Withholding Tax on Contractor Payments Pakistan 2026-27

Introduction

Paying a contractor is rarely just a matter of approving an invoice. If your business is a “prescribed person”, the law may require you to deduct income tax before the money leaves your account. That duty comes mainly from Section 153 of the Income Tax Ordinance, 2001, and it sits at the centre of withholding tax rates and wider tax compliance in Pakistan.

The stakes are real. If you deduct too little, or nothing at all, the recovery can fall on your business rather than on the contractor. That is one of the common reasons for FBR notices.

This guide explains who must deduct, which rate applies for Tax Year 2027, how to calculate and deposit the tax, how to report it, and what happens if you get it wrong. It is written for business owners, accountants, procurement teams and contractors.

Quick Answer: What Is Withholding Tax on Contractor Payments in Pakistan?

Withholding tax on contractor payments in Pakistan is income tax that a prescribed person, such as a company, must deduct under Section 153 when paying for contracts, services or supplies. For Tax Year 2027, contract rates are 7.5% for company contractors and 8% for others on the Active Taxpayer List, doubling for non-filers.

Key points:

Section 153 splits payments into three heads: supplies (153(1)(a)), services (153(1)(b)) and contracts (153(1)(c)).
The rate depends on the category of payment and on whether the payee appears on the Active Taxpayer List (ATL). Non-ATL payees pay double.
Tax is deducted when payment is made, deposited within the Income Tax Rules deadline, and reported in a quarterly statement.
Misclassification, missed deductions or late deposits can lead to recovery from your business, default surcharge and penalties.

What Is Withholding Tax on Contractor Payments?

It is an advance collection of income tax at the point of payment. The payer deducts tax at a prescribed rate and deposits it with the government. The contractor receives the net amount and later accounts for the tax deducted, either as an adjustable credit or as minimum tax, depending on the category.

Which Law Creates This Duty?

Section 153 of the Income Tax Ordinance, 2001 covers payments for goods, services and the execution of contracts. The rates sit in Division III of Part III of the First Schedule. The Tenth Schedule supplies the higher rates for payees outside the ATL.

Is Withholding Tax the Same as the Contractor’s Income Tax?

No. Withholding is a collection mechanism. The contractor must still file an income tax return and declare the income. Tax you deduct is then credited against, or treated as discharging, their liability.

Who Must Deduct Withholding Tax From Contractor Payments?

Only “prescribed persons” under Section 153(7) must deduct. In practice, whether you are one depends on your legal form and turnover.

Companies are prescribed persons regardless of size.
Federal and provincial governments, AOPs constituted by law and non-profit organisations are covered.
Individuals and AOPs become prescribed persons once turnover reaches Rs 100 million in a preceding year. The FBR explained this threshold when it was raised from Rs 50 million.
The Finance Act 2026 raised the turnover threshold for individual traders to Rs 200 million under clause (115) of Part IV of the Second Schedule. The exemption for companies operating trading houses was omitted.

Your structure therefore matters. If you are choosing between forms, compare a sole proprietor and a company or a partnership and a company before you start contracting at scale. A company obtained through private limited company registration is a withholding agent from day one.

What Are the Contractor Withholding Tax Rates for Tax Year 2027?

The FBR’s withholding income tax rate card, updated up to 30 June 2026 as per the Finance Act 2026, is the practical reference. The card itself says the Ordinance prevails if the two differ. Rates below are shown as ATL rate / non-ATL rate.

Contracts: Section 153(1)(c)

Company: 7.5% / 15%
Any other case (individuals and AOPs): 8% / 16%
Sportspersons: 15% / 30%

Services: Section 153(1)(b)

Certain specified services: 7% / 14%
IT and IT-enabled services: 4% / 8%
Independent professional services (doctors, lawyers, architects, accountants, software engineers or developers working independently): 15% / 30%
Payments to electronic and print media for advertising: 1.5% / 3%
Terminal and port operating services by companies: 12% / 24%
All other services: 14% / 28%

Supplies: Section 153(1)(a)

Rice, cotton seed or edible oils: 1.5% / 3%
Companies, other than toll manufacturing: 5% / 10%
Non-companies, other than toll manufacturing: 5.5% / 11%
Toll manufacturing: 9% / 18% for companies, 11% / 22% for others

Services to exporters (Section 153(2)) and digitally ordered goods or services (Section 153(2A)) carry their own rates. The e-commerce withholding tax guide explains those.

