If you’re a taxpayer in Pakistan, it’s important to have a clear understanding of withholding tax. Withholding tax is a tax that is deducted at source from payments made by one person to another. The person who makes the payment (the withholding agent) is responsible for deducting the tax and depositing it with the government.
In Pakistan, a withholding agent can be a company, the federal government, an Association of Persons with a turnover of 100 million or above in any preceding tax year, an individual with a turnover of 100 million or above in any preceding tax year, a person registered in Sales Tax, or a non-profit organization. The withholding agent is liable to withhold taxes under sections 149, 153, and 155 of the Income Tax Ordinance.
Section 149 of the Income Tax Ordinance deals with the payment of salary. If a business individual or an Association of Persons pays an amount of salary that falls under the slab rate of tax deduction, the employer is liable to deduct and deposit the due taxes in the government treasury, irrespective of the turnover amount.
Section 153 of the Income Tax Ordinance deals with the payment for goods/services contracts. In this case, the withholding agent is required to deduct tax at a rate of 5% of the gross amount of the payment made to the contractor.
Section 155 of the Income Tax Ordinance deals with the payment of rental income. Individuals will deduct tax from the payment of rental income if the aggregate of the rental income is more than 1.5 million. The condition of minimum turnover does not apply in this case.
All withholding agents are liable to submit quarterly withholding tax statements in the prescribed formats under section 165 of the Income Tax Ordinance. In addition to that, annual employer statements are also submitted to the tax authorities.
It’s important to note that if a withholding agent fails to deduct or deposit the withholding tax, they will be liable to pay a penalty equal to the amount of tax that was required to be deducted or deposited. This penalty can be as high as 100% of the amount of tax that was required to be deducted or deposited.
In order to ensure that your withholding tax obligations are met, it’s important to keep accurate records of all payments made and taxes withheld. This will make it easier to prepare the quarterly withholding tax statements and annual employer statements.
In conclusion, withholding tax is an important aspect of the Pakistani tax system. As a taxpayer, it’s important to have a clear understanding of your withholding tax obligations and to ensure that you comply with them. By doing so, you can avoid penalties and contribute to the development of Pakistan’s economy.