When the Law Says “Do Not Deduct”: Is a Section 159 Exemption Certificate Still Required?

November 04, 2026 (MLN): The question whether a certificate under section 159 of the Income Tax Ordinance, 2001 [the Ordinance] is invariably required before a payment may be made without deduction is not new.

It continues to arise in tax advisory practice, particularly where tax is deducted despite a clause in Part IV of the Second Schedule expressly providing that the relevant withholding provision “shall not apply.”

The issue arose again recently while reviewing the position of a taxpayer whose receipts were being subjected to deduction notwithstanding its reliance upon a specific Part IV exclusion.

The review required consideration of an important distinction: whether the recipient was claiming exemption of its underlying income or whether its income remained taxable and only the relevant withholding provision had been made inapplicable.

The practical response of a withholding agent is often to require a certificate under section 159 of the Ordinance.

Given the potential exposure under section 161 of the Ordinance, such a certificate may provide administrative comfort. Administrative comfort and legal obligation are, however, separate matters. A withholding obligation, as well as any exception to it, must arise from the Ordinance.

Commercial practice, departmental preference or the internal policy of a withholding agent cannot create a liability that the Legislature has not imposed.

The issue is not whether non-deduction may be claimed through an unsupported declaration. Every condition of the relevant clause must be established.

The narrower question is whether an express statutory non-application remains ineffective unless the Commissioner issues a certificate under section 159 of the Ordinance.

The statutory distinction

Section 53(1) of the Ordinance recognizes four distinct forms of relief under the Second Schedule. Income, persons or classes of persons may be exempt from tax, subjected to a reduced rate, allowed a reduction in tax liability, or exempted from the operation of a provision of the Ordinance. These categories broadly correspond with Parts I, II, III and IV of the Second Schedule.

The distinction is substantive. Part I ordinarily exempts the underlying income, Part II provides a reduced rate, Part III reduces the resulting tax liability, while Part IV may remove a person, payment or transaction from the operation of a specified provision.

A person may therefore remain fully taxable on its income while a particular payment received by that person is expressly excluded from deduction at source.

Part IV itself is not uniform. Certain clauses operate alongside an exemption of income under Part I. Others apply because of the status of the recipient, the identity of the payer, the nature of the transaction, or the goods or services involved. Some clauses expressly require a certificate or approval, while others directly provide that a specified withholding provision shall not apply.

This produces two materially different situations. In the first, the recipient claims that its income is exempt under Part I and relies upon corresponding relief under Part IV to receive payment without deduction.

In the second, the recipient accepts that its income remains taxable but contends that Part IV independently removes a particular payment from the operation of a withholding provision. The reported High Court judgments principally concern the first situation.

Section 159 and the Commissioner’s jurisdiction

Under section 159(1) of the Ordinance, where an amount to which the relevant deduction or collection provisions apply is exempt from tax, subject to tax at a rate lower than that specified in the First Schedule, or subject to a 100% tax credit, the Commissioner shall, upon application and being satisfied, issue an exemption or lower-rate certificate.

Section 159(2) of the Ordinance requires a person otherwise obliged to collect or deduct tax to do so at the full rate unless a certificate issued under section 159(1) of the Ordinance is in force.

The two subsections must be read together. Section 159(2) of the Ordinance does not independently create a withholding obligation; it regulates the conduct of a person otherwise required to deduct or collect tax.

The correct statutory sequence is therefore to determine first whether the relevant withholding provision applies. Only after that obligation has been established does the question arise whether a certificate under section 159 of the Ordinance modifies or removes it.

Where Part IV expressly makes the withholding provision inapplicable, the payer may no longer be a person “required” to deduct tax from that payment. Further, where the recipient’s income is neither exempt nor subject to a lower substantive rate or a 100% tax credit, it is difficult to identify the jurisdictional basis under section 159(1) of the Ordinance upon which the Commissioner could issue a certificate.

A certificate is an administrative instrument issued under authority conferred by statute. If the only relief claimed is that a withholding provision has independently been made inapplicable under Part IV, the better view is that section 159(1) of the Ordinance does not confer jurisdiction upon the Commissioner to grant an exemption from a provision that the Legislature has already declared inapplicable.

There may be instances where Commissioners have issued certificates even though the relief relied upon appears exclusively in Part IV. Such certificates may provide practical comfort, but their issuance does not determine the legal scope of section 159 of the Ordinance.

Administrative practice cannot confer jurisdiction where the Ordinance does not do so, nor can repetition of that practice convert a statutory non-application into a discretionary concession.

The judicial position and the unresolved distinction

The reported case law reflects two competing approaches. In Meezan Islamic Fund and others v. D.G. (WHT), FBR and others (2016 PTD 1204), the Sindh High Court held that approved funds relying upon clause 47B of Part IV could not receive payments without deduction unless a certificate under section 159 of the Ordinance was produced.

The Islamabad High Court adopted the same approach in Fauji Fertilizer Company Limited Employees Gratuity Fund v. Federation of Pakistan (2017 PTD 1544), while the Sindh High Court subsequently followed Meezan Islamic Fund in Telenor Microfinance Bank Limited v. Commissioner Inland Revenue (2022 PTD 1619).

