Income Tax on IT Export Services in Pakistan

IT and IT export services were previously exempt from tax in Pakistan. However through the 2nd amendment in tax laws via Ordinance 2021 the same are now shifted to Tax Credit regime. Federal Board of Revenue has expanded the definition on IT enabled services to add up inbound or outbound call centers, medical transcription, remote monitoring, graphics design, accounting services, Human Resource (HR) services, telemedicine centers, data entry operations, cloud computing services, data storage services, locally produced television programs, and insurance claims processing.

Now IT and IT enabled services do not enjoy the tax exempt status in Pakistan rather they will be allowed tax credit upon fulfillment of certain criteria.

How to avail tax credit; The new tax credit regime provides that to avail exemption from tax i.e if more than 80% of proceeds from IT and IT enabled services are brought in Pakistan through normal banking channels.

Other compliance requirements for availing the tax exemption are

• Income tax return has been filed
• Where the person is withholding agent; must file withholding tax statements
• Where the person is liable to be registered in Sales tax, he shall register and file sales tax under Federal and Provincial laws.

However the law further provides explanation that the start ups are allowed a 100% tax credit. Start ups are allowed exemption from withholding of tax under section 153/159 on presenting the exemption certificate to withholding agent.

The free lancers providing the IT and IT enabled services has the option to opt for Final Tax regime.

• The service providers can opt for FTR where tax credit is not available.
• The rate shall be one percent on the value of exports.
• All the compliance requirements for filing are met. No tax credit shall be allowed.
• The condition of bringing 80% proceeds does not apply here.
• Person can also file return under Normal Tax Regime.

This article was published by Sumera Shafqat at Income Tax on IT Export Services in Pakistan