How much sales tax can a company withhold when it buys from a registered distributor, and is it excluded for Third Schedule goods?

When a distributor sells to a company or a government office, part of the sales tax on the invoice may be kept back by the buyer and paid to the government directly. How much depends on who the buyer is, whether the distributor is on the active taxpayers list, and what goods are sold.

What does the law say?

Section 3(7) of the Sales Tax Act, 1990 says the tax shall be withheld at the rate specified in the Eleventh Schedule by any person or class of persons purchasing goods or services, acting as withholding agent. The Eleventh Schedule then sets out who withholds, from which supplier, and how much.

S. No.	Withholding agent	Supplier	Extent of deduction
1	Federal and provincial government departments, autonomous bodies, public sector organizations; companies as defined in the Income Tax Ordinance, 2001	Active Taxpayers	1/5th of sales tax shown on invoice
2	Same as S. No. 1	Active Taxpayer registered as a wholesaler, dealer or distributor	1/10th of sales tax shown on invoice
3	Federal and provincial government departments, autonomous bodies, public sector organizations	Persons other than Active Taxpayers	Whole of the tax involved, or as applicable to supplies on the basis of gross value of supplies
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

The words “association of persons and individuals” in S. No. 4 were added by the Finance Act, 2026.

An “active taxpayer” is defined in section 2(1A). It is a registered person who is not blacklisted or suspended, has not missed the monthly sales tax return by the due date for two consecutive tax periods, and has filed the income tax return and withholding statements the definition names.

When does withholding not apply?

The Schedule lists goods and supplies to which withholding “shall not be applicable”. Two matter most to distributors:

• Clause (vi): goods specified in the Third Schedule. A buyer does not withhold under the Eleventh Schedule on goods listed there.
• Clause (viii): supplies made by an Active Taxpayer to another registered person, except the supplies in S. Nos. 5, 7, 9, 10, 11, 12 and 13, which cover advertisement services, lead and scrap batteries, gypsum and limestone flux, coal, waste paper, plastic waste, and crush stone and silica.

Read together, serial 2 and clause (viii) mean the 1/10th deduction reaches an active distributor’s sales to the listed buyers that are not themselves registered persons. The Schedule does not state this in one place; it follows from the two provisions side by side.

The other exclusions cover electricity, natural gas, certain petroleum products, vegetable ghee and cooking oil, telecommunication services, supplies by importers who paid value addition tax at import, and certain supplies to low cost housing schemes.

How is it collected and credited?

Rule 150ZZI of the Sales Tax Rules, 2006 makes the buyer announce in its advertisement or notice that sales tax will be deducted, deduct the Eleventh Schedule amount, pay the balance to the supplier, deposit the deduction, and issue a certificate to the supplier.

Rule 150ZZJ requires the distributor to issue a sales tax invoice as the Act stipulates and to file its monthly return taking credit of the tax deducted. Rule 18(4A) adds a condition: if a supplier declares tax withheld but does not declare the matching sale to that withholding agent, neither the withheld amount nor the reduction in output tax is allowed.

Worked example (illustrative figures)

Awan Distributors in Rawalpindi is an active taxpayer registered as a distributor. It supplies taxable goods, not in the Third Schedule, to a federal government department that is not a registered person. The value of supply is Rs. 2,000,000. The figures are invented; the 18% rate is from section 3(1) and the fraction from S. No. 2.

1. Sales tax on invoice: 18% of Rs. 2,000,000 = Rs. 360,000.
2. Withheld by the department: 1/10th of Rs. 360,000 = Rs. 36,000.
3. Tax paid to the distributor: Rs. 360,000 minus Rs. 36,000 = Rs. 324,000.
4. Total paid to the distributor: Rs. 2,000,000 + Rs. 324,000 = Rs. 2,324,000.
5. In its return the distributor declares Rs. 360,000 output tax and takes credit for the Rs. 36,000 withheld.

Variation. If the same goods were supplied to a company by a distributor who is not an active taxpayer, S. No. 4 applies at 5% of gross value of supplies. The Schedule does not define “gross value”. Read as the value of Rs. 2,000,000 before tax, 5% is Rs. 100,000. Read as the invoice total of Rs. 2,360,000, 5% is Rs. 118,000. This site does not decide which reading is right.

Common mistakes

• Withholding on Third Schedule goods. Clause (vi) excludes them.
• Applying 1/5th to a distributor. S. No. 2 sets 1/10th for an Active Taxpayer registered as a wholesaler, dealer or distributor.
• Declaring the credit without declaring the sale. Rule 18(4A) disallows both.

What to check in the official text

Read section 3(7), the definition in section 2(1A), and the Eleventh Schedule with the clauses after its Table in the Sales Tax Act, 1990 as amended to 30 June 2026. Then read rules 150ZZI and 150ZZJ and rule 18 of the Sales Tax Rules, 2006, held here as amended to 30 June 2025. Whether a supplier is active on a given date is shown on the Board’s active taxpayers list, which this site does not hold.