The Sindh High Court decisions carry particular significance within Sindh, but their statutory context must be kept in view. They concerned approved provident, gratuity, pension or similar funds whose underlying income was claimed to be exempt under Part I and whose withholding relief arose under clause 47B of Part IV.

An important consideration underlying the certificate requirement was the need to confirm that the recipient continued to possess the approved status and associated exemption upon which the relief depended.

The Lahore High Court took a different view in Usman Hassan and another v. Federation of Pakistan and others (2017 PTD 2340). It treated clause 47B as an independent legislative direction under section 53(1)(d) of the Ordinance and held that requiring a further certificate would render the statutory non-application redundant.

The Peshawar High Court has adopted a similar approach in various judgments concerning clause 110 of Part IV, holding that no certificate under section 159 of the Ordinance was required once the relevant deduction or collection provisions had expressly been made inapplicable.

Those judgments recognize that a Part IV non-application may operate independently of a certificate. They arose, however, under the special statutory arrangements applicable to the former FATA and PATA, where exemption of the underlying income under Part I operated alongside the broad non-application of withholding provisions under clause 110 of Part IV.

None of the authorities discussed above appears to determine the narrower situation in which the recipient’s underlying income remains taxable and a standalone Part IV clause removes only the withholding obligation.

That distinction is material. Requiring official confirmation that a person continues to qualify for exemption of its income is not necessarily the same as requiring a certificate where the income remains taxable and the Legislature has excluded only a defined payment from deduction at source.

The appropriate inquiry is therefore clause-specific. It must consider whether the relief is connected with exempt income, depends upon a continuing approval or status, expressly requires a certificate or administrative determination, and is capable of verification through objective evidence.

The question is not simply whether the relief appears in Part IV, but what the particular clause legally does.

Legal obligation and administrative comfort

Withholding agents may reasonably seek protection before making payments without deduction. Even where a section 159 certificate is not legally required, the payer should insist upon sufficient evidence that every condition of the Part IV clause has been fulfilled.

Depending upon the clause, this may include registration or licensing records, appointment or distributorship agreements, invoices, purchase orders and delivery documentation.

Where the recipient earns different categories of income, the exclusion must remain confined to qualifying payments. Commission, service fees, unrelated supplies and transactions outside the relevant approval or appointment must be examined separately.

The Part IV clause is the source of the legal relief; the supporting documents establish the facts upon which that relief operates.

Leaving aside any contractual indemnity, documentary verification and a certificate under section 159 of the Ordinance may each provide comfort to the withholding agent, but they do not necessarily constitute the same legal requirement.

A properly documented, transaction-specific determination also enables the payer to demonstrate that non-deduction was based upon an express statutory provision and verified facts rather than an unsupported representation by the recipient.

The appropriate approach is therefore neither to require a certificate mechanically in every Part IV case nor to assume that placement in Part IV dispenses with all evidentiary requirements. Each clause must be construed according to its language, context and conditions.

Where the underlying income is exempt and the withholding relief depends upon the recipient’s continuing exempt or approved status, the certificate-based approach adopted by the Sindh High Court must be carefully considered.

Where the income remains taxable and Part IV independently makes the withholding provision inapplicable, a different analysis arises. If the clause expressly disapplies the withholding provision, its objective conditions are fulfilled and it does not require a certificate, the better legal view is that the withholding obligation does not arise.

Section 159(2) of the Ordinance regulates a person otherwise required to deduct or collect tax; it should not recreate an obligation that the Ordinance has removed. Correspondingly, section 159(1) of the Ordinance should not be treated as conferring jurisdiction upon the Commissioner outside the circumstances specified by the Legislature.

This conclusion does not eliminate factual verification or litigation risk. Until the distinction is authoritatively determined or clarified by FBR, withholding agents operating within Sindh may understandably remain cautious in view of Meezan Islamic Fund and Telenor Microfinance Bank.

That caution may justify additional documentation or an attempt to obtain departmental confirmation, but that administrative preference does not, by itself, determine the statutory position. Administrative comfort is one matter; the legal effect of the Ordinance is another.

FBR could reduce this uncertainty by formally distinguishing between relief connected with exempt income, relief dependent upon continuing approval, and clauses that independently disapply a withholding provision from an otherwise taxable payment.

A standardized documentary framework for transaction-based exclusions would protect withholding agents without treating section 159 of the Ordinance as a universal gateway where its statutory conditions are not attracted.

Ultimately, practice must conform to the Ordinance; the Ordinance cannot be made subordinate to practice. A certificate may confirm or implement relief where section 159 of the Ordinance applies, but it should not be treated as the source of a statutory non-application already granted by Part IV.

 About Author:

Muzammil Hemani is a tax and corporate advisory professional with extensive experience in direct and indirect taxation, corporate structuring, and regulatory compliance.

He regularly advises businesses on tax planning, documentation, and compliance strategy, with a focus on aligning practical business needs with evolving legal and fiscal frameworks in Pakistan.

He also contributes to professional forums and knowledge-sharing platforms on taxation, public finance, and emerging regulatory developments.

Disclaimer:

This article is based on the Income Tax Ordinance, 2001 as amended up to 30 June 2026.

It is intended for general professional discussion and does not constitute advice concerning any particular taxpayer or transaction.

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