Which taxes withheld from my business can I adjust against my income tax, and which are final?

Most income tax withheld from a small business in Pakistan can be set against the owner’s tax for the year. The Income Tax Ordinance, 2001 treats withheld tax as a credit by default and makes it final only where a specific provision says so. For a sole proprietor, the provision that needs the most care is section 153, because its deductions are labelled minimum tax.

What does the law say?

Section 168: the general rule. Section 168(1)(b) treats tax collected under Division II or deducted under Division III of Part V of Chapter X, or under Chapter XII, as tax paid by the person it was taken from. Section 168(2) allows that person a tax credit for it, for the tax year in which it was collected or deducted. Section 168(1)(a) also treats tax deducted from a payment as income derived by the person paid, so the full amount of a sale counts as received, including the part the customer withheld and deposited as tax.

Section 168(3): the exceptions. No credit is allowed for tax that is final under the provisions listed there. They deal with matters such as certain payments to non-residents, export of services, prizes and winnings, petroleum products and bonus shares. Sections 153, 236H and 231AB are not on that list.

Section 169: what “final” means. Where section 169 applies, the income is not chargeable under any head, no deduction is allowed for expenses of earning it, it is not reduced by deductible allowances or losses, the tax is not reduced by credits, and there is no refund unless the tax exceeds what the person is chargeable to.

How does each common withholding work?

Tax	Who takes it	Treatment for a sole proprietor
Section 153(1)(a), (b), (c): payments for goods, services and contracts	A prescribed person paying you, such as a company or an individual with turnover of Rs. 100 million or more in any preceding tax year	Creditable under section 168(2); section 153(3) declares it minimum tax
Section 236H: purchases by a retailer	Manufacturer, distributor, dealer, wholesaler or commercial importer selling to you	Adjustable: section 236H(2) allows credit
Section 231AB: cash withdrawals	Your bank, if you are not on the active taxpayers’ list and withdraw over Rs. 50,000 in a day	Adjustable: the section calls it “advance adjustable tax”

Section 153 in more detail. Section 153(3) says tax deductible under sub-sections (1) and (2) on the income of a resident person “shall be minimum tax”. Its provisos take some company and listed-company receipts out of that rule, but none of them covers an individual. The explanation to section 153(3) says the income meant is the amount on which tax is deductible. The Ordinance does not define “minimum tax” in section 2. The word indicates that the tax deducted sets a floor for tax on that income. The credit itself comes from section 168(2), since section 153 is not in section 168(3).

The rates for section 153 are in Division III of Part III of the First Schedule, and differ between companies and other persons and by type of payment.

Section 236H. The collection rate on the gross amount of sales is set in Division XV of Part IV of the First Schedule. After the 2024 amendments the section no longer lists particular sectors for sales to retailers.

Section 231AB. The rate is 0.8% of cash withdrawals, applied to a person whose name does not appear in the active taxpayers’ list, where the day’s withdrawals together exceed fifty thousand rupees.

Worked example (illustrative figures)

Imran runs a building materials shop in Peshawar. For tax year 2027 his made-up figures are:

• Tax deducted by a construction company buying cement from him under section 153(1)(a): Rs. 44,000.
• Tax collected by a cement distributor on his purchases under section 236H: Rs. 30,000.
• Tax deducted by his bank on cash withdrawals under section 231AB while he was off the active taxpayers’ list: Rs. 8,000.
• Tax on his taxable income at the normal rates: Rs. 210,000.

Step by step:

1. Credits under sections 168(2), 236H(2) and 231AB: Rs. 44,000 + Rs. 30,000 + Rs. 8,000 = Rs. 82,000.
2. Tax still payable: Rs. 210,000 minus Rs. 82,000 = Rs. 128,000.

Because the section 153 amount is minimum tax, the position changes if tax at normal rates on the income from those sales would be lower than Rs. 44,000. How the floor is worked for a mixed business is not spelled out in section 153 itself, so check it against the return form and any Board guidance.

What if …?

What if a customer deducted tax but never deposited it? S. No. 36 of the Table in section 182(1) penalises claiming credit beyond the amount verifiably deducted and deposited, as confirmed through the Board’s computerised system or otherwise. The penalty equals the excess credit claimed.

What if my credits exceed my tax? Section 168(5) says a credit, or part of a credit, that cannot be applied for the year is refunded to the taxpayer.

What if I am paid for services? Section 153(1)(b) deductions follow the same section 153(3) rule: minimum tax, with credit under section 168(2).

Common mistakes

• Relying on the old “final tax” rule for section 153. Footnotes in the consolidated text show section 153(6) once made goods payments final. The current section 153(3) says minimum tax.
• Leaving withheld tax out of income. Section 168(1)(a) treats the tax deducted as part of what you received.
• Claiming credit without evidence. The S. No. 36 penalty is tied to what was verifiably deposited.
• Assuming the cash withdrawal tax applies to everyone. Section 231AB applies only to persons not on the active taxpayers’ list.

What to check in the official text

Read section 168 and section 169 together, then sections 153, 236H and 231AB. Check the rates in Division III of Part III and Division XV of Part IV of the First Schedule in the official PDF. Section 153(4) lets the Commissioner issue a reduced-rate certificate where the deduction is not minimum tax. The Tenth Schedule and any Board notifications on persons not on the active taxpayers’ list are not covered on this page.