Withholding Tax vs Advance Tax in Pakistan: Key Differences Every Business Must Know in 2025

What is Withholding Tax (WHT)?

Withholding and Advance Tax in Pakistan are two key mechanisms used by the government to ensure timely collection of income tax. Withholding Tax (WHT) is not a separate tax—it’s a way to collect income tax in advance by deducting it at the time of payment. Whether you’re a startup or an established business, understanding how this system works is essential for compliance and avoiding penalties.

 It’s a tool to make sure the government collects the tax before the taxpayer can potentially avoid it. Learn more in our guide to [NTN Registration in Pakistan: Everything You Need to Know in 2025]

How It Works

Let’s say your startup hires a freelance designer for PKR 100,000.
The law says you must deduct 10% tax (i.e. PKR 10,000) and pay the designer PKR 90,000.

You then:

• Deposit the PKR 10,000 to FBR
  
• Issue a withholding certificate to the freelancer
  
• Record it in your IRIS account

The freelancer can claim this WHT when they file their income tax return. It gets adjusted in their final tax calculation.

Common Situations Where WHT Applies for Startups

*Some foreign payments have WHT deducted automatically by your bank as a regulatory requirement.

Why Withholding and Advance Tax Matter for Businesses

• It affects cash flow — you pay only part of the invoice
  
• You must maintain compliance — wrong WHT practices can lead to penalties
  
• You need to generate & issue WHT certificates
  
• It adds to your corporate responsibility — especially when dealing with vendors and contractors

Tips for Startups Managing Withholding and Advance Tax

Always:

• Check updated withholding tax rates
  
• Keep records of every WHT payment
  
• Use FBR’s IRIS portal to report it properly

What is Advance Tax?

Advance Tax is a way for the FBR to collect your estimated annual income tax in quarterly installments, before the tax year ends. It’s like paying your tax bill in 4 parts throughout the year.

 It is not a separate tax, just advance payment of your income tax.

Who Has to Pay?

If your business is:

• A company
  
• A large AOP (Association of Persons)
  
• Or your estimated annual tax liability exceeds a certain threshold

You are required to estimate your profit for the year and pay advance tax under Section 147 of the Income Tax Ordinance.

Payment Schedule

Calculating Withholding and Advance Tax Accurately

• Estimate your expected annual profit
  
• Use the current corporate tax rate (e.g. 29% for companies)
  
• Divide into 4 equal parts

You can revise your estimate later. Underpayment or overpayment leads to penalties or refunds.

Year-End Adjustment of Withholding and Advance Tax

At the end of the year:

• You file your income tax return
  
• Your actual tax is calculated
  
• You adjust advance tax paid and either:
  
  • Pay the balance (if underpaid)
    
  • Claim a refund (if overpaid)

Benefits

• Reduces year-end tax burden
  
• Builds tax compliance credibility
  
• Keeps you in ATL (Active Taxpayer List)
  

Penalty for Non-Payment

Late or non-payment of advance tax leads to:

• Default surcharge
  
• Penalty under Section 205
  
• Risk of audit or non-ATL status

FAQ