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Income Tax On IT Services In Pakistan

Income Tax On IT Services In Pakistan

In recent years, the Pakistani government has realized the necessity and importance of the IT sector for the economic development of the country. Many software companies call centers and other IT businesses sign up to provide IT services in Pakistan every day. According to a recent report by the State Bank of Pakistan, US$4.2 billion was collected by the IT sector in Pakistan in the third (3) quarter of 2020 due to IT services exports. Of this amount, 813 million USD were received by Pakistani IT companies in relation to computer and information services exports.

To encourage the export of IT services, the Pakistani government had previously announced that until 2025, Pakistan’s income from service exports would be completely exempt from income tax. However, in March 2021, the Government of Pakistan amended the Income Tax Act 2001, replacing the word “Exemption” in Pakistan’s IT Services Income Tax with “100% tax credit” in the process of exporting IT services to customers outside of Pakistan.

Does this mean that tax will be payable by the IT sector on amounts received on account of the export of IT services in Pakistan?

Income tax exemption for IT services in Pakistan applies to gains from exporting IT services outside of Pakistan, however, IT businesses will not be eligible for tax payable on delivered products and will be refundable to the IT business.

Now the question is why this shift of Tax policy in the IT Sector?

Considering the benefits of IT Services Income Tax Exemption in Pakistan, most IT businesses don’t bother to file their income tax returns. To improve income tax compliance and broaden the tax base, the government introduced policy changes. All you have to do to benefit from the 100% tax credit is to submit an income tax return, which is mandatory for those involved in the export process. The tax credit for 100% benefiting from IT services (not limited to computer software, and transcription services) has been removed.

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

A brief reading of Section 10 of the Income Tax Act 2001 makes it clear that all income, whether taxable or exempt under the Act, must still be reported on income statement tax. On the other hand, Section 114 of the Income Tax Act of 2001 provides a list of all persons who are required to file income tax returns. Persons covered by section 114 include:

  1. Company
  2. Every Partnership Firm
  3. Every individual doing business in Pakistan

There are several other categories of people under section 114 of the Income Tax Act 2001, but the details of each cannot be given in this article. For the above, whether you run a software company, call center, e-commerce, or any IT-related business, you have to pay a tax.

Can IT companies claim tax credits without declaring income? No, no tax credit can be claimed until income from the export of IT services from Pakistan is declared on the Federal Income tax return.

What are the Services Eligible for a 100% Tax Credit?

Income from IT services in Pakistan currently receives a 100% tax credit if it is derived from the export of IT services. Read in conjunction with the other provisions of the Income Tax Act 2001, Section 65F separates the two categories of IT services eligible for the 100% tax credit as follows:

IT Services

IT services include but are not limited to the following:

  1. Software Development
  2. Web Development
  3. Graphic Design
  4. Google Ads
  5. Search Engine Optimization
  6. Software Maintenance
  7. Web Design
  8. Web Hosting

IT Enabled Services

IT services include but are not limited to the following:

  1. Inbound or Outbound Call Centers
  2. Graphics Design
  3. Insurance Claims Processing
  4. HR Services
  5. Data Entry Operations
  6. Telemedicine Centers
  7. Remote Monitoring
  8. Medical Transcription
  9. Accounting Services
  10. Locally Produced Television Programs

What are the conditions for claiming a 100% Tax Credit?

By law, the following seven things must be done to qualify for a 100% tax credit:

  1. IT Service Provider or IT Supported Service Provider exporting services outside of Pakistan and at least 80% of export revenue must be received in Pakistan through bank accounts.
  2. Until 30 June 2025, Pakistani IT services income is eligible for a 100% tax credit.
  3. The taxpayer must file an income tax return in the year the 100% tax credit is received.
  4. All taxes deducted or charged must be set off or collected and paid according to the IT Service Provider or IT Assisted Service Provider. This means that he pays the tax he has to pay for his services in Pakistan, or he withholds the tax and pays it to the State Treasury in accordance with the law.
  5. The IT service provider or IT-enabled service provider has claimed tax relief to the FBR for the specific year for which the 100% tax credit is claimed under the law.
  6. IT service providers or IT-enabled service providers must file a tax return for the tax period claiming a 100% tax credit for the tax period. Sales tax returns include returns filed with state sales tax authorities such as the Punjab Revenue Division established in the state of Punjab.
  7. IT Service Provider, IT Service Provider/Exporter Pakistan Software Export Board (PSEB)

All taxes paid as the minimum and final tax by IT service providers (such as IT service providers or IT-enabled service providers) can now be claimed as a 100% tax credit.

Corptax Solutions is the best law firm in Lahore. Expert tax auditors at our tax consultancy firm have the decade-long experience to assist and resolve the tax concerns of IT sector businesses in Pakistan.

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