Income Tax on IT services in Pakistan

Promoting Tax Compliance in Pakistan’s IT Sector

In recent years, the Government of Pakistan has recognized the pivotal role of the IT sector in driving economic growth. With numerous software houses, call centers, and other IT enterprises emerging, Pakistan has witnessed a surge in the export of IT services. According to a State Bank of Pakistan report, the country received over $4.2 billion in revenue from IT service exports in 2020, with a significant portion attributed to computer and information services.

To incentivize and support the export of IT services, the government initially granted complete income tax exemption until 2025. However, in March 2021, an amendment to the Income Tax Ordinance, 2001, replaced the term “exemption” with “100% tax credit” on income tax related to IT services exported from Pakistan.

Does this imply that the IT sector will now be subject to tax on exported IT services in Pakistan?

While the income tax exemption for IT services in Pakistan’s exports has been discontinued, IT businesses can still claim a refund of any tax payable on such exports.

But why the change in tax policy for the IT Sector?

Many IT businesses, relying on the income tax exemption, neglected to file their tax returns. In a bid to enhance tax compliance and broaden the tax base, the government introduced this policy shift. Now, filing an income tax return has become mandatory for individuals engaged in exporting IT services, including computer software and transcriptional services, to avail 100% tax credit.

Which IT sector businesses in Pakistan are required to file tax returns?

As per Section 10 of the Income Tax Ordinance, 2001, all income, whether taxable or exempted, must be declared in the income tax return. Section 114 of the same ordinance outlines the individuals obligated to file income tax returns, including:

  • Companies
  • Partnership firms
  • Individuals conducting business in Pakistan

While there are additional categories listed in Section 114, it’s essential for all IT businesses, whether software houses, call centers, e-commerce ventures, or allied IT service providers, to file income tax returns.

Can IT sector businesses claim tax credit without filing income tax returns?

No, to claim tax credit, IT sector businesses must declare the proceeds from the export of IT services in Pakistan in their tax returns filed with the Federal Board of Revenue.

Which Services are Eligible for 100% Tax Credit?

Under Section 65F of the Income Tax Ordinance, 2001, IT services derived from the export of IT services qualify for 100% tax credit. These include:

IT Services:

  • Software Development
  • Web Development
  • Network Design
  • System Integration
  • Software Maintenance
  • Web Design
  • Web Hosting

IT Enabled Services:

  • Call Centers (Inbound or Outbound)
  • Graphics Design
  • Insurance Claims Processing
  • HR Services
  • Data Entry Operations
  • Telemedicine Centers
  • Remote Monitoring
  • Medical Transcription
  • Accounting Services
  • Locally Produced Television Programs

What are the conditions for claiming 100% Tax Credit?

To claim 100% tax credit, IT service providers exporting services outside Pakistan must fulfill the following conditions:

  1. Export proceeds must be received in Pakistan via the banking channel, with at least 80% through this channel.
  2. The tax credit is applicable until June 30, 2025, on income tax for IT services in Pakistan.
  3. Taxpayers must file income tax returns for the relevant year.
  4. Any required tax deductions or collections must be duly made and paid.
  5. Withholding tax statements and sales tax returns must be filed with the FBR.
  6. IT service providers must be registered with the Pakistan Software Export Board (PSEB).

Additionally, tax paid by exporters of IT services, including minimum tax and final tax, can now be claimed as a 100% tax credit.

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