Withholding tax is an act of deduction or collection of tax at source, which has generally been in the nature of an advance tax payment. In Pakistan, withholding taxes (WHTs) are applicable on a multitude of payments made to resident taxpayers by withholding agents specified in the local law (commonly known as ‘prescribed persons’) and on payments to non-residents having no permanent establishment in Pakistan. The tax withheld is deemed to be the final tax liability of the non-resident.

The applicable WHT rate on payments to non-residents ranges from 10% to 15% for dividends, 10% to 15% for interest, and 15% for royalties. However, the rates may vary depending on the tax treaty between Pakistan and the recipients country of residence. For resident taxpayers and non-residents having a permanent establishment in Pakistan, WHTs are applicable on a number of transactions, including the sale of goods, execution of contracts, and rendering of services.

The Directorate General of Withholding Taxes was created through the Finance Act of 2008 under section 230A of the Income Tax Ordinance 2001 to monitor and manage the system of Withholding Tax Regime in Pakistan. The collection as well as dependence on Withholding Taxes is on the rise over the years, and out of the total direct taxes collection of Rs. 740(b) for the financial year 2012, Rs. 422(b) with a percentage share of 57% came from various Withholding Taxes.

In summary, withholding tax in Pakistan is a mechanism of collecting tax at the source, and it is applicable on a multitude of payments made to resident taxpayers by withholding agents specified in the local law and on payments to non-residents having no permanent establishment in Pakistan. The tax withheld is deemed to be the final tax liability of the non-resident. The applicable WHT rates vary depending on the type of payment and the tax treaty between Pakistan and the recipients country of residence.