What Changed Under the Finance Act 2026?

From 1 July 2026, the revised services structure applies. According to independent professional services coverage of the FBR’s budget explanatory circular, a 15% rate now applies to independent professionals. Terminal and port operating services moved to 12%, and other unspecified services to 14%. The specified-services rate rose from 6% to 7%. The contract rates on the FBR card remain 7.5% and 8%. For the wider picture, see the top tax changes in Pakistan’s 2026-27 budget.

Is Your Contractor a Supplier, a Service Provider or a Contractor?

The category decides the rate, so classify before you calculate. The Ordinance treats a “contract” as one other than a contract for sale of goods or for rendering services.

How Should Construction and Works Contracts Be Treated?

A contractor who executes a building, civil or installation job usually falls under the contract head. Check first whether the work matches an item on the specified services list, because that changes the rate.

What About Invoices That Mix Goods and Services?

A single invoice for supply and installation can span two heads. Where the contract and invoice separate the elements clearly, deduct each at its own rate. Where they do not, document your reasoning and get advice before the first payment. Reasoned, written classification is your best defence in an audit.

How Are Subcontractors Treated?

Each prescribed person who pays has its own duty. A main contractor that is a company must deduct when paying its subcontractor, in the same way your business deducts when paying the main contractor.

What About Foreign Contractors?

Payments to non-residents fall under Section 152, not Section 153. The FBR card lists those rates separately.

Is the Worker a Contractor or an Employee?

Salary is withheld under Section 149 and contractor payments under Section 153. Labelling an employee as a contractor to avoid payroll deductions is a common source of disputes. A written contract helps, but the substance of the relationship decides.

How Does Contractor Withholding Tax Apply in Specific Industries?

The rates come from the same FBR card. The classification question changes from industry to industry.

Construction and Civil Works

A contractor who builds, installs or completes a project for you usually falls under the contract head. The FBR card shows 7.5% for companies and 8% for other cases for ATL payees. Check first whether the work matches a service on the specified list, because that changes the head. Where the project also involves supplies, review the mixed invoice guidance above before you finalise the split.

IT, Software and Digital Services

IT and IT-enabled services carry 4% for ATL payees and 8% for non-ATL payees on the FBR card. An independent software engineer or developer working independently falls in the independent professional category at 15% / 30%. Which one applies depends on what the contractor actually provides and in what capacity, so read the card’s wording before deciding.

If the IT contractor serves foreign clients, the position is different. Export proceeds fall under Section 154A, not under Section 153 on your payments. The FBR card shows 0.25% for PSEB-registered persons and 1% for others on export proceeds from tax year 2024 up to tax year 2029. See the PSEB registration and tax rate guide and our guide for software houses and startups.

Engineering, Maintenance and Consultancy

Some engineering and maintenance services appear on the specified services list at 7% / 14%. Consultancy delivered by an independent professional can fall in the 15% / 30% category. The label on the invoice does not decide the head, so check the nature of the work against the First Schedule. Engineers filing their own returns can see the income tax return guide for engineers.

Advertising

Payments to electronic and print media for advertising carry 1.5% / 3% on the FBR card. Payments to advertising agents are treated differently. The card lists commission to advertising agents under Section 233 at 10% / 20%. Do not apply the media rate to an agency invoice without checking the head.

Government Contractors

Government departments are prescribed persons and deposit on the day of deduction under Rule 43. A contractor paid by a government body should expect deduction on every payment and should ask for the certificate. Contractors working on public projects can also review corporate tax advisory to plan cash flow around deductions.

How Does Filer Status Affect Contractor Withholding Tax?

Every rate above has a non-ATL column that is double the ATL column. A contractor missing from the list therefore costs them, and costs you if you apply the wrong rate. Read the difference between filers and non-filers and the position of late filers and active filers.

How Do You Verify a Contractor’s ATL Status?

Use the FBR’s Active Taxpayer List verification page. The FBR also publishes an SMS route: send “ATL” followed by the 13-digit CNIC for individuals, or the 7-digit NTN for companies and AOPs, to 9966. Our guides on how to check the ATL and NTN verification online walk through each method. Save a dated screenshot against the payment voucher.

