In Pakistan’s income tax system, you might encounter two terms: withholding tax and advance tax. While they both involve tax deductions, there are key differences:
Withholding Tax:
- Definition: Tax deducted “at source” by the party paying you.
- Example: Salary income often has withholding tax deducted by your employer.
- Application: Applies to various income streams like salaries, rent, payments for services, and sale of goods (if exceeding a certain limit).
- Tax Rate: Deducted based on your income tax bracket.
- Adjustment: Yes, the withheld tax can be adjusted against your final tax liability when you file your income tax return. You may even get a refund if the withheld amount is more than your final tax due.
Advance Tax:
- Definition: Estimated tax payments made in advance throughout the year.
- Example: Applies to businesses and individuals with high estimated annual income.
- Basis: Based on your previous year’s tax liability or potential future income.
- Payment: Typically paid quarterly or monthly installments as per FBR notices.
- Adjustment: Yes, advance tax payments are also adjusted against your final tax liability during income tax return filing.
Here’s a table summarizing the key differences:
| Feature | Withholding Tax | Advance Tax |
|---|---|---|
| Definition | Tax deducted at source by the payer | Estimated tax payments made in advance |
| Application | Salaries, rent, services, goods sale (above limit) | Businesses/individuals with high income |
| Tax Rate | Based on income tax bracket | Based on previous year’s tax or estimated income |
| Adjustment | Yes, adjusted against final tax liability | Yes, adjusted against final tax liability |
| Refund | Possible if withheld tax exceeds final tax due | Not applicable (payments on estimated tax) |
Remember:
- Withholding tax is deducted on top of your income stream.
- Advance tax is paid based on your consumption or expenditure.
- You can adjust and potentially get refunds for both withholding and advance tax when filing your income tax return.
By understanding the difference between withholding tax and advance tax, you can effectively manage your tax liabilities in Pakistan.
