Does my company have to withhold sales tax from suppliers' invoices as a withholding agent?

A company that buys taxable goods can be required to hold back part of the sales tax on its suppliers’ invoices and pay it to the government itself. Two texts in this corpus deal with it, and they are of different ages, so which one a reader relies on matters.

Which texts apply?

1. The Sales Tax Special Procedure (Withholding) Rules, 2007. The edition in this corpus is amended only to 30 June 2015. Any SRO amending the Rules after that date is not in the corpus and is not reflected here.
2. The Sales Tax Act, 1990, as amended to 30 June 2026. Section 3(7) says tax shall be withheld “at the rate as specified in the Eleventh Schedule, by any person or class of persons” being purchasers of goods or services, as withholding agents, in the manner the Board prescribes. The Eleventh Schedule was inserted by the Finance Act, 2019 and amended as recently as the Finance Act, 2026.

Where the two differ, the Eleventh Schedule is the later text and is part of the Act itself.

What do the 2007 Rules say?

Rule 1(2) lists the withholding agents. Clause (d) names “companies as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), which is registered for sales tax, federal excise duty or income tax”. A company holding only an NTN is therefore covered.

Rule 2(2) requires a withholding agent, other than a recipient of advertisement services, to deduct one fifth of the total sales tax shown on the invoice of a registered person and pay the balance to the supplier. Rule 2(2A) sets one tenth for suppliers registered as a wholesaler, dealer or distributor. Rule 2(8) requires the agent to give the supplier a certificate showing the tax deducted.

Rule 2(6) says an agent registered for sales tax or federal excise deposits the withheld tax with its own return for the month in which the purchase was made. An agent that holds only an NTN files the return in the Annexure to the Rules electronically. Rule 3(2) lets the supplier adjust its output tax, “taking due credit of the sales tax deducted by the withholding agent”.

What does the Eleventh Schedule say now?

For companies as withholding agents, the Table reads:

S. No.	Supplier	Deduction
1	Active taxpayers	1/5th of sales tax as shown on invoice
2	Active taxpayer registered as a wholesaler, dealer or distributor	1/10th of sales tax as shown on invoice
4	Persons other than active taxpayers	5% of gross value of supplies

S. No. 4 excludes companies exporting surgical instruments, and the Finance Act, 2026 extended it to associations of persons and individuals.

Section 2(1A) defines an active taxpayer as a registered person who does not fall into any of four categories: blacklisted or suspended; failing to file sales tax returns by the due date for two consecutive tax periods; failing to file its income tax return by the due date; or failing to file its quarterly or annual withholding tax statement under the Income Tax Ordinance.

Which purchases are excluded?

The Schedule lists goods and supplies to which it does not apply, including electrical energy, natural gas, specified petroleum products, vegetable ghee and cooking oil, telecommunication services and Third Schedule goods. Clause (viii), substituted by the Finance Act, 2024, excludes “Supplies made by an Active Taxpayer as defined in the Sales Tax Act, 1990 to another registered person”, except supplies under S. Nos. 5, 7, 9, 10, 11, 12 and 13.

Read as printed, a company registered for sales tax does not deduct one fifth when it buys ordinary goods from an active taxpayer. A company registered only for income tax is not a registered person under the Sales Tax Act, so clause (viii) does not remove its deduction. The Schedule does not add more detail on this point.

Worked example (illustrative figures)

Margalla Software (Pvt) Ltd, Islamabad, holds an NTN but is not registered for sales tax. It buys office furniture from an active taxpayer manufacturer. Figures are invented; the fractions are those in the Schedule.

1. Value of supply: Rs. 1,000,000. Sales tax on invoice at 18%: Rs. 180,000.
2. Deduction under S. No. 1: Rs. 180,000 / 5 = Rs. 36,000.
3. Sales tax paid to the supplier: Rs. 180,000 - Rs. 36,000 = Rs. 144,000.
4. Total paid to the supplier: Rs. 1,000,000 + Rs. 144,000 = Rs. 1,144,000.
5. Rs. 36,000 is deposited with the government, and a certificate is given to the supplier.

If Margalla instead bought Rs. 500,000 of goods from a supplier that is not an active taxpayer, S. No. 4 would require 5% of gross value: Rs. 500,000 x 5% = Rs. 25,000.

What if the 2015 Rules and the Schedule differ?

Rule 2(3)(ii) of the 2015 edition requires one percent of value on purchases from persons liable to be registered but not registered. S. No. 4 of the Schedule in the 2026 Act sets 5% of gross value for suppliers other than active taxpayers. The later Act text governs the rate; how the Rules were amended after 2015 is not in this corpus.

Common mistakes

• Using the 2015 Rules alone. The rates now come from section 3(7) and the Eleventh Schedule.
• Deducting from every supplier. Clause (viii) and the other exclusions remove many purchases.
• Checking registration instead of active status. S. Nos. 1, 2 and 4 turn on whether the supplier is an active taxpayer.
• Treating this as income tax withholding. Income tax withheld from supplier payments under the Income Tax Ordinance is a separate obligation with its own rates.

What to check in the official text

Read section 3(7), section 2(1A) and the Eleventh Schedule with its exclusions in the Sales Tax Act, and rules 1 to 3 of the 2007 Rules. Check the current consolidated Rules and any SRO issued after 30 June 2015 for the deposit procedure.