How much tax will a local client withhold under section 153 when it pays our software house for IT services?

When a company or other prescribed person in Pakistan pays your software house for IT work, section 153 makes it deduct income tax from the payment before it pays you. For tax year 2027 the rate for IT services and IT-enabled services is 4% of the gross amount payable, under the proviso in Division III of Part III of the First Schedule.

What does the law say?

Section 153(1)(b) applies to a payment “for the rendering of or providing of services”, made in full or in part, including an advance, to a resident person. The prescribed person making the payment must “deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division III of Part III of the First Schedule”. Clause (b) has a threshold built into it: no deduction is required where payment is less than thirty thousand rupees in aggregate during a financial year.

Paragraph (2) of Division III sets the rates for services. Sub-paragraph (i) lists services taxed at 7% of the gross amount payable. The list includes “software development services, IT services and IT enabled services as defined in section 2”, alongside transport, courier, security guard, engineering and other services. It then adds a proviso: “the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2.”

Section 2 defines both terms. Clause (30AD) says IT services include, but are not limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design. Clause (30AE) says IT-enabled services include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry, cloud computing, data storage, locally produced television programmes and insurance claims processing.

Service (Division III, paragraph (2))	Rate, tax year 2027
IT services and IT-enabled services as defined in section 2 (proviso to sub-paragraph (i))	4% of gross amount payable
Other services named in sub-paragraph (i)	7% of gross amount payable
Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently (sub-paragraph (ii))	15%
Services not covered by sub-paragraphs (i) to (iv) (sub-paragraph (v))	14% of the gross amount

Who has to deduct the tax?

Only a “prescribed person” under section 153(7)(i). The list includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, a foreign contractor or consultant, a consortium or joint venture, an AOP or an individual with turnover of one hundred million rupees or more in any of the preceding tax years, a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any preceding tax year, and builders and developers. A small sole trader who hires you to build a website, and who is not on that list, is not required to deduct.

How does it work in practice?

The client deducts at the time it makes the payment, whether the payment is the full invoice, a part payment or an advance. The base is the gross amount payable, which includes any sales tax on the invoice. Provincial sales tax on services is outside this corpus, so its rate is not covered here.

Section 153(3) makes the tax deductible under sub-section (1) a minimum tax on the income of a resident person. The provisos to sub-section (3) cover goods sold by manufacturers or listed companies, and contracts by listed companies. They do not cover services, so the deduction on your IT invoices stays minimum tax.

The Explanation under sub-paragraph (i) of Division III adds a condition. The listed rate applies “only to a service provider whose services are subjected to withholding tax on gross receipts and the service provider has not agitated taxation of gross receipts before any court of law”.

Worked example (illustrative figures)

Bytecraft (Pvt) Ltd in Lahore maintains a payroll system for a Karachi company during tax year 2027. The client pays three invoices whose totals, including any sales tax charged, come to Rs. 2,500,000.

1. The client is a company, so it is a prescribed person under section 153(7)(i)(b).
2. Software maintenance is listed in clause (30AD), so the 4% proviso applies.
3. Tax deducted: Rs. 2,500,000 x 4% = Rs. 100,000.
4. Bytecraft receives Rs. 2,500,000 - Rs. 100,000 = Rs. 2,400,000.

A second client, a small company, pays Bytecraft Rs. 25,000 in total during the financial year for a one-off fix. That is less than thirty thousand rupees in aggregate, so section 153(1)(b) does not require a deduction.

What if we are not on the Active Taxpayers List?

Rule 1 of the Tenth Schedule increases the rate of deduction by one hundred percent of the rate for persons not appearing in the active taxpayers’ list. On IT services that turns 4% into 8%. Section 153 is not among the exclusions in rule 10. The related page on higher withholding covers this in detail.

What if we bill “software development” rather than “IT services”?

Sub-paragraph (i) names “software development services” separately in its 7% list, while the 4% proviso refers to “IT services and IT enabled services as defined in section 2”. Clause (30AD) of section 2 includes software development within IT services. The Ordinance does not expressly say how these two references fit together, and this page does not resolve it.

What if a developer works independently rather than through a company?

Sub-paragraph (ii) of paragraph (2) sets 15% for independent professional services, naming “software engineers or developers, working independently”. Which row applies to a particular individual depends on how their work is characterised, which the Schedule does not define further.

Common mistakes

• Using 7% for all IT work. The proviso sets 4% for IT services and IT-enabled services as defined in section 2.
• Deducting on the amount before sales tax. Section 153(1) says “gross amount payable (including sales tax, if any)”.
• Treating the deduction as final tax. Section 153(3) makes it minimum tax for services.
• Assuming every client must deduct. Only prescribed persons under section 153(7)(i) must.

What to check in the official text

Read section 153(1), (3) and (7), then paragraph (2) of Division III of Part III of the First Schedule in the official PDF, since the site text leaves out the rate tables. Read clauses (30AD) and (30AE) of section 2 to confirm your service is listed. Check rules 1 and 10 of the Tenth Schedule for the rate if your business is not on the Active Taxpayers List.