How much income tax does a company deduct under section 153 when it buys goods from me as a distributor?

The default rate on goods is 5% of the gross amount when the distributor is a company and 5.5% when it is not. Distributors of cigarettes, pharmaceutical products and certain listed goods get lower rates through clauses in the Second Schedule. These rates come from the Income Tax Ordinance, 2001 as amended to 30 June 2026, so they apply for tax year 2027.

What does the law say?

Section 153(1)(a) requires every “prescribed person” paying for the sale of goods to a resident person to deduct tax “from the gross amount payable (including sales tax, if any)” at the rate in Division III of Part III of the First Schedule. It excludes cases where the payment is less than seventy-five thousand rupees in aggregate during a financial year.

Section 153(7) lists the prescribed persons who must deduct. They include the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, an AOP or individual with turnover of one hundred million rupees or above in any of the preceding tax years, and 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.

What rates apply to a distributor in tax year 2027?

Situation	Where the rate is	Rate on gross amount
Sale of rice, cotton seed or edible oils	Division III, para (1)(a)	1.5%
Other goods, seller is a company	Division III, para (1)(b)(i)	5%
Other goods, seller is not a company	Division III, para (1)(b)(ii)	5.5%
Distributors of cigarette	Second Schedule, clause (24A)	2.5%
Distributors of pharmaceutical products	Second Schedule, clause (24A)	1%
Distributors, dealers, sub-dealers, wholesalers and retailers of fast moving consumer goods, fertilizer, electronics excluding mobile phones, sugar, cement, steel and edible oil	Second Schedule, clause (24C), if on both active taxpayers’ lists	0.25%

Clause (24C) sets its rate “subject to the condition that beneficiaries of reduced rate are appearing on the Active Taxpayers’ Lists” issued under both the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001. A distributor on only one list does not meet that condition.

Clause (24C) also carries a proviso that “the benefit under this clause shall only be available to those Tier-1 retailers as defined under Sales Tax Act, 1990 who are integrated” with the Board’s computerized system. Read literally, that wording speaks only of Tier-1 retailers. The clause does not say whether the proviso limits the benefit for distributors, dealers and wholesalers, who are not retailers. This page does not resolve that.

Is the deduction minimum tax for a distributor?

Yes, unless the distributor is a manufacturer company or a listed company. Section 153(3) says tax deductible under sub-section (1) shall be minimum tax. Its proviso says tax deducted under clause (a) is not minimum tax where payments for goods are received by a company being a manufacturer of such goods, or a public company listed on a registered stock exchange in Pakistan. A trading distributor fits neither exception.

What if I am not on the active taxpayers’ list?

Rule 1 of the Tenth Schedule says that where tax is to be deducted from a person not appearing in the active taxpayers’ list, the rate “shall be increased by hundred percent” of the rate specified in the Ordinance. The reduced rate in clause (24C) is in any case available only to persons on both active taxpayers’ lists.

Worked example (illustrative figures)

A company running a chain of grocery stores in Rawalpindi pays four suppliers, each invoice Rs. 2,000,000 gross including sales tax. All suppliers are on the active taxpayers’ list under the Ordinance.

Supplier	Rate	Arithmetic	Tax deducted
Stationery distributor, an AOP	5.5%	2,000,000 × 5.5%	Rs. 110,000
FMCG distributor, on both active taxpayers’ lists	0.25%	2,000,000 × 0.25%	Rs. 5,000
Pharmaceutical distributor	1%	2,000,000 × 1%	Rs. 20,000
Cigarette distributor	2.5%	2,000,000 × 2.5%	Rs. 50,000

Check: 110,000 + 5,000 + 20,000 + 50,000 = Rs. 185,000 deducted in total. Each distributor receives Rs. 2,000,000 minus its own deduction.

Common mistakes

• Applying the rate before sales tax. Section 153(1) says the gross amount includes sales tax.
• Assuming FMCG status alone gives 0.25%. Clause (24C) requires appearance on both active taxpayers’ lists.
• Treating the deduction as adjustable. For a trading distributor it is minimum tax under section 153(3).
• Overlap between clauses. Cigarettes may also be described as fast moving consumer goods. Clauses (24A) and (24C) do not say which prevails where both could apply.

What to check in the official text

Read section 153, including sub-section (3) and the definitions in sub-section (7). Check paragraph (1) of Division III of Part III of the First Schedule, clauses (24A) and (24C) of Part II of the Second Schedule, and rule 1 of the Tenth Schedule. Also check whether the buyer holds, or you hold, a certificate under section 153(4), which allows a reduced rate only where the tax is not minimum tax.