What Does a Non-Filer Contractor Actually Cost?

The FBR card doubles every rate for non-ATL payees. On a Rs 1,000,000 payment, the difference is large:

Company contract (7.5% against 15%): Rs 75,000 against Rs 150,000. Extra deduction of Rs 75,000.
Other contract (8% against 16%): Rs 80,000 against Rs 160,000. Extra deduction of Rs 80,000.
Other services (14% against 28%): Rs 140,000 against Rs 280,000. Extra deduction of Rs 140,000.

These amounts are illustrative and use the card rates. The contractor bears the higher deduction, which often becomes a negotiation point. Pricing contracts to cover non-filer deductions without recording them properly leaves you exposed. See late filer, non-filer and active filer and the ATL guide.

What If a Contractor Is Not Registered?

Ask them to complete NTN registration for a business and file their return. A contractor who wants to return to the list can read how to remove inactive ATL status and the benefits of becoming a tax filer.

How Do You Calculate Withholding Tax on a Contractor Invoice?

Follow these steps for every payment:

Confirm that you are a prescribed person.
Classify the payment as a supply, service or contract.
Verify the payee’s ATL status on the payment date.
Pick the rate from the current FBR card.
Apply the rate to the gross amount payable.
Pay the net amount and record the deduction in your ledger.
Deposit the tax and report it in your statement.

Is There a Minimum Payment Below Which No Tax Is Deducted?

Yes, for goods and services. FBR guidance states that no tax is deducted where payments for supplies of goods are below Rs 75,000 in aggregate during a financial year. For services, the figure is Rs 30,000 in aggregate during a financial year.

The test is cumulative, not per invoice. If you pay the same vendor several times, add the payments together across the year. Once the total crosses the threshold, check how the Ordinance applies it to your payments.

The FBR guidance reviewed for this article states these thresholds for goods and services only. For contracts under Section 153(1)(c), read the current text of the Ordinance before assuming a similar exclusion applies. Keep a vendor-wise running total in your ledger so the position is easy to show in an audit. See our monthly tax compliance checklist for a simple routine.

Worked Examples

These examples use assumed amounts and assume the classification is correct.

Company contractor on the ATL, building contract of Rs 2,000,000: tax at 7.5% is Rs 150,000. Net payment is Rs 1,850,000.
Same contractor outside the ATL: tax at 15% is Rs 300,000. Net payment is Rs 1,700,000. The difference is Rs 150,000.
Individual contractor on the ATL, contract of Rs 500,000: tax at 8% is Rs 40,000. Net payment is Rs 460,000.
Service invoice of Rs 500,000 from an ATL payee: Rs 35,000 at 7% (specified service), Rs 70,000 at 14% (other services) or Rs 75,000 at 15% (independent professional).

Use the withholding tax calculator to check your working. The FBR tax calculator guide for 2026-27 covers related calculations. Contract terms that say the company will “bear the tax” do not remove the duty to deduct. They only change who funds it.

How Are Advance Payments, Running Bills and Retention Money Treated?

FBR guidance says a prescribed person collects tax under Section 153 at the time the amount is actually paid. That makes every real payment a deduction event, including mobilisation advances, running bills, milestone payments and the release of retention money.

The safest approach is to deduct on each payment unless a valid Section 159 certificate says otherwise. Keep one consistent, documented method for retention money. Confirm unusual payment structures with an adviser before you pay.

Do not skip deduction on an advance because the final bill will come later. Keep one consistent, documented approach for retention money and confirm unusual structures with an adviser before you pay.

How Are Milestone Payments, Contract Variations and Reimbursed Expenses Treated?

Milestone Payments

Each milestone payment is a payment, so each one is a deduction event at the rate for the contract category. Record the milestone, the gross amount, the rate and the deposit reference together.

Contract Variations

A variation order that increases the contract value does not change the category in itself. Additional amounts you pay are deducted at the same rate when paid. Keep the variation order with the invoice so your classification is easy to trace.

Reimbursed Expenses

Practice differs here, and I have not found an official ruling that settles it. This section is therefore interpretation, not statute. The FBR card states service and contract rates on the gross amount payable. If the contractor bills reimbursements as part of what you pay under the contract, the cautious approach is to treat them as part of that gross amount unless the law or a written ruling clearly excludes them.

