Does a company deduct withholding tax when it pays my restaurant for food or catering?

When a company pays a restaurant’s invoice, the answer turns on the method of payment. Section 153 of the Income Tax Ordinance, 2001 makes companies deduct tax from payments for goods and services, and Part IV of the Second Schedule carves out restaurants paid in cash for food. A bank-paid catering invoice falls back under the ordinary rule.

What does the law say?

Section 153(1) requires every prescribed person making a payment, in full or in part and including an advance, to a resident person:

• for the sale of goods, except where payment is less than seventy-five thousand rupees in aggregate during a financial year;
• for the rendering of or providing of services, except where payment is less than thirty thousand rupees in aggregate during a financial year;
• on the execution of a contract,

to deduct tax from the gross amount payable, including sales tax, at the rate in Division III of Part III of the First Schedule.

Section 153(7) defines “prescribed person”. It includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organisation, a foreign contractor or consultant, a consortium or joint venture, and individuals, associations of persons and sales tax registered persons with turnover of one hundred million rupees or more in any of the preceding tax years.

Clause (46AA) of Part IV of the Second Schedule lists recipients to whom “the provisions of section 153 shall not apply”. Sub-clause (vii) is “hotels and restaurants receiving payments in cash for providing accommodation or food or both, as the case may be”.

What does that mean for a restaurant?

How the company pays for food	Section 153 deduction?
Cash	No, clause (46AA)(vii) applies
Cheque, bank transfer or other non-cash method	Yes, if the payer is a prescribed person and the yearly threshold is crossed

The clause is tied to the form of payment, not to the type of business alone. A restaurant does not escape section 153 on a bank-paid invoice simply because it is a restaurant.

Which rate applies to a bank-paid invoice?

This is where the law is not clear. Division III of Part III has one rate for goods and several for services, for tax year 2027:

Category in Division III	Rate
Sale of goods (other than toll manufacturing), recipient a company	5% of gross amount
Sale of goods (other than toll manufacturing), other recipients	5.5% of gross amount
Services listed in paragraph (2)(i), which include “hotel services”	7% of gross amount
Services other than those in sub-paragraphs (i) to (iv)	14% of gross amount

The Ordinance, as held in this corpus, does not say whether a restaurant supplying cooked food or catering is selling goods or providing a service. Restaurant and catering services are not named in paragraph (2)(i). The text does not settle which row applies, and this page does not choose one.

Worked example (illustrative figures)

Tandoor House, a restaurant run by a sole proprietor in Blue Area, Islamabad, caters lunch for a private limited company. The invoice for one month is Rs. 400,000, including sales tax. The company pays by bank transfer, and its payments to Tandoor House during the year are well above both thresholds.

• Clause (46AA)(vii) does not apply, because the payment is not in cash.
• If the payment is treated as a sale of goods to a recipient that is not a company: 5.5% x Rs. 400,000 = Rs. 22,000 deducted, Rs. 378,000 paid.
• If it is treated as a service outside paragraph (2)(i) to (iv): 14% x Rs. 400,000 = Rs. 56,000 deducted, Rs. 344,000 paid.

The gap between the two readings is Rs. 56,000 - Rs. 22,000 = Rs. 34,000 on a single invoice, which is why the classification matters.

The same company then pays Rs. 25,000 in cash for a staff dinner at the restaurant. Clause (46AA)(vii) applies, so section 153 does not.

What if the payer is a small business or an individual?

Section 153 applies only to prescribed persons. An individual or an association of persons below the one hundred million rupee turnover test in section 153(7), and not otherwise in the list, is not required to deduct under section 153.

What if the restaurant wants a lower deduction?

Section 153(4) lets the Commissioner allow deduction at a reduced rate, but only where the tax deductible is not minimum tax. Section 153(3) makes tax deductible under sub-section (1) a minimum tax on a resident person’s income, with exceptions for goods sold by manufacturer companies and listed public companies. The reduced rate route is therefore narrow for most restaurants.

Common mistakes

• Assuming all restaurant income is outside section 153. The clause (46AA)(vii) carve-out is limited to payments received in cash.
• Ignoring sales tax in the base. Section 153(1) applies the rate to the gross amount payable including sales tax.
• Treating a card payment as cash. The clause says “in cash” and does not define it. Whether a card payment counts is not addressed in the text.

What to check in the official text

Read section 153 of the Income Tax Ordinance as amended to 30 June 2026, clause (46AA) of Part IV of the Second Schedule, and Division III of Part III of the First Schedule. Sales tax on restaurant services is provincial, or in Islamabad falls under the ICT (Tax on Services) Ordinance; provincial laws are outside this corpus.