How much income tax is deducted under section 153 when a manufacturer supplies goods, and is it minimum tax or adjustable?

When a spinning mill sells yarn to a weaving company, the buyer does not pay the full invoice. It deducts income tax under section 153 of the Income Tax Ordinance, 2001 and pays that amount to the government in the mill’s name. The Ordinance, amended to 30 June 2026, fixes the rates for tax year 2027, which covers payments from 1 July 2026 to 30 June 2027.

What does the law say?

Section 153(1)(a) requires every “prescribed person” paying a resident person for the sale of goods, including toll manufacturing, to deduct tax at the rate in Division III of Part III of the First Schedule. The deduction is made from the gross amount payable, including sales tax, and it applies to advances as well as full or part payments. It does not apply where payments are less than Rs. 75,000 in aggregate during a financial year.

A “prescribed person” under section 153(7) includes the Federal Government, a company, an association of persons constituted by or under law, a non-profit organisation, and an association of persons or individual with turnover of one hundred million rupees or more in any preceding tax year. It also covers a sales tax registered person with turnover of one hundred million rupees or more in any preceding tax year.

What are the rates for tax year 2027?

Paragraph (1) of Division III sets these rates on payments for goods:

Supply	Company	Other than a company
Sale of goods other than toll manufacturing	5%	5.5%
Toll manufacturing	9%	11%
Sale of rice, cotton seed or edible oils	1.5%	1.5%

Rule 1 of the Tenth Schedule, given effect by section 100BA, increases the rate by one hundred percent where the recipient does not appear in the active taxpayers’ list. Rule 10 lists the provisions this does not apply to, and section 153 is not among them. So for a supplier off the list, 5% becomes 10% and 5.5% becomes 11%.

Is the deduction minimum tax or adjustable?

Section 153(3) says the tax deductible under sub-section (1) is minimum tax on the income of a resident person. Its proviso then says tax deducted under clause (a) is not minimum tax where payments for sale or supply of goods are received by:

• a company being a manufacturer of such goods; or
• a public company listed on a registered stock exchange in Pakistan.

For those two, the deduction is an ordinary tax credit. Section 168 treats tax deducted as tax paid, allows it as a credit against tax due for the tax year of deduction, and says any credit that cannot be used for the year is refunded to the taxpayer.

For everyone else, including a trader, an individual or an association of persons running a weaving unit, the deduction is minimum tax. The Explanation to section 153(3) says the income it relates to “means the amount on which tax is deductible”. Section 153(4) also allows a reduced-rate certificate, capped at eighty percent of the rate, only where the tax is not minimum.

“Manufacturer” is defined in section 153(7) as a person engaged in production or manufacturing, including converting materials into a distinct article, or assembling, mixing, cutting or preparing goods.

Worked example (illustrative figures)

A Faisalabad spinning company, on the active taxpayers’ list, supplies yarn it has spun to a garment exporter. The invoice is Rs. 5,000,000 plus Rs. 900,000 sales tax.

1. Gross amount payable, including sales tax: Rs. 5,000,000 + Rs. 900,000 = Rs. 5,900,000.
2. Rate for a company, sale of goods: 5%.
3. Tax deducted: Rs. 5,900,000 x 5% = Rs. 295,000.
4. Because the spinner is a company manufacturing the yarn, the Rs. 295,000 is not minimum tax and is credited against its tax for tax year 2027 under section 168.

If the same yarn were supplied by a yarn trader operating as an individual, the rate would be 5.5%: Rs. 5,900,000 x 5.5% = Rs. 324,500, treated as minimum tax. If that trader were not on the active taxpayers’ list, the rate would double to 11%: Rs. 5,900,000 x 11% = Rs. 649,000.

What if the buyer is an exporter paying for processing?

Payments by an exporter or export house for stitching, dyeing, printing, embroidery, washing, sizing and weaving services fall under section 153(2), at the rate in Division IV of Part III, not the goods rate. Toll manufacturing is covered by the separate higher rates in the table above.

Common mistakes

• Applying the rate to the value before sales tax. Section 153(1) uses the gross amount including sales tax.
• Assuming every manufacturer gets adjustable treatment. The proviso to section 153(3) covers a company manufacturing the goods, not an individual or association of persons.
• Ignoring the active list. Rule 1 of the Tenth Schedule doubles the rate for a supplier off the list.

What to check in the official text

• Section 153(1), (3), (4) and (7) of the Income Tax Ordinance, 2001.
• First Schedule, Part III, Division III, paragraph (1).
• Section 100BA and the Tenth Schedule, rules 1 and 10.
• Section 168 for how the credit is applied.