details.
The contractor should keep this certificate because it helps establish the tax deducted on their behalf.
The certificate should be checked against the contractor’s bank receipts, invoices and tax information available through IRIS.
If the tax is missing from the contractor’s tax records, the contractor should contact the withholding agent and resolve the issue before filing the income tax return.
15. Is withholding tax under Section 153 adjustable or final?
This is one of the most important questions for contractors.
A tax deduction does not always have the same treatment for every taxpayer or transaction. Depending on the relevant provision, the tax may be treated as minimum tax or final tax.
Section 153 contains specific rules and exceptions. The treatment can depend on whether the recipient is an individual, company or another type of taxpayer, and on the nature of the payment.
For example, the law provides different treatment for certain services and for specified categories of goods and contracts.
Therefore, contractors should not automatically assume that every amount deducted under Section 153 is fully adjustable against their final income tax liability.
Before preparing the annual return, check the relevant provisions of Section 153, the First Schedule and any applicable special rules.
16. Can a contractor apply for a lower withholding tax rate?
In certain circumstances, a taxpayer may be eligible to apply for an exemption or lower-rate certificate under Section 159.
If the FBR issues a valid certificate, the withholding agent should examine its conditions, validity period and scope before applying a reduced rate or making a payment without deduction.
A contractor should not simply ask the business to deduct less tax without providing the required legal authority.
Similarly, the withholding agent should not accept an expired certificate or apply it to payments that are outside its scope.
17. What if the contractor is not a resident of Pakistan?
Section 153 generally deals with payments to resident persons and permanent establishments in Pakistan of non-resident persons.
Payments to non-residents may fall under Section 152 or another applicable provision, depending on the nature of the payment and the recipient’s circumstances.
For example, a Pakistani business paying a foreign company for services should not automatically apply the ordinary resident contractor rates under Section 153.
The business should review the relevant non-resident withholding provisions, applicable tax treaty, permanent establishment position and nature of the payment.
18. Difference between salary and contractor payments
Businesses should also understand the difference between an employee and an independent contractor.
Salary payments to employees generally fall under Section 149 of the Income Tax Ordinance, 2001.
Payments to contractors for goods, services or execution of contracts may fall under Section 153, where the prescribed-person and other legal conditions are met.
The label used in an agreement does not automatically determine the tax treatment. The actual working relationship, control, responsibilities and nature of the arrangement should be considered.
A business should not treat an employee as a contractor simply to avoid salary withholding requirements.
19. Is sales tax also applicable to contractor payments?
Withholding income tax and sales tax are separate taxes.
A contractor may charge provincial sales tax on services where the service and transaction fall within the relevant provincial or federal sales tax law.
For example, services may be covered by the rules administered by:
- Punjab Revenue Authority (PRA).
- Sindh Revenue Board (SRB).
- Khyber Pakhtunkhwa Revenue Authority (KPRA).
- Balochistan Revenue Authority (BRA).
The applicable registration, rate, invoicing and withholding requirements depend on the service and jurisdiction.
A business should check both income tax withholding and sales tax obligations instead of assuming that deduction under Section 153 covers all tax responsibilities.
20. What are the consequences of not deducting or depositing withholding tax?
Failure to comply with withholding tax requirements can create serious problems for a business.
Some possible consequences include:
Recovery of tax: Under Section 161, a withholding agent may become liable for tax that should have been deducted or paid to the government.
Recovery from the recipient: Section 162 contains provisions relating to recovery from the person receiving the payment in certain circumstances.
Default surcharge: Section 205 may apply where tax has not been paid within the required time.
Penalties: Section 182 contains penalties for specified tax compliance failures, including relevant statement-related defaults.
Business expense issues: Non-compliance with withholding requirements may also affect the deductibility of certain business expenses under Section 21, where its conditions apply.
The actual consequence depends on the nature of the default, the relevant legal provision and the facts of the case.
