If your business executes supply contracts, construction contracts, or works contracts for companies or government departments in Pakistan, the payer is legally required to withhold tax on every payment made to you under Section 153(1)(a) of the Income Tax Ordinance. Understanding these rates and how they get credited back matters directly for your cash flow.
What Counts as a "Contract" Under Section 153
Section 153(1)(a) covers payments made for the "execution of a contract" — this is broader than most people assume. It includes construction contracts, supply-of-goods contracts, transport contracts, advertising contracts, and various services delivered under a signed agreement. Whenever a company, AOP, or government entity pays a contractor or supplier above the prescribed threshold, tax must be withheld before the payment is released.
Current Rates for Filers vs Non-Filers
- Company/AOP contracts — filer: around 7% of the gross contract payment.
- Company/AOP contracts — non-filer: roughly double, around 14.5%.
- Supply of goods under a contract — filer: around 4%.
- Supply of goods under a contract — non-filer: around 8%.
These are adjustable withholding taxes, not final tax — meaning whatever is deducted becomes a credit against your total tax liability for the year, and any excess is refundable.
Why the Filer Gap Matters So Much Here
Because contract payments are often large and recurring, the filer/non-filer gap compounds fast. A contractor billing Rs. 5 million across a year on services contracts pays roughly Rs. 350,000 in withholding as a filer versus around Rs. 725,000 as a non-filer — a difference of well over Rs. 350,000 sitting idle with FBR until reconciled, or simply lost if the contractor never files a return to claim it back.
Who Has to Withhold
The obligation to deduct falls on the payer, not the contractor. Companies, AOPs above a certain size, and all government departments making contract payments above the prescribed threshold must deduct the tax, deposit it with FBR within the prescribed timeframe, and report it in their monthly withholding statement. A contractor receiving payment from an individual client who isn't a registered withholding agent may not have tax withheld at all — but the income is still fully taxable and must be declared.
Claiming the Deducted Tax Back
Every withholding agent issues a certificate showing how much tax was deducted from each payment. At return time, these certificates are collected and entered under the tax credits section of the annual FBR return on IRIS. The system nets this off against your computed tax liability for the year automatically. If your total withheld tax across all contracts exceeds what you actually owe, the difference becomes a refundable amount.
Common Mistakes Contractors Make
- Losing or misplacing WHT certificates, which makes reconciling credits at filing time far harder.
- Assuming WHT already deducted means no further filing obligation — it doesn't; the return must still be filed to actually claim the credit.
- Not registering as a filer, and therefore absorbing double the withholding rate on every contract payment for no benefit.
- Failing to reconcile declared contract income against the sum of all WHT certificates received, which can trigger a mismatch notice from FBR.