Withholding is an act of deduction or collection of tax at source, which has generally been in the nature of an advance tax payment. It is an effective mechanism and important/timely source of revenue. Their contribution is about 41 percent of total direct tax revenues. Increase from Rs.5(b) in 1991 to above Rs 422(b) in 2012 speaks of exponential growth and consequential heavy reliance on withholding taxes in Pakistan.
Under the repealed Income Tax Act, 1922, tax was deducted from two main sources of income; namely, salaries and interest on securities. Over the period of time, Withholding Tax net was extended, by steadily introducing different Provisions in the Tax Laws. The repealed Income Tax Ordinance, 1979, brought in all the provisions of the Income Tax Act, 1922. However, in the 1990s, withholding tax net was expanded extensively by providing for withholding tax on a wider variety of transactions and making most of them presumptive. Provisions of the Income Tax Ordinance, 2001, are more or less the same, except for a few changes and additions. Important withholding provisions relate to salary, imports, exports, commission and brokerage, dividend, contracts, profit on debt, utilities, vehicles tax, stock exchange-related provisions and non-residents, etc., with varying rates.