As a textile company or exporter, when must I withhold sales tax from payments to my own suppliers?

A textile company is not only a seller that suffers sales tax withholding. As a buyer it is also a withholding agent, and the Sales Tax Act, 1990 can require it to deduct part of the sales tax from what it pays its own suppliers. Whether it must do so depends on who the supplier is and what is being bought.

What does the law say?

Section 3(7) of the Act says tax “shall be withheld” at the rate in the Eleventh Schedule by persons purchasing goods or services, acting as withholding agents. The Eleventh Schedule Table names the agents, the suppliers and the deduction. The entries a textile company is most likely to meet are:

S. No.	Withholding agent	Supplier	Deduction
1	Government bodies, and companies as defined in the Income Tax Ordinance, 2001	Active taxpayers	1/5th of sales tax as shown on invoice
2	The same agents	Active taxpayer registered as a wholesaler, dealer or distributor	1/10th of sales tax as shown on invoice
4	Companies, associations of persons and individuals as defined in the Income Tax Ordinance, 2001, excluding companies exporting surgical instruments	Persons other than active taxpayers	5% of gross value of supplies
5	Registered persons receiving advertisement services	Person providing advertisement services	Whole of sales tax applicable
14	Registered persons engaged in toll manufacturing	Person other than registered person	Four times of the tax charged on conversion charges

The words “association of persons and individuals” in serial number 4 were added by the Finance Act, 2026, and serial number 14 was also added by that Act.

Which purchases are excluded?

Withholding under the Schedule does not apply to the supplies listed after the Table. They include electrical energy, natural gas, certain petroleum products, vegetable ghee and cooking oil, telecommunication services, goods in the Third Schedule, and supplies by importers who paid value addition tax at import.

The exclusion that matters most for a mill is clause (viii): supplies made by an active taxpayer “to another registered person”, except the supplies at serial numbers 5, 7, 9, 10, 11, 12 and 13. So where a registered mill buys yarn, dyes or packing material from an active registered supplier, serial numbers 1 and 2 do not bite. Serial number 5 (advertisement services) remains, because it is in the exception.

How does it work in practice?

In practice, a registered mill’s everyday withholding duty mostly arises when it buys from a supplier who is not on the active taxpayers list. Serial number 4 then requires a deduction of 5% of the gross value of supplies. The Schedule does not define “gross value of supplies”.

Rule 150ZZI of the Sales Tax Rules, 2006 sets out the agent’s duties:

• say in any advertisement or notice for the purchase that sales tax will be deducted;
• deduct the Schedule amount and pay the supplier the balance;
• if registered for sales tax or federal excise, deposit the withheld amount with the monthly return for the month of purchase, alongside other liability;
• issue the supplier a certificate showing its name and registration number, the goods and the tax deducted.

The proviso to rule 150ZZI(2) says the agent cannot reclaim or deduct the withheld amount as input tax.

Rule 150ZZH(1) says the chapter applies to supplies to withholding agents in the Eleventh Schedule “for the purpose of deduction and deposit of sales tax by persons registered as exporters”. The Rules do not explain whether this wording limits the chapter to exporters or simply names them. The Act and the Schedule themselves make companies withholding agents without regard to export status.

Worked example (illustrative figures)

A Karachi garment export company, registered for sales tax, makes three purchases in one month:

1. Fabric worth Rs. 3,000,000 plus Rs. 540,000 sales tax from an active registered weaver. Clause (viii) excludes this supply, so nothing is withheld.
2. Cartons for Rs. 400,000 gross from a supplier not on the active taxpayers list. Serial number 4 applies: Rs. 400,000 x 5% = Rs. 20,000 withheld. The supplier is paid Rs. 380,000.
3. Advertising services with sales tax of Rs. 90,000 on the invoice. Serial number 5 requires the whole of the sales tax to be withheld, so Rs. 90,000 is deducted.

The company deposits Rs. 110,000 (Rs. 20,000 + Rs. 90,000) with its monthly return and issues certificates to both suppliers. It cannot claim either amount as its own input tax under rule 150ZZI.

What if my mill does toll manufacturing?

Serial number 14 names registered persons engaged in toll manufacturing as agents, the supplier as a “person other than registered person”, and the deduction as “four times of the tax charged on conversion charges”. The Schedule does not say which side of a toll arrangement the unregistered person is on, and the Rules in this corpus, amended to 30 June 2025, predate the entry. The text alone does not settle how it is applied.

Common mistakes

• Withholding from every supplier. Clause (viii) removes an active taxpayer’s supplies to a registered buyer from serial numbers 1 and 2.
• Claiming withheld tax as input tax. The proviso to rule 150ZZI(2) forbids it.
• Overlooking advertisement services. Serial number 5 is carved back into withholding even for active suppliers.

What to check in the official text

• Section 3(7) of the Sales Tax Act, 1990 and the full Eleventh Schedule, including clauses (i) to (ix) after the Table.
• Rules 150ZZH and 150ZZI of the Sales Tax Rules, 2006.
• The supplier’s status on the active taxpayers list on the date of purchase.
• Any later amendment of the Rules to reflect serial number 14, which is not in this corpus.