Why is the withholding rate on our services doubled when the company is not on the Active Taxpayers List?

The doubling is written into the Income Tax Ordinance itself. Section 100BA hands the treatment of anyone missing from the active taxpayers’ list to the Tenth Schedule, and rule 1 of that Schedule raises the withholding rate by one hundred percent. A client paying for IT services in tax year 2027 therefore deducts 8% instead of 4%.

What does the law say?

Three provisions work together.

Section 181A creates the list. It says the Board “shall have the power to institute active taxpayers’ list” and that the list “shall be regulated as may be prescribed”. The Ordinance itself does not set out who goes on the list. That detail is in the Income Tax Rules, 2002.

Section 100BA(1) says that the collection or deduction of advance income tax, and the computation of income and tax, for a person not appearing on the active taxpayers’ list “shall be determined in accordance with the rules in the Tenth Schedule”. Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything to the contrary in the Ordinance.

Rule 1 of the Tenth Schedule says that where tax is to be deducted or collected under any provision of the Ordinance from a person not on the list, the rate “shall be increased by hundred percent of the rate specified in this Ordinance”. Its provisos set special figures for property and distributor transactions. None of them concerns payments for services.

Who decides whether a software house is on the list?

Rule 81B of the Income Tax Rules, 2002, in the edition held in this corpus (amended to 24 November 2023), sets the criteria:

• Sub-rule (5): a person is included if it filed a return of income, or a statement in place of a return, for the tax year whose filing due date fell in the preceding twelve months.
• Proviso to sub-rule (5): a company or AOP whose return is not yet due because it was incorporated or formed after 30 June of that tax year “shall be included” in the list.
• Sub-rule (4): the list is updated every Sunday at 24:00 hours.
• Sub-rule (8): a person who meets the criteria is included on the next updation date.

For a brand new software house, the proviso matters. On the text of the rule, a company is not left off the list merely because its first return is not yet due. A company that missed its first return deadline is in a different position.

How is the higher rate applied to our invoices?

Section 153 requires a prescribed person paying for services to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule. For tax year 2027, paragraph (2)(i) of that Division sets 7% for a list of services, and its proviso sets 4% for IT services and IT enabled services as defined in the Ordinance.

Rule 10 of the Tenth Schedule lists the deductions to which the Schedule does not apply. Section 153 is not among them, so rule 1 applies to deductions from payments for IT services. Clause (ca) of rule 10 does exclude the separate deduction banks make on export proceeds, so the export rate is not doubled.

Service	Normal rate, tax year 2027	Rate if not on the list
IT services and IT enabled services	4%	8%
Other services in paragraph (2)(i)	7%	14%

Worked example (illustrative figures)

Indus Pixel (Pvt) Ltd, a Lahore software house, missed its return deadline and dropped off the list. A Karachi bank then pays it Rs. 2,500,000 for a mobile app build in tax year 2027.

1. Division III rate for IT services: 4%.
2. Rule 1 increase: 4% + (100% of 4%) = 8%.
3. Tax deducted: Rs. 2,500,000 x 8% = Rs. 200,000.
4. At the normal rate: Rs. 2,500,000 x 4% = Rs. 100,000.
5. Extra deduction because of list status: Rs. 200,000 - Rs. 100,000 = Rs. 100,000.

Indus Pixel receives Rs. 2,300,000 instead of Rs. 2,400,000 on that invoice.

What happens if the company still does not file?

Rule 3 of the Tenth Schedule says that where tax was deducted under rule 1 and the person fails to file the return by the due date, the Commissioner makes a provisional assessment within sixty days, imputing income from the tax deducted. For a company, rule 6(b) defines imputed income as the income that would produce, under Division II of the First Schedule, tax equal to the tax deducted at the higher rate.

Rule 4(1) turns the provisional assessment into a final assessment forty-five days after it is served. Rule 4(2) says it abates if the returns and wealth statement for that year and the preceding year are filed within those forty-five days. Rule 4(3) then makes the tax deducted under rule 1 adjustable against the tax payable in the return.

What if the company was not required to file a return at all?

Rule 2 lets the withholding agent, if satisfied that the payee was not required to file a return of income, send the Commissioner an electronic notice before deducting. The Commissioner has thirty days to accept this or direct deduction under rule 1. If no order is passed within thirty days, the contention is treated as accepted.

What if we are on the list but filed late?

Section 100BA(1) still mentions persons on the list who filed after the due date. The rule that set rates for them, rule 1A, was omitted by the Finance Act, 2026, according to the Schedule’s footnotes. The Tenth Schedule in this corpus contains no separate rate for that group now.

Common mistakes

• Assuming a new company is automatically off the list. The proviso to rule 81B(5) includes a newly incorporated company whose return is not yet due.
• Treating the extra deduction as a penalty that cannot be recovered. Rule 4(3) makes it adjustable when the return is filed in time.
• Assuming the doubling reaches export proceeds. Rule 10(ca) takes the bank deduction on export proceeds out of the Schedule.

What to check in the official text

Read section 100BA, section 181A and rules 1 to 4, 6 and 10 of the Tenth Schedule in the Ordinance amended to 30 June 2026, and paragraph (2) of Division III of Part III of the First Schedule for the base rate. Rule 81B is quoted from the Income Tax Rules as amended to 24 November 2023. Any later change to the list criteria is not in this corpus, nor are the FBR portal steps for checking status.