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Understanding Section 153 Income Tax Ordinance

Understanding Section 153 Income Tax Ordinance

Introduction

The Income Tax Ordinance of Pakistan defines tax structures more elaborately and section 153 Income Ordinance deals with the payments to non-residents and some other incomes. For any business person, a freelancer, or anyone who is associating with business people from another country, it is essential to develop an understanding of Section 153. This section mainly discusses withholding tax which is paid when making the payment to the FBR. In the following blog post, we will explain section 153 of the Income Tax Ordinance, its effects, and consequences on those living as well as operating companies in Pakistan.

What is Section 153 Income Tax Ordinance?

Section 153 income tax ordinance is quite important because it defines withholding tax for some categories of payments made by individuals or entities. This section focuses on the bar which relates to payments for services, contracts, and importation of goods or provision of services. It was established by Section 153 income tax ordinance and its main purpose is to compel compliance with tax payment by deducting some cash as the tax and giving the balance to the main receiver who is usually a non-resident or foreigner.

Types of Payments Covered Under Section 153

Section 153 income tax ordinance covers many payments. Here are the major types of transactions covered:

Payments for Contracts

Section 153 also provides that payment made for contracts of various natures including construction contracts, service contracts or any other work contract is subject to withholding tax. The contractor is urged to make payment to the tax authorities by a certain percentage of the payment.

Payments for Services

This entails payments made on charges for professional services; consultancy fees; or any other service as might have been offered by a layperson or a corporation. It does not matter if it is a legal service, medical, or advisory service, withholding tax is compulsory.

Payments for the Import of Goods

Section 153 applies to payments made with respect to imported goods in Pakistan. On such payments, a withholding tax is applied to facilitate tax on international business as a way of encouraging compliance.

Payments to Non-Residents

If payment is made to a non-resident for services or contract work, Section 153 income tax ordinance 2001 applies and withholdings tax is calculated and paid before payment is affected.

Withholding Tax Rates Under Section 153

Withholding tax under Section 153 income tax ordinance are amounts based on the following tables depending on the type of payment to be made. The tax rates include variable charges and vary between citizens and foreigners. The following are the general withholding tax rates:

  • For Contract Payments: The tax rates are approximately 7.5% to 10% as per the type of contract including construction or service.
  • For Professional Services: Most services whether rendered by resident or non-resident professionals are subjected to a withholding tax of 10%.
  • For Imports of Goods: The tax imposed on the payment for imported goods is usually at the range of 5% to 7%.
  • For Non-Resident Payments: Fees for services, royalties, or technical fees arising from outside Pakistan are charged to tax at approximately 15% or as per the provisions of Pakistan’s tax laws or treaties with the country of residence of the recipient.

But it is also good to note that the rates could differ and thy here in, thus the taxpayers should always confirm with FBR on the current rates.

Who is Responsible for Deducting Tax Under Section 153?

Section 153 of income tax act vests the duty of deduction and remitting tax in the hands of the payer. This means that any individual or company making a payment to a contractor, professional service provider, or foreign entity is required to:

  1. Deduct Tax at the Applicable Rate: As provided under (Section 153 a tax example0, the payer has to deduct withholding tax when making the payments.
  2. Remit the Tax to the FBR: Where an amount has been deducted the same has to be paid to FBR within a period of time as provided under the act.
  3. Provide Tax Certificates: Where the tax has been deducted and paid to the revenue authority, the payer must issue the recipient with a tax deduction certificate. This certificate acts as an acknowledgment receipt for the taxpayer and the recipient is entitled to claim for tax credit on it.

How Does Section 153 Impact Non-Residents?

For non-residents, Section 153 income tax ordinance provides the payment made at the time of services, contract, or imports is taxed at source. This tax is paid over in the course of payment hence non-residents don’t have to apply for tax filing in Pakistan. But still in this case a non-resident is allowed to claim a tax refund or reduced rate of tax under the provisions of the income tax treaty entered between Pakistan and the country where the non-resident qualifies to be taxed from and get the refund or reduced tax rate based on production of such necessary documents.

Non-residents should ensure they keep a record of the certificates of the withholding tax that they were given so that they can offset it on their income tax return while in their home country or in the Islamic Republic of Pakistan.

How to File and Pay the Withholding Tax?

Here’s a simplified guide for the process:

  1. Obtain NTN (National Tax Number): Every person whether a Pakistani national or foreigner requires an NTN for taxation in Pakistan. It is an important number to use in both filing of taxes for withholding and making payments thereof.
  2. Deduct the Tax at the Source: The payer is supposed to calculate the right amount of tax that should be deducted from the contractor or service provider during payment.
  3. Submit the Tax to the FBR: When the actual tax liability is computed the payer is expected to make the payment to the FBR within the provided timeframe.
  4. Issue a Tax Certificate: The opportunities that each payer offers the recipient are tax deduction certificates that can be used in claiming tax credits.
  5. Filing Tax Returns: The payer has to complete a monthly or, at most, quarterly withholding tax return to report the deducted tax. This can be done through the FBR’s online portal.

Penalties for Non-Compliance with Section 153

Failure to comply with deduce (deduce meaning in urdu nateeja nikalna )can lead to significant penalties, including:

  • Late Filing Fees: The penalty for failure to file withholding tax returns is fines compounded by charges that accrue in the form of interest.
  • Failure to Deduct Tax: They will be seized with the responsibility of paying the tax in case the payer has not deducted it on raw materials.
  • Penalties for Non-Resident Withholding: Non-residents showing less of the necessary documents for pleading lower rates of taxation may be charged high tariffs besides penalties being imposed on them.

Explore: Income Tax Ordinance in Pakistan. A complete guide for Taxpayers

Conclusion

Section 153 income tax ordinance is very important in the context of Pakistan’s taxation regime, particularly for those units that are involved in contracts, services, or international transactions. Through advocacy for the implementation of the deduction at the source, this section ensures the realization of efficient tax collection for the government.

Every person, who deals with the payments as a businessman, a contractor, or only as a taxpayer-receiver, should consider the provisions of Section 153 to be obligatory for performing. It is advised to always find out the current tax rates, try to keep your records updated, and pay your taxes on time so as not to be charged with penalties and try to take advantage was possible tax credits or refunds.