Advance Income Tax Deduction at Source
Generally, majority of us are not very well aware of withholding agent’s legal obligations about collecting advance income tax under various provisions of Income Tax Ordinance (ITO), 2001.
There are many provisions of Income Tax Ordinance, 2001 which deal with collection of Advance Income Tax at source. These provisions make it compulsory for a withholding agent to deduct advance income tax form different persons on occurrence of certain events.
Remember, you can adjust the withheld income tax against the tax liability in the annual return of income filed at the close of relevant tax year. In case the overall annual tax liability is less than the tax withheld, then the unadjusted tax can either be claimed as refund or left as balance for adjustment in next year annual return.
For removal of doubt, it is clarified that only withheld income tax is adjustable. It may not be mistaken with sales tax.
Relevant Sections About Advance Income Tax Withholding
Different provisions under which advance income tax is withheld by withholding agents are discussed below:-
Withholding Agent in Pakistan
Division II of Part V to ITO, 2001
Division II deals with advance tax paid to collection agents. It deals with tax payment at the stage of import of goods into Pakistan. Section 148 of ITO, empowers the Collector of Customs to collect advance tax from every importer of goods. Tax is calculated on the value of the goods. Rates are specified in Part II of the First Schedule and Parts I to III of the Twelfth Schedule.
Division III of Part V to ITO, 2001
Division III deals with collection of tax at source by different withholding agents. Division III and Sec 153 in particular, is the most confusing section; hence each provision is explained in the following paragraphs.
Advance Tax collection from salary
Under Section 149, employers are bound by law to withhold tax from salary while making payment to employees.
Advance Tax collection on Payment of Dividend
Section 150 empowers the withholding agents to deduct tax at the specified rates from the gross amount of the dividend paid.
Advance Tax collection on Profit on Debt
Section 151 deals with deduction of tax on profit on debt. Profit on debt is the profit you receive on your bank accounts and other instruments like fixed deposits, certificates etc. This section makes certain category of persons, including banks, responsible to withhold tax from the profit they pay to resident investors on accounts, deposits or certificates. Rates of deductions are specified in Division IA of Part III of the First Schedule. This section is applicable to resident persons only and specifies the treatment procedure of the deductible tax.
Advance Tax on Payment to Non-Residents
Section 152 is applicable on Non-residents only. This section binds the payers to deduct tax from gross payment to Non-resident persons on account of royalty or fee for technical services.
Advance Tax on Sale of Goods, services and Contracts
Section 153 deals with payment for sale of goods, provision of services and on the execution of contracts. It binds every person who is making payment to a resident person on account of receipt of goods, services or contracts to deduct advance tax at specified rates. This section is not applicable on sale of goods by importer; because tax on imports is dealt with under section 150. Section 153 is one of the most complicated sections of ITO; hence thorough knowledge and utmost care is required in its application.
Advance Tax on Export of Goods
Section 154 deals with deduction of tax on the export of goods. It binds the authorized foreign exchange dealers, banking companies, Export Processing Zone Authority, direct exporter and The Collector of Customs to deduct tax on realization of foreign exchange on account of export of goods and commission due to an indenting commission agent. Further, this section enumerates the applicability and treatment of collected tax with regard to taxpayers.
Advance Tax on Export of Services
Section 154A deals with export of services. This section was inserted through Finance Act 2021. This section puts legal obligation on every authorized foreign exchange dealer to collect advance tax from the foreign exchange proceeds at the given rates. Tax is collected at the time of realization of foreign exchange proceeds on account of export of computer software, IT services, IT enabled services, technical services, royalty, commission or fees and certain other services.
Advance Tax on Rent of Immovable Property
Section 155 deals with rent of immoveable property. It binds tenants to deduct tax while making payment to landlord on account of rent of immovable property. Rent of immovable property includes the rent of furniture and fixtures, and amounts for services relating to such property. rates are specified by FBR in Division V of Part III of the First Schedule.
Advance Tax on Prize Bonds etc.
Section 156 deals with deductible tax by all those persons who are paying prizes on prize bond, winnings from a raffle, lottery, quiz, prize offered by companies for promotion of sale, or cross-word puzzle. It specifies that tax should be collected on the fair market value of prize if it is not in cash. Such collected tax is treated as final tax liability.
Advance Tax on Commission to Petrol Pumps
Section 156A deals with collection of tax by payer from the commission or discount allowed to operators of petrol pumps.
Advance Tax on Commission to Petrol Pumps
Section 158 elucidates the time of collection of tax under above mentioned sections. Under section 151, tax is required to be deducted at the time of making payment in cash or when the amount is credited to account of recipient. In all other cases, tax is to be collected when the amount is actually paid.
Chapter XII of ITO, 2001
Chapter XII deals with the transactional advance income tax. It contains the withholding provisions of section 231 to 236. Each provision is explained in succeeding paragraphs.
Advance Tax on Registration of Vehicles
Section 231 empowers Excise and Taxation Department, leasing companies, banks etc. manufacturers to collect advance tax from buyers at the time registration, leasing or sale of the vehicles. They are required to collect tax at 100% higher rate from those whose names are not appearing in Active Taxpayer List.
Advance Tax on Brokerage & Commission
Section 233 deals with brokerage and commission. Under this section, withholding agent (prescribed principal) is legally bound to collect advance tax from the payment on account of brokerage and commission to the agent. Rates of tax have been prescribed in Division II of Part IV of the First Schedule.
Advance Tax Collection with Motor Vehicle Tax
Section 234 deals with tax on motor vehicles. It describes the procedure of collection of advance income tax at the time of collecting motor vehicle tax and its rates. It may be of interest to note that no advance income tax is collected if a motor car has been used in Pakistan for more than ten years.
Tenth Schedule of ITO, 2001
The tenth schedule pertains to the rules that are applicable to persons whose name does not appear in the list of active tax payers.
Under this schedule, the withholding agents deduct tax at double the rate from such persons whose name is not in Active Tax Payers List.
Moreover, commissioner has power to make provisional assessment about imputed income. Such assessment is made on the basis of amount of tax collected from a person who does not file his tax return.
Further, provision of section 111 are also applicable on unexplained income, asset or expenditure in excess of imputed income treated as concealed income under this schedule.
It is pertinent to mention that imputable or concealed income does not absolve the assessee from requirement of filing of wealth statement.