Ask the contractor to show reimbursements separately, with supporting documents. Get written advice on your specific arrangement before excluding them from the base.

When and How Must the Deducted Tax Be Deposited?

Under Rule 43 of the Income Tax Rules, 2002, government departments deposit on the day of deduction. Other withholding agents deposit within seven days from the end of each week ending on Sunday. Confirm this against the current Rules before you set your payment calendar.

Example: if you deduct tax on Tuesday 10 November 2026, the week ends on Sunday 15 November and the deposit is due by Sunday 22 November 2026.

How Do You Pay the Tax?

Log in to IRIS and generate a PSID under the correct tax head. See how to generate a PSID and pay tax online.
Pay through a bank or app.
Keep the CPR (Computerised Payment Receipt).

If you are not yet set up, follow the FBR IRIS registration guide and read the IRIS 2.0 features explained. A deposit under the wrong head will not match your statement, so check the head before paying.

How Does the Quarterly Withholding Statement Work?

Section 165 requires a statement of tax deducted, filed through IRIS. It is quarterly, due on the 20th of the month after each quarter ends:

Quarter ending 31 March: by 20 April
Quarter ending 30 June: by 20 July
Quarter ending 30 September: by 20 October
Quarter ending 31 December: by 20 January

What Are the Key Contractor Tax Compliance Deadlines?

Government departments: deposit on the day of deduction (Rule 43(a)).
Other withholding agents: deposit within seven days from the end of each week ending on Sunday (Rule 43(b)).
Quarterly statement: 20 April, 20 July, 20 October and 20 January.
Revision of a filed statement: within sixty days of filing (Section 165(2A)).
Certificate of deduction: issue within the time the Income Tax Rules prescribe. Confirm the current period before you set your internal deadline.

Build these dates into one internal calendar. See Pakistan’s tax filing deadlines for 2026.

Do You File If No Tax Was Deducted?

Yes. The proviso to Section 165(1) requires a statement even where no tax was collected or deducted.

Can You Correct a Statement After Filing?

Section 165(2A) allows a revised statement within sixty days of filing the original. After that, correction usually becomes a departmental matter.

Baco’s quarterly withholding statements filing service covers preparation and submission. A monthly tax compliance checklist helps you keep the internal cycle on track.

What Is a Withholding Tax Certificate, and Who Issues It?

Under Section 164, the withholding agent issues a certificate of deduction to the payee, showing the gross amount, tax deducted and deposit details. The contractor needs it to claim credit, so a missing certificate becomes a commercial dispute very quickly. Our guide on how to get a tax withholding certificate explains the process in detail.

How Do You Reconcile Contractor Withholding Tax With Your Returns?

For the Business That Deducts

Compare each quarter’s statement with your ledger, your deposits and your CPRs. Rule 44(4) of the Income Tax Rules, 2002 allows the Commissioner to ask a person who files withholding statements for a reconciliation with the return and related documents. Quarterly reconciliation means you answer in days rather than weeks. Confirm the current Rule text before relying on this description.

For the Contractor

Check the tax your clients report against the certificates you hold. If a client deducted but never deposited or reported the tax, the credit may be disputed. Raise the mismatch early. When you file, follow our guide to filing an income tax return in Pakistan.

Fixing Errors and Disputes

If something is wrong in a filed return, see how to correct mistakes in an FBR income tax return, revised return versus rectification and how to file a rectification application. For IRIS problems, use the guide to return errors and form bugs. If a dispute goes further, read how to appeal a tax assessment and the tax appeal process.

What About Exemption and Lower-Rate Certificates?

A contractor may hold a certificate under Section 159 for a lower rate or exemption. If it is valid and covers the payment, you apply the certificate rate. Record the certificate number and its validity period. See who needs a tax exemption certificate, how to apply and the exemption certificate process.

Is Contractor Withholding Tax Final or Adjustable?

It depends on the category and payee. Some Section 153 deductions are minimum tax and others are adjustable advance tax. The contractor’s position should be confirmed from Section 153(3) and the First Schedule, not assumed. The choice between regimes also affects how credit works. See final versus normal tax regime and who can opt for the final tax regime.

FBR guidance issued for earlier years describes Section 153 deductions on goods and services as minimum tax. The exceptions were goods supplied by manufacturing companies and by public companies listed on a registered stock exchange in Pakistan. That means the deduction is the contractor’s baseline tax on that income. If their normal tax liability is higher, they pay the difference.

