Is the tax deducted from our local IT service invoices adjustable, or is it minimum tax for a company?

What does section 153(3) say?

Section 153(3), as amended to 30 June 2026, says the tax deductible under section 153(1) and (2) “on the income of a resident person” shall be minimum tax. The provisos then take these receipts out of minimum tax:

• tax on sale or supply of goods received by a company that manufactures those goods, or by a listed public company, which is “not minimum tax”;
• tax on execution of contracts received by a listed public company, which is “adjustable”.

None of the provisos mentions services. A former clause (b), which spoke specifically of services, was omitted by the Finance Act, 2020, but the main sentence still covers everything deducted under section 153(1), including clause (b) payments for services. So for a software house, whether a company, a partnership or a sole proprietor, tax deducted from local IT service fees is minimum tax.

The Explanation to section 153(3) adds that the income concerned “means the amount on which tax is deductible”. In other words, the floor is measured against the gross receipts on which the client deducted.

Where does the “companies are treated differently” idea come from?

The consolidated text prints, as a footnote, the version of section 153 that the Finance Act, 2011 replaced. In that old text, section 153(6) made the deduction a final tax, with a proviso that sub-section (6) “shall not apply to companies” for services, and a further proviso that service deductions were minimum tax. That is superseded wording. The current section 153 has no separate rule for companies receiving payment for services.

How does section 168 credit work alongside it?

Section 168(1)(b) treats tax deducted under Division III of Part V of Chapter X, which includes section 153, as tax paid by the person from whom it was deducted. Section 168(2) allows a tax credit for it “in computing the tax due by the person on the taxable income”. The footnotes show that section 153(3) was removed from the list of final taxes in section 168(3) by the Finance Act, 2019, so the credit is available.

Put together:

• If the company’s normal tax is higher than the deductions, the deductions are credited and the company pays the balance.
• If the company’s normal tax is lower than the deductions, the tax on that income cannot fall below the amount deducted, because it is minimum tax. The shortfall is not refundable. Section 168(5) refunds credit that cannot be used, but it does not override the minimum set by section 153(3).

The Ordinance does not lay out a step by step computation for combining section 153 minimum tax with section 113 minimum tax on turnover. The Explanation to section 113(1) excludes final taxes and the super taxes from “tax payable or paid”, and says nothing specific about section 153. This page does not resolve that interaction.

Worked example (illustrative figures)

A software company in Peshawar (not a small company) earns Rs. 30,000,000 in tax year 2027 from local clients who are all prescribed persons. Each deducted 4% under paragraph (2)(i) of Division III: Rs. 30,000,000 x 4% = Rs. 1,200,000.

Case A: a profitable year. Taxable income from the local business is Rs. 8,000,000.

1. Normal tax at 29%: Rs. 8,000,000 x 29% = Rs. 2,320,000.
2. Credit under section 168 for the deductions: Rs. 1,200,000.
3. Balance payable: Rs. 2,320,000 minus Rs. 1,200,000 = Rs. 1,120,000.
4. Section 113 check: Rs. 30,000,000 x 1.25% = Rs. 375,000, below Rs. 2,320,000, so it does not bite.

Case B: a thin year. Taxable income is Rs. 2,000,000.

1. Normal tax at 29%: Rs. 2,000,000 x 29% = Rs. 580,000.
2. Deductions: Rs. 1,200,000, which is minimum tax on the Rs. 30,000,000 receipts.
3. Because Rs. 580,000 is less than Rs. 1,200,000, the tax on this income stays at Rs. 1,200,000. The difference of Rs. 620,000 is not refunded.
4. Section 113 on turnover would give Rs. 375,000, lower than both figures.

What if …?

The client deducted more than the correct rate. Minimum tax is the tax “deductible”, which is 4% for IT services. An amount deducted above that is not the minimum set by section 153(3); how it is recovered is a matter for the refund provisions.

The company wants a reduced rate certificate. Section 153(4) allows one only where the deductible tax “is not minimum”. Tax on services is minimum, so this route is not open on the wording of the section.

Common mistakes

• Treating service withholding as fully adjustable and expecting a refund in a loss year. Section 153(3) makes it a floor.
• Reading the old section 153(6) footnote as current law and assuming companies are carved out.
• Treating it as final tax and leaving the income out of the return. It is minimum tax, so the income is still computed normally and the deduction credited.

What to check in the official text

Read section 153(3) and (4) and section 168(1) to (5) of the Ordinance as amended to 30 June 2026, together with section 113 and the Division IX table if your turnover is large relative to profit.