No withholding tax deduction for making payments to banking companies

ISLAMABAD (March 01 2008): There is no requirement in the Seventh Schedule (banking schedule) of the Income Tax Ordinance 2001 to deduct withholding tax at the time of making payment to banking companies. FBR has issued an income tax circular on Friday to clarify the applicability of withholding tax provision in case of banking companies.

According to circular 2 of 2008, a new section 100A has been inserted in the Income Tax Ordinance, 2001 through Finance Act, 2007, which provides that income, profit and gains of a banking company and tax payable thereon shall be computed in accordance with the rules in Seventh Schedule which has also been provided through the said Act by substituting the earlier one.

It has clearly been provided under Rules 5(2) of the Seventh Schedule that provisions of withholding tax under the Ordinance shall not apply to a banking company as a recipient of the amount on which tax is deductible.

However, it has been brought to the notice of FBR that withholding agents dealing with the banking companies do not comply with the provision of the said rule and insist on production of a specific exemption certificate for making payment without deduction of tax.

It is clarified that provisions of the Seventh Schedule of the Ordinance are applicable from January 1, 2008 (relevant to tax year 2009) and no tax is required to be deducted at the time of making payment to a banking company. Accordingly, the withholding agents are not required to ask for a specific exemption certificate from the banks, the circular added.

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