As a sole proprietor, do I have to deduct tax when I pay suppliers, contractors or my own employees?

A sole proprietor can become a withholding agent in two separate ways. Paying salary brings in section 149 regardless of how big the business is. Paying suppliers, service providers and contractors brings in section 153 only after the business crosses a turnover line. The two duties are worth keeping apart, because many owners assume that “small business” means “no withholding at all”.

What does the law say?

Salary (section 149). Section 149(1) says every person responsible for paying salary to an employee must, at the time of payment, deduct tax at the employee’s average rate. That rate is worked out on the employee’s estimated salary income for the tax year, using the rates in Division I of Part I of the First Schedule. Section 149(2) gives the formula: the tax on the estimated salary divided by the estimated salary. Nothing in section 149 limits it to companies or large employers.

Goods, services and contracts (section 153). Section 153(1) requires every “prescribed person” making a payment, including an advance, to a resident person to deduct tax from the gross amount payable:

• for the sale of goods (including toll manufacturing), except where payments are less than Rs. 75,000 in aggregate during a financial year;
• for services, except where payments are less than Rs. 30,000 in aggregate during a financial year;
• on the execution of a contract, other than a contract for goods or services.

Section 153(7) defines “prescribed person”. For a sole proprietor, the relevant entry is sub-clause (i): an individual having turnover of one hundred million rupees or above in any of the preceding tax years. Sub-clause (j) separately covers a person registered under the Sales Tax Act, 1990 with turnover of one hundred million rupees or more in any of the preceding tax years, and sub-clauses (k) and (l) cover builders and developers whatever their turnover.

The cost of not deducting (section 21(c)). Section 21(c) disallows any expenditure from which a person was required to deduct or collect tax, unless the tax was deducted and paid. The first proviso limits the disallowance for purchases of raw materials and finished goods to twenty per cent of those purchases. The second proviso says that tax later recovered under the Ordinance’s recovery provisions for failure to deduct counts as tax paid.

How does it work in practice?

The turnover test in section 153(7) looks backwards. It asks whether turnover reached Rs. 100 million in any preceding tax year, so a single year above the line is enough, and nothing in the definition switches the status off if turnover later falls. “Turnover” is defined in the same sub-section as gross sales or receipts, inclusive of sales tax, federal excise duty and trade discounts shown on invoices, plus gross fees for services and gross receipts from contracts.

The rates are set in Division III of Part III of the First Schedule, and they depend on what is being paid for and whether the recipient is a company. For a recipient that is not a company, the table in force for tax year 2027 gives these rates, among others:

Payment	Rate for a recipient other than a company
Sale of goods, other than toll manufacturing	5.5% of the gross amount payable
Toll manufacturing	11% of the gross amount payable
Execution of a contract	8% of the gross amount payable
Independent professional services such as doctors, lawyers, architects and accountants	15% of the gross amount payable
Services not covered by the other sub-paragraphs	14% of the gross amount payable

Section 153(1) says the gross amount includes sales tax, if any. Section 153(4) lets the Commissioner, on the recipient’s application, allow payment at a reduced rate where the tax is not minimum tax.

Worked example (illustrative figures)

Imran Traders is a Faisalabad wholesaler run by Imran as a sole proprietor. His turnover for tax year 2025 was Rs. 112,000,000. In tax year 2027 he makes these payments to resident individuals:

1. Rs. 2,000,000 to a supplier of finished goods. Deduction at 5.5%: 2,000,000 x 5.5% = Rs. 110,000. He pays the supplier Rs. 1,890,000.
2. Rs. 1,500,000 to a contractor for building a storeroom. Deduction at 8%: 1,500,000 x 8% = Rs. 120,000. He pays the contractor Rs. 1,380,000.
3. Salary to four shop staff. For each, he estimates the year’s salary income and applies that person’s average rate under section 149. Where the estimated salary falls in the 0% band of the salary table, the deduction is nil.

Because Imran’s tax year 2025 turnover was Rs. 112,000,000, he is a prescribed person for tax year 2027 under section 153(7)(i). If his turnover had never reached Rs. 100,000,000, items 1 and 2 would carry no deduction duty under that sub-clause, but item 3 would still fall under section 149.

What if my turnover drops below Rs. 100 million?

The wording is “in any of the preceding tax years”. Read literally, one earlier year at or above the line keeps the individual within the definition. The section does not say how long that lasts, and this page does not resolve that question.

What if I am registered for sales tax?

Section 153(7)(j) brings in a sales tax registered person with turnover of Rs. 100 million or more in any preceding tax year. For an individual this overlaps with sub-clause (i), because the threshold is the same.

Common mistakes

• Thinking salary withholding is only for companies. Section 149 starts with “every person responsible for paying salary”.
• Deducting on every small purchase. Section 153(1) excludes goods payments below Rs. 75,000 and service payments below Rs. 30,000 in aggregate during a financial year.
• Treating the missed deduction as a paperwork issue only. Under section 21(c) it can remove the expense from the profit calculation.
• Deducting on the amount before sales tax. Section 153(1) says the gross amount payable includes sales tax.

What to check in the official text

Read section 153(7) for the full list of prescribed persons and the turnover definition, and section 153(5) for payments that are outside the section, such as a refund of a security deposit. The rate table in Division III of Part III of the First Schedule has more service categories than the summary above. How and when deducted tax must be deposited is set out in Division IV of Part V of Chapter X, which this page does not cover.