Who pays advance tax when I lease a car through a bank, and can I claim it in my own return?

What does the law say?

Section 231B(1A) of the Income Tax Ordinance, 2001, as amended to 30 June 2026, reaches a wide group of lessors: a leasing company, a scheduled bank, a non-banking financial institution, an investment bank, a modaraba or a development finance institution, “whether shariah compliant or under conventional mode”. When one of them leases a motor vehicle to a person whose name is not on the Active Taxpayers’ List, “either through ijara or otherwise”, it must collect advance tax “at the rate of four per cent of the value of the motor vehicle”.

Three other parts of the Ordinance finish the picture:

• Section 231B(5): advance tax collected under section 231B is adjustable. The same subsection excludes the Federal, Provincial and Local Governments, foreign diplomats and diplomatic missions.
• Section 231B(7): for this section, “motor vehicle” includes cars, jeeps, vans, pickups, SUVs, trucks, wagons and similar vehicles. It excludes vehicles used for public transportation, carriage of goods and agriculture machinery, rickshaws, motorcycle rickshaws and vehicles up to 200cc.
• Clause (102) of Part IV of the Second Schedule: section 231B(1A) “shall not apply to light commercial vehicles leased under the Prime Minister’s Youth Business Loan Scheme”.

Who actually pays, and who gets the credit?

The 4% is collected from the lessee, the person the vehicle is leased to. Section 168(1)(b) treats tax collected under Chapter XII (which contains section 231B) as “tax paid by the person from whom the tax was collected”. Section 168(2) then gives that person a tax credit against tax on taxable income for the tax year in which it was collected. So the lessee who paid the 4% claims it in the lessee’s own return, not the bank.

Section 164 backs this up. The collector must give the person from whom tax is collected a copy of the Computerized Payment Receipt (CPR) and a certificate showing the amount collected, and the return must attach the CPR. See the related page on proof of payment.

Other vehicle taxes under section 231B work the same way: credit follows whoever the tax was collected from. Section 231B(3) collects from “the person to whom such sale is made” by the manufacturer, and section 231B(1) collects at registration. The Ordinance does not say, for a leased vehicle, which party those taxes are collected from. That depends on who buys and registers the vehicle, and the credit follows accordingly.

Worked example (illustrative figures)

Sana runs a boutique in Lahore. She leases a car valued at Rs. 4,500,000 through a bank’s ijara facility in September 2026, which falls in tax year 2027.

1. Sana is not on the Active Taxpayers’ List at the time of leasing. The bank collects 4% of Rs. 4,500,000 = Rs. 180,000 under section 231B(1A).
2. She files her return for tax year 2027. Suppose (an invented figure) the tax on her taxable income comes to Rs. 250,000. She claims the Rs. 180,000 as a credit under section 168: Rs. 250,000 - Rs. 180,000 = Rs. 70,000 still payable.
3. Had she been on the list when the car was leased, section 231B(1A) would not have applied, and the bank would have collected nothing under it.

What happens when the lease ends and the car moves into my name?

Section 231B(2) requires the Excise and Taxation registering authority to collect advance tax “at the time of transfer of registration or ownership” of a motor vehicle, at the rates in clause (2) of Division VII of Part IV of the First Schedule. The text read for this page contains no exception for a transfer at the end of a lease, so on its words a transfer from the bank to the lessee is a transfer like any other. Two limits apply:

• The proviso to section 231B(2) stops collection on transfers “after five years from the date of first registration in Pakistan”.
• A proviso to Division VII, clause (2) reduces the rate by ten percent each year from the date of first registration.

For a person not on the Active Taxpayers’ List, rule 1 of the Tenth Schedule increases section 231B tax “by two hundred percent of the rate specified in First Schedule”. The 4% lease rate is written into section 231B(1A) itself rather than in the First Schedule, and the text does not say clearly whether that increase reaches it. This page does not settle that point.

Common mistakes

• Assuming only conventional leases are covered. Section 231B(1A) names ijara and shariah-compliant lessors expressly.
• Assuming the bank keeps the credit. Section 168 gives the credit to the person the tax was collected from, which for the 4% is the lessee.
• Assuming every Youth Loan vehicle is exempt. Clause (102) covers only light commercial vehicles leased under that scheme, and only section 231B(1A).
• Forgetting the lease-end transfer. Section 231B(2) can apply again when ownership passes to the lessee within five years of first registration.

What to check in the official text

Read section 231B(1A), (2), (5) and (7), clause (102) of Part IV of the Second Schedule, and sections 164 and 168. Division VII of Part IV of the First Schedule and rule 1 of the Tenth Schedule are in the official PDF. Section 231B(1A) does not say how “the value of the motor vehicle” is fixed. Division VII has a valuation proviso (import value, invoice value or auction value), but it is written for the Division VII table, so the text does not settle whether it governs the lease rate.