Which taxes withheld from my business, such as advance tax on my purchases, are adjustable and which are final?

What does the law say?

The Income Tax Ordinance, 2001 has one general rule and a short list of exceptions.

The general rule: credit under section 168. Section 168(1)(b) treats tax collected under Division II of Part V of Chapter X or Chapter XII, or deducted under Division III or Chapter XII, as tax paid by the person from whom it was collected or deducted. Section 168(2) then allows that person a tax credit for it when computing tax due on taxable income for the tax year in which it was collected or deducted. In everyday terms, this is “adjustable” tax: it counts as a payment toward your year-end bill.

The exceptions: final tax. Section 168(3) says no credit is allowed for tax that is a final tax under the provisions it lists. The current list is short and mostly outside ordinary trading. It covers items such as prizes and winnings, commission paid to petrol pump operators, export of services, certain payments to non-residents, and bonus shares. Section 169 describes what final means. Under section 169(2):

• the income is not charged to tax under any head in computing taxable income;
• no deduction is allowed for expenses incurred in earning it;
• the income is not reduced by deductible allowances or set-off of losses;
• the tax is not reduced by any tax credit; and
• there is no refund unless the tax collected or deducted exceeds the amount for which the taxpayer is chargeable.

What about advance tax on my purchases?

Two sections in Chapter XII make suppliers collect advance tax from small buyers, and both say directly that it is creditable.

Section	Who collects	From whom	Rate (First Schedule, Part IV)	Treatment
236G	Manufacturer or commercial importer	Distributors, dealers and wholesalers	Division XIV: 0.7% for fertilizers, 0.1% for other goods (fertilizer is 0.25% where the buyer is on both the income tax and sales tax active taxpayers’ lists)	Section 236G(2): credit allowed against the distributor’s, dealer’s or wholesaler’s tax due for the year
236H	Manufacturer, distributor, dealer, wholesaler or commercial importer	Retailers (and, from a distributor or dealer, another wholesaler)	Division XV: 0.5% of the gross amount of sales	Section 236H(2): credit allowed against the retailer’s tax due for the year

These rates are the ones in force for tax year 2027 (1 July 2026 to 30 June 2027) in the text amended to 30 June 2026.

Worked example (illustrative figures)

Bilal owns a general store in Peshawar. In tax year 2027 he buys Rs. 7,200,000 of stock from distributors, who each collect advance tax under section 236H.

1. Advance tax collected: Rs. 7,200,000 x 0.5% = Rs. 36,000.
2. Suppose, when he files his return, the tax on his taxable business income comes to Rs. 95,000.
3. Section 236H(2) and section 168(2) give a credit of Rs. 36,000.
4. Tax still payable with the return: Rs. 95,000 minus Rs. 36,000 = Rs. 59,000.

If instead the tax on his income were Rs. 20,000, the credit of Rs. 36,000 would exceed it by Rs. 16,000. Section 168(5) says a credit that cannot be applied for the year is refunded to the taxpayer.

Now compare a final tax. Suppose Bilal also received a prize from which tax was deducted as a final tax. Under section 169(2), that prize is left out of his taxable income, the tax on it cannot be used against the tax on his shop’s profit, and it is not refunded unless it is more than he is chargeable to.

What if…?

What if tax is deducted from payments I receive from companies? That is section 153. It is not on the section 168(3) list. Section 153(3) calls the tax deductible under it a minimum tax, which works differently from both adjustable and final tax.

What if I have no proof the supplier collected the tax? Section 168(2) gives credit for tax that “has been collected”. Keep the supplier’s invoice showing the advance tax so the credit can be supported.

Common mistakes

• Treating every withholding as final. Most taxes collected or deducted are creditable under section 168(2). Final treatment applies only where section 168(3) and section 169 say so.
• Forgetting the tax year. Credit under section 168(2) and sections 236G(2) and 236H(2) is for the tax year in which the tax was collected, not the year you happen to find the receipt.
• Deducting expenses against final-tax income. Section 169(2)(b) allows no deduction for expenditure incurred in deriving income taxed as final.

What to check in the official text

Read section 168, especially sub-sections (2), (3) and (5), for the list of final taxes as it stands on 30 June 2026. Read section 169(2) for what final treatment means. For purchases, read sections 236G and 236H with Divisions XIV and XV of Part IV of the First Schedule. The Tenth Schedule sets higher collection rates for persons not on the active taxpayers’ list, so check it if you are not on that list.