ISLAMABAD: Pakistan Advertising Association (PAA) seeks a 50 percent cut in withholding tax on commission and service income levied on advertising agencies.
In its tax proposal submitted to the Chairman of the Federal Board of Revenue for the upcoming budget, the PAA stated that advertising agencies are presently subjected to extremely high withholding tax rates on both commission and service income, resulting in a significant financial burden on an industry already grappling with shrinking margins and rising costs. In a letter to the FBR, the PAA said that the commission income is presently subjected to withholding tax at the rate of 10 percent, whereas service income is subjected to withholding tax at the rate of 6 percent. These rates are excessive and unsustainable when viewed against the actual tax liability of the industry. Since withholding tax is deducted at source on gross amounts, the cumulative deductions invariably and substantially exceed the corporate tax rate of 29 percent applicable on net income. It is therefore proposed that withholding tax on commission income be reduced from 10 percent to 5 percent and withholding tax on service income be reduced from 6 percent to 3 percent.
Under the current tax framework, PAA claimed there exists no provision for refund of excess withholding tax, which means that the surplus amount deducted over and above the actual tax liability is lost entirely to the taxpayer. This results in advertising agencies permanently bearing a tax cost that is significantly higher than their true and lawful tax obligation amounting to nothing less than an inequitable levy on a fully compliant industry.
Presently, the letter stated that the taxes deducted at source inter alia under section 153 and 233 of the Income Tax Ordinance, 2001 are treated as “minimum tax”. The Association respectfully submits that this regime requires reconsideration. It is our considered view that that the basic charging scheme of the Ordinance does not contemplate a “minimum tax regime”. As per section 4, which is the main charging provision in the Ordinance, an income can only be subjected to: (i) (ii) (iii) Normal Tax Regime Separate Tax Regime Final Tax Regime. The concept of “minimum tax”, particularly through excessive withholding from gross receipts, effectively creates a parallel and economically punitive tax regime which finds no place within the principal charging structure of the law. The Association, therefore, proposes that advertising agencies be brought entirely under the Normal Tax Regime and that all taxes deducted at source be treated as adjustable, with full credit available against the actual tax liability, thereby restoring the fundamental principle that tax should be imposed on real and actual income and not on gross receipts.
Alternatively, if the minimum tax regime is to be retained, then there must at least be consistency between the withholding tax provisions and section 113 of the Ordinance. At present, section 113 prescribes minimum tax at a maximum rate of 1.25 percent of the turnover, whereas withholding taxes under sections 153 and 233 are collected at substantially higher rates on the same gross receipts.
This defeats the very rationale of section 113 and renders the statutory minimum tax framework practically meaningless. The law cannot, on one hand, prescribe a ceiling for minimum tax under section 113 and, on the other, recover significantly higher amounts through withholding provisions on the same turnover base.
At present, withholding tax is deducted on the gross invoice value, including the sales tax component. This effectively results in imposition of direct tax upon an indirect tax amount that does not constitute income of the advertising agency. The practice creates an anomalous “tax on tax” situation and causes substantial financial loss to the industry. It is respectfully proposed that the relevant withholding provisions in the Income Tax Ordinance, 2001 be amended to expressly provide that withholding tax shall only apply to the net taxable value excluding sales tax.
Copyright Business Recorder, 2026
