When a company or government buyer withholds one-fifth of the sales tax on my invoice, how do I account for it in my return?

When a buyer acts as a sales tax withholding agent, the supplier does not receive the whole of the sales tax shown on its invoice. Part of it is deducted by the buyer and paid to the government directly. The supplier’s job in the return is to declare the full supply and take credit for that deducted part.

What does the law say?

Section 3(7) of the Sales Tax Act, 1990 says tax “shall be withheld” at the rate in the Eleventh Schedule by persons purchasing goods or services, acting as withholding agents, in the manner the Board prescribes. The Eleventh Schedule Table sets the rates. The entries relevant to a manufacturer are:

S. No.	Withholding agent	Supplier	Deduction
1	Federal and provincial government departments, autonomous bodies, public sector organisations, and companies as defined in the Income Tax Ordinance, 2001	Active taxpayers	1/5th of sales tax as shown on invoice
2	The same agents	Active taxpayer registered as a wholesaler, dealer or distributor	1/10th of sales tax as shown on invoice
3	Government departments, autonomous bodies and public sector organisations	Persons other than active taxpayers	Whole of the tax involved, or as applicable on gross value of supplies
4	Companies, associations of persons and individuals as defined in the Income Tax Ordinance, 2001, excluding companies exporting surgical instruments	Persons other than active taxpayers	5% of gross value of supplies

The Schedule then lists supplies to which withholding does not apply. For a manufacturer the key one is clause (viii): supplies made by an active taxpayer “to another registered person”, except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. The other exclusions include electricity, natural gas, certain petroleum products, vegetable ghee and cooking oil, telecommunication services and Third Schedule goods.

When does the 1/5th deduction actually arise?

Reading serial number 1 with clause (viii), the 1/5th deduction falls on an active taxpayer’s supplies to a withholding agent that is not itself a registered person. In practice that is most often a government department, autonomous body or public sector organisation, or a company that is not registered for sales tax. The Schedule does not list which buyers are registered, so the supplier has to know its buyer’s status.

How does the buyer handle the deduction?

Rule 150ZZI of the Sales Tax Rules, 2006 sets out the withholding agent’s side:

• the agent’s advertisement or notice for the purchase must say sales tax will be deducted;
• the agent deducts the Schedule amount and pays the supplier the balance;
• a registered agent deposits the amount with its own monthly return, and other agents deposit it by the 15th of the following month;
• for government departments, the Drawing and Disbursing Officer shows the withheld amount on the bill and the accounting office credits it to the government;
• the agent issues the supplier a certificate showing the supplier’s name and registration number, the goods and the tax deducted.

The same rule bars the agent from claiming the withheld amount as its own input tax.

How does the supplier account for it in the return?

Rule 150ZZJ has two requirements. The supplier issues a sales tax invoice for every taxable supply to a withholding agent, and it files the monthly return “taking due credit of the sales tax deducted by the withholding agent, in the manner as prescribed in the return”. Under rule 150ZZK, the Commissioner checks that suppliers named in the agents’ returns are filing and declaring those supplies. The exact return fields are part of the prescribed return form, which is not reproduced in this corpus.

Worked example (illustrative figures)

A Multan yarn mill, an active taxpayer, supplies cotton yarn worth Rs. 2,000,000 (excluding sales tax) to a public sector organisation that is not registered for sales tax. The standard rate under section 3(1) is eighteen per cent.

1. Sales tax on the invoice: Rs. 2,000,000 x 18% = Rs. 360,000.
2. Withheld by the buyer at 1/5th: Rs. 360,000 / 5 = Rs. 72,000.
3. Sales tax paid to the mill: Rs. 360,000 - Rs. 72,000 = Rs. 288,000.
4. Total paid to the mill: Rs. 2,000,000 + Rs. 288,000 = Rs. 2,288,000.
5. In its return the mill declares the Rs. 2,000,000 supply and Rs. 360,000 output tax, and takes credit for the Rs. 72,000 deducted, backed by the buyer’s certificate.

Rule 150ZZI’s own illustration uses the same method, with an older seventeen per cent rate.

What if I am not on the active taxpayers list?

Then serial numbers 3 and 4 apply instead. A government department, autonomous body or public sector organisation withholds the whole of the tax involved, and a company, association of persons or individual withholds 5% of the gross value of supplies. Clause (viii) protects only an active taxpayer.

Common mistakes

• Treating the withheld amount as a lost sale. Rule 150ZZJ gives the supplier credit for it in the return.
• Assuming every company withholds. Clause (viii) removes an active taxpayer’s supplies to a registered person.
• Not collecting the certificate. Rule 150ZZI(8) requires the agent to issue one, and it is the supplier’s evidence of the deduction.

What to check in the official text

• Section 3(7) of the Sales Tax Act, 1990 and the Eleventh Schedule, including clauses (i) to (ix) after the Table.
• Rules 150ZZI, 150ZZJ and 150ZZK of the Sales Tax Rules, 2006.
• The current return form for where the credit is entered, which is not in this corpus.
• Rule 150ZZH(1) says the chapter applies to supplies to withholding agents “for the purpose of deduction and deposit of sales tax by persons registered as exporters”. Its reference to exporters is not explained in the Rules.