How much tax will a local client withhold under section 153 when it pays our software house for IT services?

What does the law say?

Section 153(1)(b) requires every prescribed person that pays a resident person “for the rendering of or providing of services” to deduct tax at the time of payment, from the gross amount payable including sales tax, at the rate in Division III of Part III of the First Schedule. Advance payments are covered too.

For tax year 2027, paragraph (2)(i) of Division III sets 7% of the gross amount payable for a list of services that includes “software development services, IT services and IT enabled services as defined in section 2”. A proviso to that sub-paragraph then says: “the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2.” So the working rate for a software house is 4%.

What counts as IT services and IT enabled services?

Section 2 defines both terms, each as a list that is “not limited to” the items named:

• IT services include software development, software maintenance, system integration, web design, web development, web hosting and network design.
• IT enabled services include inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry, cloud computing services, data storage services, locally produced television programmes and insurance claims processing.

Software development is named inside the section 2 definition of IT services, so it falls within the 4% proviso.

Who has to deduct?

Only a “prescribed person” under section 153(7). The list includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organization, a foreign contractor or consultant, a consortium or joint venture, an individual or association of persons with turnover of one hundred million rupees or more in any preceding tax year, a sales tax registered person above the same turnover, and builders and developers. A small sole trader client below that turnover is not a prescribed person and does not deduct.

Section 153(1)(b) also excuses a payer whose payments for services to you are “less than thirty thousand Rupees in aggregate, during a financial year”.

Worked example (illustrative figures)

A software house in Karachi builds an inventory app for a private limited company in Faisalabad. The invoice shows:

• Development fee: Rs. 2,000,000.
• Provincial sales tax: Rs. 300,000 (an invented figure; provincial sales tax rates are outside this site).
• Gross amount payable: Rs. 2,300,000.

1. The client is a company, so it is a prescribed person.
2. Its payments for the year are well above Rs. 30,000, so the threshold does not help.
3. Tax to deduct: Rs. 2,300,000 x 4% = Rs. 92,000.
4. Amount actually received: Rs. 2,300,000 minus Rs. 92,000 = Rs. 2,208,000.

When reconciling a short payment of Rs. 92,000 against this invoice, the gap matches a 4% deduction on the gross including sales tax, not on the fee alone (which would be Rs. 80,000).

What if …?

The client deducts 7% instead of 4%. The 7% rate in paragraph (2)(i) is the general rate for the listed services. The 4% proviso applies to IT services and IT enabled services as defined in section 2. The Explanation to paragraph (2)(i) also limits that paragraph’s rates to a service provider whose services are subject to withholding on gross receipts and who “has not agitated taxation of gross receipts before any court of law”.

The service is not IT at all. Services outside the paragraph (2)(i) list and outside the other named sub-paragraphs fall under paragraph (2)(v), at 14% of the gross amount.

The developer is an individual freelancer, not a company. Paragraph (2)(ii) sets 15% for “independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently”. The Division does not state how that sub-paragraph interacts with the 4% proviso for an individual providing IT services. This page does not resolve that point.

Common mistakes

• Applying the rate to the fee only. Section 153(1) uses the gross amount payable including sales tax.
• Assuming every client deducts. Only prescribed persons listed in section 153(7) do.
• Using the pre-2026 figures. The Finance Act, 2026 raised the general paragraph (2)(i) rate from 6% to 7%. The footnotes show the IT proviso rate has been 4% since the Finance Act, 2023 replaced 3%.

What to check in the official text

Read section 153(1), (3) and (7), the definitions of IT services and IT enabled services in section 2, and paragraph (2) of Division III of Part III of the First Schedule, as amended to 30 June 2026. Whether the deduction is adjustable or minimum tax is covered on a separate page.