How can a manufacturer get an exemption or reduced-rate certificate so buyers or customs deduct less income tax?

A manufacturer pays income tax in advance at several points: at import, when buyers pay for goods, and through utility bills. When those amounts run ahead of the tax the business will actually owe, the Income Tax Ordinance, 2001 offers certificates that tell the collecting or deducting person to take less, or nothing.

What does the law say?

Section 159(1) applies to an amount to which Division II or Division III of Part V of Chapter X, or Chapter XII, applies. Division II is advance tax paid to a collection agent, which is where section 148 on imports sits. Division III is deduction at source, which includes section 153 on payments for goods and services. Chapter XII holds other advance taxes, including the one collected through electricity bills.

Where the Commissioner is satisfied that the amount is:

• (a) exempt from tax under the Ordinance,
• (b) subject to tax at a rate lower than the First Schedule rate, or
• (c) subject to a hundred percent tax credit under the Ordinance,

the Commissioner shall, on a written application in the prescribed form, issue an exemption or lower rate certificate.

Three provisos, added by the Finance Act, 2021, apply to companies:

1. The Commissioner shall issue the certificate within fifteen days of the company filing its application.
2. On expiry of fifteen days, the Commissioner is deemed to have issued the exemption certificate, and Iris processes and issues it automatically.
3. The Commissioner may modify or cancel a certificate issued automatically by Iris, for reasons recorded in writing, after giving an opportunity of being heard.

Section 159(2) is the other side. The person collecting or deducting tax must take the full amount unless a certificate is in force, and if one is, must comply with it.

How does section 153(4) fit in?

Section 153(4) is a separate power for payments under section 153(1). The Commissioner may, where the tax deductible is not minimum tax, allow payment after deduction at a reduced rate. The reduction “shall not exceed eighty percent of the rate specified in the said Division”, except for public limited companies, where the Commissioner may allow payment without any deduction. A company gets the reduced rate certificate within fifteen days if its advance tax liability has been discharged, and it is otherwise deemed issued through Iris.

This matters because section 153(3)(a)(i) says tax deducted on sale or supply of goods is not minimum tax where the recipient is a company that manufactures those goods. So a manufacturing company selling its own yarn or fabric is the kind of recipient section 153(4) can reach.

Where does section 148 come in?

Section 148(1) has customs collect advance tax from importers. Section 148(7) makes that tax minimum tax, but says the sub-section does not apply to imports of goods on which tax is collected “by an industrial undertaking for its own use”. A mill importing dyes, chemicals or fibre for its own production is therefore outside the minimum tax rule in section 148(7), and section 159(1) is the provision under which the mill may apply for a certificate, if the Commissioner is satisfied that one of its conditions is met.

Worked example (illustrative figures)

A weaving company in Faisalabad sells fabric it manufactures to a Lahore garment company for Rs. 10,000,000, including sales tax.

1. Rate under clause (1)(b)(i) of Division III of Part III for a company, other than toll manufacturing: 5 percent of the gross amount payable.
2. Full deduction: Rs. 10,000,000 x 5 percent = Rs. 500,000.
3. The largest reduction section 153(4) allows is eighty percent of the 5 percent rate, which is 4 percentage points, leaving 1 percent.
4. Deduction at that lowest reduced rate: Rs. 10,000,000 x 1 percent = Rs. 100,000.

The actual rate in any certificate is the Commissioner’s decision. If the company were a public limited company, section 153(4) lets the Commissioner allow payment with no deduction.

What if the Commissioner later cancels an Iris certificate?

The third proviso to section 159(1) lets the Commissioner modify or cancel the automatically issued certificate, with written reasons and a hearing. Once it is cancelled, section 159(2) returns the buyer or collector to deducting the full amount.

Common mistakes

• Assuming every business gets the fifteen-day rule. The deemed issue in section 159(1) and section 153(4) applies to companies.
• Expecting nil deduction under section 153(4). Only public limited companies can be allowed payment without deduction. For others the reduction is capped at eighty percent of the rate.
• Forgetting the certificate has to be in force. Section 159(2) ties the buyer’s duty to a certificate that is in force at the time.

What to check in the official text

• Section 159(1) and (2), with its three provisos, of the Income Tax Ordinance, 2001, as amended to 30 June 2026.
• Section 153(3) and (4), and section 148(1) and (7).
• Division III of Part III of the First Schedule for the section 153 rates.
• The prescribed application form is set by rules. The Income Tax Rules, 2002 in this corpus are updated only to 24 November 2023.