Treat this as a starting point, not a final answer. Confirm the current position for each category in Section 153(3) and the First Schedule. Contracts need particular care, because published summaries differ on whether the deduction is minimum or adjustable for some company contractors. Related reading: final versus normal tax regime, who can opt for the final tax regime and how to file a final tax regime return.

How Does Withholding Tax Differ From Sales Tax on Contractor Payments?

They are separate regimes that can apply to the same invoice. Withholding income tax is deducted under the Income Tax Ordinance. Sales tax on services is a separate levy, and provincial authorities such as the PRA, SRB and KPRA run their own regimes with their own withholding rules.

Read what sales tax is in Pakistan, the PRA registration process for service providers, the SRB tax filing guide and the Punjab sales tax filing guide. If the invoice also carries sales tax, ask your adviser how it interacts with the gross amount for Section 153 purposes.

What Should Contractors Do When Clients Deduct Tax?

Stay on the Active Taxpayer List, so the lower rate applies.
Quote your NTN and category clearly on invoices.
Ask for a certificate of deduction after each deposit.
Keep a certificate register and match it to the credit shown in your records.
Declare the income and file on time.
If the standard rate exceeds your likely tax, ask whether a Section 159 certificate suits your case.

New contractors can start with NTN registration for a business, NTN registration for a partnership or AOP and the documents required for NTN registration. For annual filing, see income tax filing for sole proprietors and our guide for SMEs.

Illustrative Scenario 1: A Construction Company Paying a Works Contractor

Assume a company pays an ATL-listed company contractor Rs 8,000,000 for a warehouse build in three equal-value stages. At 7.5%, the deduction across the project is Rs 600,000. Each stage is a deduction event, so about Rs 200,000 is deducted from each. If one stage is paid to the same contractor while it sits outside the ATL, that stage is deducted at 15%.

Illustrative Scenario 2: An IT Services Company Paying Vendors

Assume the same company pays an IT-enabled services vendor Rs 600,000 at 4% (ATL) and an independent developer working independently Rs 300,000 at 15%. The deductions are Rs 24,000 and Rs 45,000. The two rates apply because the categories differ, not because the amounts do.

Both scenarios use assumed figures to show the mechanics. They are not client results.

What Happens If You Do Not Deduct, Deduct Short or Deposit Late?

Several consequences can stack on top of each other:

Section 161: recovery of the tax from you as withholding agent, even though the contractor received the full amount.
Section 162: possible recovery from the payee, which is discretionary and slow.
Section 205: default surcharge on unpaid tax.
Section 21: disallowance of the related expense, including under clause (c).
Section 182: penalties, including for statement defaults.

For late or missing statements, the penalty has commonly been Rs 5,000 where the tax was paid on time and the statement is filed within ninety days. Otherwise it is Rs 2,500 per day, with a minimum of Rs 10,000. The Finance Act 2026 also amended Section 182, so check the current table before relying on any figure.

Example: if a company pays a contractor Rs 2,000,000 and deducts nothing, the tax not deducted is Rs 150,000 at 7.5%, before surcharge and penalty. For responses, see how to handle tax notices from the FBR, the FBR notice response guide and the guide to the Section 177 and 214C audit. To avoid late-filing exposure, read how to avoid late tax filing penalties and use the late filing penalty calculator.

What Are the Common Mistakes With Contractor Withholding Tax?

Using an old ATL check instead of the status on the payment date.
Applying a services rate to a contract, or the reverse.
Treating an advance or retention release as outside the net.
Deducting on the net amount instead of the gross amount payable.
Depositing under the wrong tax head, so the CPR does not match.
Skipping the nil statement.
Ignoring the sixty-day revision window.
Not issuing a certificate, which leaves the contractor unable to claim credit.

What Records Should You Keep for Contractor Payments?

Contract or purchase order, and the signed scope of work
Tax invoice or bill, with the classification note
NTN and ATL verification screenshot on the payment date
Any Section 159 certificate, with number and validity
Your deduction working and ledger entry
PSID and CPR for each deposit
Quarterly statement and its acknowledgement
Certificate of deduction issued to the contractor

Keep records for the period the Ordinance requires. If you are strengthening your wider systems, see business tax compliance in Pakistan, small business accounting and digital accounting services. Your accounting package matters too, so read which accounting software suits a small business. For invoice-level data, the FBR digital invoicing guide is also relevant.

