Why is withholding on our IT services doubled when our company is not on the Active Taxpayers List?

The doubling comes from the Tenth Schedule to the Income Tax Ordinance. Section 100BA says that deduction of tax from a person not appearing on the active taxpayers’ list is determined under the Tenth Schedule, and rule 1 of that Schedule raises the rate by one hundred percent. On IT services in tax year 2027, a client deducts 8% instead of 4%.

What does the law say?

Section 100BA(1) says the collection or deduction of advance income tax, and the computation of income and tax, for a person not appearing on the active taxpayers’ list “shall be determined in accordance with the rules in the Tenth Schedule”. Section 100BA(2) gives the Tenth Schedule effect notwithstanding anything to the contrary in the Ordinance.

Rule 1 of the Tenth Schedule reads, in part: where tax is to be deducted or collected under any provision of the Ordinance from persons not appearing in the active taxpayers’ list, the rate “shall be increased by hundred percent of the rate specified in this Ordinance”. The provisos set different figures for certain advance taxes on property transactions and on sales to distributors and retailers. None of them concerns section 153.

Rule 10 lists sections to which the Schedule does not apply. The list includes tax deducted from salary, some payments to non-residents, tax on exports of goods and, in clause (ca), tax under section 154A on exports of services. Section 153 is not on the list, so rule 1 applies to deductions from payments for services.

How does it work in practice?

The prescribed person paying your invoice applies the Division III rate and then increases it under rule 1. For IT services and IT-enabled services as defined in section 2, the Division III proviso sets 4%, so the increased rate is 8%. For services in the 7% list, the increased rate is 14%.

Export proceeds are treated differently. Section 154A requires the bank to deduct tax on proceeds from “exports of computer software or IT services or IT enabled services” and other exported services. Clause (ca) of rule 10 says the Tenth Schedule does not apply to tax collected or deducted under section 154A, so the export rate is not doubled.

Worked example (illustrative figures)

Cloudnine Labs (Pvt) Ltd in Islamabad was incorporated recently and did not appear on the active taxpayers’ list when a Rawalpindi company paid it Rs. 1,500,000 for web development in tax year 2027.

1. Division III rate for IT services: 4%.
2. Increase under rule 1: 4% + (100% x 4%) = 8%.
3. Tax deducted: Rs. 1,500,000 x 8% = Rs. 120,000.
4. At the normal rate the deduction would have been Rs. 1,500,000 x 4% = Rs. 60,000.
5. Extra tax because of the list status: Rs. 120,000 - Rs. 60,000 = Rs. 60,000.

If Cloudnine also realised Rs. 4,000,000 of export proceeds through a bank that month, the section 154A deduction on those proceeds would be at the normal rate, because rule 10(ca) excludes section 154A.

What happens to the extra tax once we file?

Rule 3 says that where tax was deducted under rule 1 and the person does not file a return by the due date (or as extended by the Board), the Commissioner makes a provisional assessment within sixty days, imputing income from the tax deducted. Rule 4(1) says that provisional assessment becomes final forty-five days after it is served.

Rule 4(2) says the provisional assessment abates if the returns and wealth statement for that year and the preceding year are filed within forty-five days of receiving the order. Rule 4(3) then provides that where returns have been filed before a provisional assessment, or under rule 4(2), the tax deducted under rule 1 “shall be adjustable against the tax payable in the return filed for the relevant tax year”.

Section 169(4) says the same for final taxes: the final tax is the First Schedule rate, and the excess collected under the Tenth Schedule is adjustable if the return is filed before finalization of assessment under rule 4. Section 153(3) makes the deduction on services a minimum tax rather than a final tax, so for IT services the adjustment runs through rule 4(3).

What if our company was not required to file a return?

Rule 2 lets the withholding agent, if satisfied that the person was not required to file a return of income, give the Commissioner an electronic notice before deducting. The Commissioner has thirty days to accept the contention or direct deduction under rule 1. If no order is passed in thirty days, the contention is treated as accepted.

What if we are on the list but filed late?

Section 100BA(1) still refers to persons on the list who have not filed by the due date. The rule in the Tenth Schedule that set rates for them, rule 1A, was omitted by the Finance Act, 2026. The Schedule held in this corpus now contains no separate rate for that group.

Common mistakes

• Assuming export proceeds are doubled too. Rule 10(ca) excludes section 154A.
• Treating the extra tax as lost. Rule 4(3) makes it adjustable when the return is filed in time.
• Ignoring the deadline. A provisional assessment becomes final forty-five days after service if returns are not filed.

What to check in the official text

Read section 100BA, then rules 1, 2, 3, 4 and 10 of the Tenth Schedule in the official PDF. Read section 169(4) for final taxes. The rules that decide who appears on the active taxpayers’ list are outside the scope of this page.