The Finance Act 2025 has revised the rate of withholding tax on services under section 153(1)(b) of the Income Tax Ordinance, 2001. Although this is a fiscal amendment, it has practical implications for long-term commercial agreements, particularly in the power and infrastructure sectors where Change in Law provisions are an essential part of contractual risk allocation. The Finance Act provides a useful example of how such provisions are applied in practice.
Many O&M agreements require a contractor seeking relief to give notice of a claim within a fixed period, commonly twenty eight days from the occurrence of the relevant event. The consequence of failing to meet this deadline is usually the loss of any entitlement to additional payment and a discharge of the employer from liability. Procedural compliance is therefore fundamental to the validity of a claim.
The definition of Change in Law in these agreements typically has two parts. First, there must be a modification of law occurring after a defined base date. Second, the modification must result in a material increase in costs or a material decrease in revenue that is materially more restrictive than the position prevailing at the base date. Both limbs must be satisfied before a claim can succeed.
The Finance Act illustrates the importance of these requirements. An increase in withholding tax does not, by itself, constitute a compensable cost. If the contractor’s normal tax liability exceeds the withheld amount, the deduction remains fully creditable and no additional cost arises. Where the withholding operates as a minimum tax, and is not creditable, the increase may give rise to an actual cost. The evidentiary burden lies with the contractor to demonstrate that outcome.
Even if a cost impact is established, the contractor must also show that the new rate is more restrictive than the rate in force at the base date. If the rates applicable at the base date were higher than the current rate, the claim cannot succeed under the contractual definition.
The Finance Act 2025 therefore shows that Change in Law provisions do not provide automatic relief from every tax adjustment. Their operation depends on timely notice, the scope of the clause, the existence of a demonstrable cost impact, and the base date comparison. For employers this means that claims should be carefully tested against the contractual framework. For contractors it means that claims should be supported by clear financial evidence and a proper analysis of the base date position.
Our Projects, Energy & Infrastructure team, comprising Ahmed Reza Mirza and Khadeeja Ahmad, recently advised on Change in Law claims arising from the Finance Act 2025. These matters highlight the importance of close adherence to procedural rules, precise drafting of definitions, and careful financial assessment of any alleged cost increases. Parties negotiating new agreements should consider how tax changes are addressed in their contracts, while those operating under existing arrangements should assess whether their current protections remain adequate.
