Understanding Withholding Tax (WHT) for Startups and Freelancers
Withholding Tax (WHT) is one of the most misunderstood parts of Pakistan’s tax system — especially for startups, small business owners, and freelancers. Whether you’re offering software development, marketing, or consulting services, you’ve probably noticed deductions in your bank receipts or client payments marked as “Withholding Tax” or “Advance Tax.”
Understanding how this system works helps you avoid overpayment, stay compliant with the Federal Board of Revenue (FBR), and ensure you get credit for the taxes you’ve already paid.
What Is Withholding Tax (WHT)?
Withholding Tax is a tax collected in advance at the time of payment by the payer on behalf of the recipient. It’s not an additional tax — rather, it’s a prepayment of your final income tax liability.
For example, when a client, company, or bank pays you, they deduct a small percentage (WHT) and deposit it directly into FBR’s account under your National Tax Number (NTN). When you file your annual tax return, that amount appears as an adjustable tax credit, reducing your final payable tax.
Why WHT Matters for Startups and Freelancers
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It directly affects your cash inflows since a percentage is deducted before you receive payment.
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It determines your tax liability at year-end (you can adjust it against your total tax).
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If you remain an inactive filer, the WHT rate doubles — significantly reducing your income.
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It ensures your compliance with FBR and helps maintain your Active Taxpayer status (ATL).
Common Scenarios Where WHT Applies
| Scenario | Type of WHT | Typical Rate (2025) | Who Deducts It |
|---|---|---|---|
| Freelancers receiving payment from Pakistani clients | Payment for services (Section 153) | 3% to 10% | The client or company |
| Startups providing IT or consulting services to local clients | Services income | 3% (if active filer) / 6% (if inactive) | The client company |
| Online platforms (Upwork, Fiverr, Payoneer) | Export income | Usually exempt under Section 65F if PSEB registered | Not deducted locally |
| Bank transactions | Cash withdrawal or transfer | 0.6% (non-filers) | The bank |
| Property rent or commission income | Rent, brokerage | 5% to 10% | The tenant or agent |
| Company contracts | Supply or contracts | 4.5% to 8% | The withholding agent (customer) |
How Startups and Freelancers Can Claim WHT Adjustments
1. Verify Your WHT Deduction
Log in to the FBR IRIS portal → Go to “Payments – Tax Credits” → Check your withholding tax statement (Annexure A).
All WHT deducted by clients or banks will appear there automatically if deposited correctly.
2. File Annual Income Tax Return
When filing your tax return, declare your income under the correct head (Business Income / Professional Income) and include your WHT deductions.
FBR’s system automatically adjusts the credited tax, reducing your payable tax.
3. Stay on the Active Taxpayer List (ATL)
If you file returns every year before the due date, your name remains on FBR’s ATL. Active filers enjoy lower WHT rates, while inactive filers face double rates.
4. Keep Digital Proofs
Always keep the following records for verification:
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Payment slips and invoices
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Bank credit advices showing WHT deduction
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Client contracts or service agreements
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eFBR challans showing tax deposited under your NTN
Example: How WHT Adjustment Works
Let’s say a startup earns PKR 2,000,000 during the year. Clients deduct PKR 60,000 as WHT and deposit it in FBR’s account.
At year-end, your actual income tax liability is PKR 75,000.
| Description | Amount (PKR) |
|---|---|
| Total tax payable | 75,000 |
| Less: Withholding tax deducted | (60,000) |
| Final tax payable | 15,000 |
If your total WHT exceeds your tax liability, you can carry forward the balance or apply for a refund through FBR IRIS.
Key Withholding Tax Rates in 2025
| Category | Active Filer Rate | Inactive Filer Rate | Legal Reference |
|---|---|---|---|
| Services (Section 153) | 3% | 6% | Income Tax Ordinance, 2001 |
| Contracts | 4.5% | 9% | Section 153(1)(c) |
| Supplies | 4% | 8% | Section 153(1)(a) |
| Bank Withdrawals (above Rs. 50,000) | Exempt | 0.6% | Section 231A |
| Dividends | 15% | 30% | Section 150 |
WHT Compliance for Startups
Startups often overlook withholding responsibilities when they themselves pay vendors, freelancers, or consultants.
If your startup is incorporated (Pvt Ltd) or registered as an AOP, you are a withholding agent and must:
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Deduct tax when making payments to suppliers or freelancers.
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Deposit the deducted amount into FBR using PSID (Payment Slip ID).
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File monthly withholding statements via the IRIS portal.
Failure to deposit WHT can result in:
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Penalties up to 10% of the unpaid tax
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Disallowance of related expenses in tax computation
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Audit or legal action by FBR
WHT for Freelancers Working with Foreign Clients
Freelancers earning in foreign currency through Payoneer or bank remittance are generally exempt from WHT, provided:
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The income is received via formal banking channels.
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The taxpayer is registered with PSEB.
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They file returns on time and claim tax credit under Section 65F.
This means IT exporters and remote service providers can enjoy 100% tax credit while remaining compliant with FBR and PSEB.
Tips to Minimize Withholding Tax Impact
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Always remain on ATL by filing returns yearly.
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Use registered business accounts for payments — avoid personal accounts.
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Collect WHT certificates from clients who deduct tax.
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Cross-check all deposits in IRIS withholding statements before filing returns.
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Register your business with SECP and PSEB if you’re offering IT services — it opens access to full or partial tax exemptions.
Common Mistakes to Avoid
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Ignoring WHT deduction entries in IRIS — causing mismatch in FBR data.
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Receiving payments without valid NTN — your WHT can’t be claimed later.
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Using personal bank accounts for export income — may disqualify tax credits.
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Late filing of returns — results in loss of credit adjustment and higher rates.
Final Thoughts
Withholding Tax may seem like a burden at first, but for startups and freelancers, it’s actually a prepaid tax system designed to simplify compliance. By tracking your deductions, filing returns on time, and maintaining ATL status, you can easily offset your WHT against your final tax or even get refunds if you’ve overpaid.
Understanding how WHT works — and using it strategically — ensures your business stays compliant, cost-efficient, and trusted by clients and financial institutions alike.