How Can Accounting Software Reduce Errors?

Whether you use a spreadsheet or an ERP, the controls are the same. Store a withholding category on each vendor record. Store the ATL status check date. Let the section code travel with the invoice, so it is not guessed at quarter-end. Add a reminder for certificate expiry dates. Read which accounting software suits a small business and the FBR digital invoicing guide. The corporate compliance calculator is also useful for planning.

Do You Need a Tax Consultant for Contractor Payments?

Not always. A business with a handful of resident, ATL-listed vendors and a single payment category can manage in-house. Professional help earns its cost when you have mixed invoices, subcontractors, foreign payees, old defaults or an open notice. Fees vary by firm, city and volume, so ask for a written scope before you compare quotes.

Local guides that may help:

Islamabad: FBR tax consultant in Islamabad and corporate tax advisory
Lahore: best tax consultant in Lahore
Karachi: best tax consultant in Karachi
Rawalpindi: best tax consultant in Rawalpindi
Faisalabad: best tax consultant in Faisalabad

For planning ahead, see tax planning strategies for businesses and corporate tax planning strategies for 2026.

Why Choose Baco Consultants for Contractor Withholding Tax Compliance

Baco Consultants offers a quarterly withholding statements filing service, a free withholding tax calculator and a library of guides on certificates, exemptions, notices and ATL status. These cover the steps in this article from rate selection to reporting.

If you need to register or restructure before contracting, the same site covers NTN registration for companies and private limited company registration. Contractors who need their own filings can see annual income tax filing for sole proprietors and for partnerships and AOPs.

Frequently Asked Questions

What is Section 153?

It is the Income Tax Ordinance provision requiring prescribed persons to deduct tax on payments for goods, services and contracts.

Who deducts contractor withholding tax?

The prescribed person making the payment, such as a company, government body, or an individual or AOP above the turnover threshold.

What is the contractor rate for Tax Year 2027?

On the FBR card, 7.5% for company contracts and 8% for other cases for ATL payees, and 15% and 16% for non-ATL payees.

Is tax calculated on the gross amount?

The FBR card states service and contract rates on the gross amount payable.

When must I deposit the tax?

Under Rule 43, government departments on the day of deduction and other agents within seven days from the end of each week ending on Sunday.

Do I need to deduct tax on an advance payment?

As a practical rule, treat advances as payments. Confirm unusual structures with an adviser.

Can a contractor claim credit for tax I deducted?

Yes, using your certificate, where the deduction is adjustable. Some deductions are minimum tax, so check the category.

What if I deducted the wrong amount?

Correct it in a revised statement within sixty days of filing. Fix any shortfall and keep a written note of the reason.

Is withholding tax the same as sales tax?

No. They are separate regimes and can apply to the same invoice.

Is there a minimum payment below which no tax is deducted?

For goods, no deduction applies where payments are below Rs 75,000 in aggregate in a financial year. For services, the figure is Rs 30,000. Check Section 153(1)(c) for contracts.

Do I deduct tax on each milestone payment?

Yes. Each payment is a deduction event at the rate for the contract category.

Which rate applies to an IT vendor?

IT and IT-enabled services carry 4% (ATL) and 8% (non-ATL). An independent software developer working independently falls under the 15% / 30% category.

Does the media advertising rate apply to an advertising agency?

Not automatically. The 1.5% / 3% rate covers payments to electronic and print media. Agent commission is treated under Section 233.

Does a government department deduct tax from contractors?

Yes, as a prescribed person. It deposits the tax on the day of deduction.

Do foreign contractors fall under Section 153?

No. Payments to non-residents are dealt with under Section 152. Check the FBR card for those rates.

Conclusion

Contractor withholding tax comes down to a repeatable routine: confirm you are a prescribed person, classify the payment, verify ATL status, apply the Tax Year 2027 rate, deposit on time, file the quarterly statement and issue the certificate. The heaviest costs come from misclassification and missed deductions, not from the rates themselves.

If you would like help building that routine or filing your statements, explore Baco’s quarterly withholding statements filing service or contact the Baco team to discuss your contractor payments.