FBR explains the procedure for obtaining exemption or lower-rate certificates, including the 15-day deadline for companies and special provisions for profit on debt and residential property.
ISLAMABAD: The Federal Board of Revenue (FBR) has outlined the procedure for obtaining an income tax exemption or lower-rate certificate during tax year 2027 under Section 159 of the Income Tax Ordinance, 2001.
According to the Income Tax Ordinance, 2001, updated up to June 30, 2026, tax year 2027 runs from July 1, 2026, to June 30, 2027. Section 159 sets out the circumstances in which taxpayers may apply for exemption from withholding tax or a reduced rate of tax.
Who can apply for an income tax exemption certificate?
Under Section 159(1), the Commissioner of Inland Revenue may issue an exemption or lower-rate certificate upon receiving an application in the prescribed form from a person whose income or payment falls into any of the following categories:
READ MORE: Time of withholding tax deduction under section 158 in tax year 2027
• The amount is exempt from tax under the Income Tax Ordinance, 2001.
• The amount is subject to tax at a rate lower than the rate specified in the First Schedule.
• The amount qualifies for a 100% tax credit under the Ordinance.
The certificate allows the relevant person responsible for collecting or deducting tax to apply the exemption or reduced rate specified in the certificate, rather than deducting or collecting tax at the standard applicable rate.
FBR’s 15-day deadline for companies
Section 159 provides a specific timeline for companies applying for exemption or lower-rate certificates.
The Commissioner is required to issue the certificate within 15 days of the company’s application.
If the certificate is not issued within this period, it is deemed to have been issued upon expiry of the 15-day deadline. The certificate is then to be automatically processed and issued through the FBR’s Iris system.
However, the Commissioner may subsequently modify or cancel an automatically issued certificate. The law requires the Commissioner to record the reasons in writing and provide the company with an opportunity to be heard before making such a decision.
Exemption certificate for profit on debt
Section 159(1A) provides a separate mechanism for obtaining an exemption certificate for profit on debt.
Under this provision, a person whose income is not likely to be chargeable to tax under the Ordinance may apply to the Commissioner in the prescribed form.
READ MORE: FBR explains tax collection on prize bond winnings for Tax Year 2027
Upon receiving the application, the Commissioner shall issue an exemption certificate covering profit on debt referred to in Section 151(1)(c).
The provision is intended for cases in which the applicant’s income is not expected to be taxable under the applicable provisions of the Ordinance.
Exemption from advance tax on residential property
Section 159(1B) also provides relief from the collection of advance tax under Section 236C on the sale or transfer of certain residential immovable properties.
A person may apply for an exemption certificate where the capital gains from the property are not chargeable to tax under Section 37(1A), subject to the prescribed conditions.
The residential property must meet all three requirements:
1. It must have been in the applicant’s personal use for the preceding 15 years.
2. The applicant must have declared the property in their wealth statements under Section 116 for the preceding 15 years.
3. The property must appear as a residence for personal use in the applicant’s tax records.
The exemption certificate under this provision may be issued only once in 15 years.
Applicants must therefore satisfy the prescribed conditions relating to personal use, wealth statements and tax records before qualifying for the exemption.
Exemption certificates for investment funds and companies
Section 159(1C) establishes eligibility for an exemption certificate where a person has distributed at least 90% of its accounting income among unit holders, certificate holders or shareholders, as applicable, in accordance with clauses (99) and (99C) of Part I of the Second Schedule.
The distribution must relate to the year immediately preceding the last tax year, as specified in the provision. Eligible persons may receive an exemption certificate for the subsequent full tax year.
For a person starting business for the first time, the certificate may be issued on the basis of an undertaking submitted to the Commissioner confirming that at least 90% of accounting income will be distributed to unit holders or shareholders during the relevant tax year.
In addition, Section 159(1D) provides eligibility for an exemption certificate for the full tax year to a person who has received approval under Section 2(36)(c) of the Ordinance for that tax year.
Tax deduction remains mandatory without a valid certificate
Section 159(2) clarifies that persons responsible for collecting advance tax or deducting tax from payments must collect or deduct the full amount specified under the relevant provisions unless a valid exemption or lower-rate certificate is in force.
These requirements apply to tax collection under Division II, tax deduction under Division III and the relevant provisions of Chapter XII of the Ordinance.
Where a valid certificate applies, the person responsible for collecting or deducting tax must comply with its terms.
Consequently, taxpayers seeking exemption or reduced withholding tax should ensure that they have obtained the relevant certificate and that it covers the payment or transaction concerned.
Existing notifications remain effective
Section 159(6) provides that notifications issued under the omitted sub-sections (3), (4) and (5), which remain in force, will continue to have effect unless the Federal Board of Revenue rescinds them through a notification published in the official Gazette.
The provision preserves the validity of existing notifications until they are formally withdrawn.
For tax year 2027, Section 159 therefore provides several routes for obtaining exemption or lower-rate certificates, depending on the taxpayer’s circumstances, the nature of the income and the applicable legal conditions. Taxpayers should ensure that their applications meet the prescribed requirements before seeking relief from withholding or advance tax collection.