FBR Directs Banks to Deduct Withholding Tax on FATA/PATA Transactions Following Finance Act 2026 Tax Abolition
The Federal Board of Revenue (FBR) has directed all commercial banks to start deducting withholding taxes on financial transactions and specified payments in the erstwhile Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) following the withdrawal of tax exemptions under the Finance Act, 2026.
This directive, issued within the past week, marks a material shift in the tax treatment of business and financial activity in these merged districts—a development of immediate relevance to practising accountants advising clients operating in or remitting payments to FATA/PATA regions.
Background: Abolition of Long-Standing Exemptions
The Finance Act, 2026 has amended the Income Tax Ordinance, 2001, abolishing the tax exemptions previously available to the erstwhile FATA/PATA, as a result of which income arising in these areas is now taxable in accordance with the applicable provisions of the Ordinance.
These erstwhile tribal areas, merged into Khyber Pakhtunkhwa and other provinces in 2018, had historically enjoyed concessional tax treatment. The 2026 Finance Act's abolition of those exemptions represents a policy shift towards uniform tax application across all of Pakistan's territory—though it has generated significant pushback from business chambers in the region.
Specific Withholding Tax Instructions to Banks
The tax authority instructed banks to ensure deduction of withholding tax on profit on debt paid to residents of the erstwhile FATA/PATA under section 151, rent payments made to landlords of bank premises in these areas under section 155 and withholding tax deduction on salary.
This directive operationalises the new taxability of income in these areas by placing the withholding obligation on financial intermediaries at the point of payment—a mechanism familiar to practitioners, but now extended to transactions previously exempt.
Implications for Practitioners
Accountants advising businesses that conduct operations in FATA/PATA, remit salary, rent or debt service to persons resident there, or receive such payments from clients in those areas must now ensure their clients' banking and withholding compliance aligns with these new directives. A failure to deduct, or a client's omission to withhold at source, may expose both the client and the bank to audit and enforcement action. Additionally, practitioners should verify with their clients and banking partners that the withholding rates applied conform to the relevant sections of the Income Tax Ordinance (particularly sections 151, 155, and salary withholding provisions).
Commercial Impact and Industry Response
The directive arrives amid considerable industry concern.
The Sarhad Chamber of Commerce and Industry and United Business Group (UBG) fully backed the stance and reservations of the business community belonging from erstwhile FATA and PATA regarding the imposition of taxes and called upon the government to revisit its decision while keeping the prevailing scenario in the region.
Border closures and trade disruption have already pressured traders in these areas; the addition of full tax liability compounds their financial burden. However, the FBR has now set the compliance expectation clearly: banks must deduct, and taxpayers must comply.
Practical Steps for Firms
Accounting practices should alert clients operating in or receiving income from FATA/PATA to the new withholding regime with immediate effect. This includes reviewing employment and rental arrangements, loan documentation, and remittance procedures to ensure withholding is calculated and deducted correctly. Firms serving financial institutions should also confirm that their banking clients have updated their withholding algorithms and trained staff to apply these section 151, 155 and salary rules to FATA/PATA transactions.
The FBR's instruction to banks is binding and represents an enforcement priority. Practitioners who proactively advise clients and ensure compliance will mitigate audit and penalty risk in what is a transitional and politically sensitive tax policy change.
This is an AI-assisted summary of recent FBR directives. Practitioners should verify all withholding rates and applicability against the official Finance Act, 2026, the Income Tax Ordinance, 2001, and the latest FBR circulars at fbr.gov.pk.