21. Records every business should maintain
A withholding agent should maintain proper documentation for every contractor payment.
Important records include:
- Contractor agreement or purchase order.
- Contractor’s NTN and registration details.
- Invoice and payment evidence.
- ATL status verification.
- Working paper showing the applicable tax rate.
- Copy of any exemption or lower-rate certificate.
- PSID and CPR.
- Withholding tax statement and filing acknowledgement.
- Withholding tax certificate issued to the contractor.
- Ledger and bank reconciliation.
These records can help the business explain its tax deductions during an FBR audit, notice or reconciliation.
22. A simple monthly withholding tax checklist
Before closing the monthly accounts, a business can use this checklist:
- Identify all payments made to contractors and service providers.
- Confirm whether the business is a prescribed withholding person.
- Classify each payment under the correct legal provision.
- Check the recipient’s ATL status.
- Confirm the applicable Tax Year 2027 rate.
- Calculate the deduction on the correct payment base.
- Release the net amount to the contractor.
- Deposit the deducted tax within the applicable deadline.
- Save the PSID and CPR.
- Reconcile the records and prepare the required withholding statements.
Following a consistent process can reduce mistakes and make tax compliance easier.
Learn more: How to file Income Tax Return in Pakistan
FAQs
1. What is the withholding tax rate on contractor payments in Pakistan for 2026-27?
For Tax Year 2027, the general ATL rate is 7.5% for payments to company contractors and 8% for other cases under Section 153(1)(c). The corresponding non-ATL rates are 15% and 16%. Special categories may have different rates.
2. Is withholding tax applicable to every contractor?
No. Section 153 applies when the payment and the person making it meet the relevant legal conditions. The withholding agent must generally be a prescribed person, and the payment must fall within the section.
3. Is the contractor withholding tax rate different for companies and individuals?
Yes. For ordinary contract payments, the ATL rate is 7.5% for companies and 8% for other cases. The non-ATL rates are generally 15% and 16%, respectively.
4. Is tax deducted from the contractor’s profit or gross payment?
The relevant Section 153 deduction is generally calculated on the gross amount payable, not the contractor’s net profit. The correct tax base should still be checked against the applicable legal provision.
5. Does a contractor need to file an income tax return after tax deduction?
Yes, where the contractor is required to file a return under the law. Withholding tax deduction does not automatically remove the contractor’s filing obligations.
6. Can a company deduct withholding tax from an advance payment?
Yes. Section 153 covers payments made in full or in part, including advances, where its conditions apply.
7. What is the difference between Section 153(1)(b) and Section 153(1)(c)?
Section 153(1)(b) covers payments for services, while Section 153(1)(c) covers payments for execution of contracts. The correct classification depends on the actual nature of the transaction.
8. Can a contractor claim the deducted tax in their income tax return?
The contractor should report the tax deduction in the return and apply the treatment allowed under the relevant legal provisions. Whether it is adjustable, minimum or final tax depends on the category and applicable law.
9. What happens if a contractor is not on the ATL?
The contractor may face a higher withholding tax rate. For many Section 153 categories, the non-ATL rate is twice the ATL rate.
10. Where can I check the latest withholding tax rates?
You can use the FBR’s official withholding tax rate card for Tax Year 2027. Always check the current Income Tax Ordinance as well because the law takes priority if there is a difference.
Conclusion
Withholding tax on contractor payments is an important responsibility for businesses in Pakistan. The correct deduction depends on the nature of the payment, the status of the withholding agent, the contractor’s ATL status and the applicable provision of the Income Tax Ordinance, 2001.
For Tax Year 2027, businesses should use the updated FBR rate card and maintain proper payment, deduction and deposit records. Contractors should also reconcile their withholding certificates and tax deductions before filing their annual income tax returns.
If a payment involves mixed services, subcontracting, a foreign service provider or an exemption certificate, it is better to review the transaction carefully before applying a rate.
