What withholding tax applies to toll manufacturing, such as processing or converting someone else's yarn or fabric?

Many textile units never own the yarn or fabric they work on. A sizing unit sizes a weaver’s yarn, a weaving shed converts a mill’s yarn into greige cloth, or a processing house dyes an exporter’s fabric, and each is paid a conversion charge. The Income Tax Ordinance, 2001 calls this toll manufacturing and deducts tax on it at a higher rate than on an ordinary sale of goods.

What does the law say?

Section 153(1)(a) requires every prescribed person making a payment to 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 words “including toll manufacturing” were inserted by the Finance Act, 2020. The deduction is taken from the gross amount payable, including sales tax, and covers 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.

The Ordinance does not define “toll manufacturing”. Section 153 defines “manufacturer” and “sale of goods”, but not the toll term itself.

What are the rates for tax year 2027?

Paragraph (1)(b) of Division III, amended to 30 June 2026 and so applying to tax year 2027, sets:

Recipient	Toll manufacturing	Other sale of goods
Company	9% of gross amount payable	5% of gross amount payable
Other than a company	11% of gross amount payable	5.5% of gross amount payable

Rule 1 of the Tenth Schedule increases the rate by one hundred percent where the recipient does not appear in the active taxpayers’ list. Section 153 is not among the exceptions in rule 10. On that reading, 9% becomes 18% for a company and 11% becomes 22% for others.

Is it minimum tax?

Section 153(3) says the tax deductible under sub-section (1) is minimum tax on the income of a resident person. The Explanation to that sub-section says the income it relates to is the amount on which tax is deductible. For a toll unit run by an individual or an association of persons, the deduction is therefore minimum tax.

The proviso to section 153(3) makes the deduction not minimum tax where payments for sale or supply of goods are received by a company being a manufacturer of such goods, or by a listed public company. A listed public company doing toll work falls within the second limb on its words. For an unlisted company doing toll work, the Ordinance does not say whether processing goods owned by someone else makes it “a manufacturer of such goods”. The text leaves that point open.

Section 153(4) allows the Commissioner to issue a reduced-rate certificate, capped at eighty percent of the rate, only where the tax deductible is not minimum.

Worked example (illustrative figures)

A weaving unit in Faisalabad, run as an association of persons and on the active taxpayers’ list, converts a mill company’s yarn into greige fabric. Its conversion bill for the month is Rs. 1,500,000 plus Rs. 270,000 sales tax.

1. Gross amount payable, including sales tax: Rs. 1,500,000 + Rs. 270,000 = Rs. 1,770,000.
2. Rate for toll manufacturing, other than a company: 11%.
3. Tax deducted by the mill: Rs. 1,770,000 x 11% = Rs. 194,700.
4. Amount paid to the weaving unit: Rs. 1,770,000 - Rs. 194,700 = Rs. 1,575,300.
5. Because the unit is not a company, the Rs. 194,700 is minimum tax under section 153(3).

Had the same work been an ordinary sale of goods, the rate would have been 5.5%: Rs. 1,770,000 x 5.5% = Rs. 97,350.

What if the payer is an exporter?

Section 153(2) separately requires an exporter or export house to deduct tax on payments for stitching, dyeing, printing, embroidery, washing, sizing and weaving services, at the rate in Division IV of Part III. Several of those activities could also be described as toll manufacturing. The Ordinance does not say which provision prevails where an exporter pays for such work, so the text alone does not settle it.

Is there a sales tax rule on toll manufacturing too?

Yes, separately. The Finance Act, 2026 added serial number 14 to the Eleventh Schedule of the Sales Tax Act, 1990. It names “Registered persons engaged in toll manufacturing” as withholding agents, the supplier as a “Person other than registered person”, and the deduction as “four times of the tax charged on conversion charges”. This is sales tax, not income tax, and it does not change the section 153 rates.

Common mistakes

• Using the 5% or 5.5% goods rate for conversion work. Toll manufacturing has its own 9% and 11% rates.
• Deducting on the conversion charge before sales tax. Section 153(1) uses the gross amount including sales tax.
• Assuming the deduction is adjustable. For individuals and associations of persons, section 153(3) makes it minimum tax.

What to check in the official text

• Section 153(1)(a), (2), (3) and (4) of the Income Tax Ordinance, 2001.
• First Schedule, Part III, Division III, paragraph (1)(b).
• Tenth Schedule, rules 1 and 10.
• Eleventh Schedule to the Sales Tax Act, 1990, serial number 14, for the separate sales tax treatment.