Section 153 of the Income Tax Ordinance, 2001 of Pakistan outlines the obligations and rules concerning tax deduction at source on payments made for goods, services, and contracts. It applies to prescribed persons who are required to deduct tax on payments to resident individuals or permanent establishments of non-resident entities. Below is a detailed explanation of the section:
Key Provisions of Section 153
- Applicability to Prescribed Persons
The section is applicable to prescribed persons, which include:- Federal, provincial, and local governments.
- Companies, associations of persons (AoPs), and non-profit organizations.
- Exporters, export houses, consortiums, joint ventures, individuals, and entities registered under the Sales Tax Act, 1990, with turnovers of Pak Rs. 100 million or more.
- Persons engaged in construction and sale of buildings or development and sale of plots.
- Types of Payments Covered
Prescribed persons must deduct tax on payments made to resident persons for:- Sale of Goods: Includes toll manufacturing and applies to payments exceeding Pak Rs. 75,000 in aggregate during a financial year.
- Rendering of Services: Covers services such as accounting, legal, medical, and engineering, excluding payments below Pak Rs. 30,000 in aggregate during a financial year.
- Execution of Contracts: Includes construction and other contracts, including those signed by sportspersons, but excludes contracts for the sale of goods or services.
- Tax Deduction Mechanism
- Tax is deducted from the gross amount, at rates specified in Division III and IV of Part III of the First Schedule.
- Tax deducted is treated as a minimum tax, except in cases explicitly mentioned.
- Exemptions and Exclusions
Tax deduction is not required for certain transactions, such as:- Sale of imported goods where tax under Section 148 has already been paid.
- Refund of security deposits.
- Payments for securitization of receivables or issuance of sukuks.
- Payments by governments for construction materials supplied to contractors.
- Exporters and Export Houses
Exporters and export houses are required to deduct tax on payments made for services such as stitching, dyeing, printing, embroidery, washing, and weaving. - Minimum and Adjustable Tax
- For sale of goods, tax deducted is not considered minimum tax for manufacturers or listed public companies.
- For contracts, tax deducted is adjustable for listed public companies.
- Reduced Tax Rates
A reduced tax rate certificate may be issued by the Commissioner if the taxpayer’s advance tax liability has been fulfilled. If the certificate is not issued within 15 days of application, it is deemed issued. - Agent and Third-Party Payments
If a payment is routed through an agent or third party, the agent’s fees are treated as income of the recipient, and tax is to be deducted accordingly. - Definitions and Interpretations
- Goods: Include all tangible items, whether sold under a contract or otherwise.
- Services: Encompass professional services such as those provided by doctors, lawyers, accountants, etc.
- Manufacturer: Defined as a person or entity involved in the transformation of raw materials into finished products.
- Turnover: Gross receipts from sales, services, and contracts, inclusive of taxes and trade discounts.
- Special Cases for Tax Credit
Taxes deducted on payments to Special Purpose Vehicles (SPVs) are credited to the originator of the transaction.
Practical Implications
This section ensures a robust tax collection mechanism by requiring withholding taxes on payments for goods, services, and contracts. It minimizes tax evasion, simplifies compliance, and ensures that taxpayers meet their obligations. However, taxpayers and prescribed persons must be aware of specific thresholds, exemptions, and procedural requirements to avoid penalties and ensure proper compliance.
Compliance Challenges
While Section 153 lays down clear guidelines, challenges may arise in its implementation due to complexities in determining the scope of certain transactions, calculating turnover thresholds, and managing timely issuance of reduced tax rate certificates.
Section 153 serves as a critical tool for enforcing tax compliance in Pakistan. By focusing on withholding taxes on transactions involving goods, services, and contracts, it promotes fiscal discipline and aids in meeting revenue collection targets. Prescribed persons must ensure adherence to the provisions to avoid legal complications and support the broader tax system.
