Taxation of Export of IT Services/ Freelancing

Exporting IT and IT-enabled services has become a key aspect of Pakistan’s exports. The IT exports of Pakistan for the fiscal year 2022-23 were anticipated to be around USD 2.59 billion, representing a 21% increase compared to the previous fiscal year. This growth was driven by increasing global demand for Pakistani IT services and strategic policy changes by the country’s central bank, such as raising the retention limit in Exporters’ Specialized Foreign Currency Accounts from 35% to 50%.? Despite the impressive growth, the ambitious target of USD 3.5-3.6 billion for FY24 is unlikely to be met, with IT exports expected to close between USD 3.1-3.2 billion (The Nation ) (Pkrevenue.com ). This increase demonstrates Pakistan's increasing competence in the global IT environment and underlines the potential for further growth as IT companies expand their footprint in international markets, particularly in the Gulf region.?

Freelancing has now become one of the most common means of IT exports in Pakistan. Due to the COVID-19 pandemic, its volume has increased drastically over the last few years. Pakistan is the world's fourth-fastest-growing freelancing market, with a major economic impact. The expansion of IT export companies in Gulf countries, especially Saudi Arabia, the relative stability of the Pakistani rupee, and supportive government policies have contributed to this growth. Freelancers in Pakistan offer a diverse range of services, such as software development, graphic design, digital marketing, and customer support, making significant contributions to the IT export industry. As the global demand for remote work and IT services continues to rise, Pakistani freelancers are well-positioned to leverage these opportunities, further bolstering the country’s economic growth and development.

Before March 2021, the export of IT services and IT-enabled services/ Income of freelancers was exempt from tax with the condition that eighty percent (80%) of the export proceeds be remitted through normal banking channels to Pakistan as foreign exchange.

On March 22, 2021, the Government of Pakistan issued Tax Laws (Second Amendment) Ordinance, 2021, in which tax exemption was withdrawn from the export of IT services and IT-enabled services and introduced 100% tax credits on the export of IT services and IT-enabled services subject to the fulfillment of some conditions for proper documentation of the economy and freelancers.

In the Finance Act 2022, effective from July 01, 2022, the clause for a 100% tax credit was omitted, making freelancers and IT service exporters liable to pay taxes.

Every foreign exchange-authorized dealer/ bank is required to deduct tax at the following rates from the remittance proceeds:

Export proceeds of computer software IT services, or IT-enabled services by a person registered with the Pakistan Software Export Board (PSEB) ~ 0.25% of proceeds

Any other case ~ 1% of proceeds

The tax deductible above by the authorized dealer/bank is the final tax. This means no further tax will be required to pay if the taxpayer/ freelancer fulfills the following conditions:

1. The annual income tax return has been filed,
2. Withholding tax statements have been filed (if applicable),
3. Monthly sales tax return has been filed (this condition is not applicable if taxpayer is registered with PSEB)
4. There shall be no credit for any foreign taxes paid.

If any of the above conditions are not fulfilled, additional tax will be required to pay by the taxpayer on the applicable tax rates i.e. 29% in the case of a company and 5% to 45% in the case of an individual or AOP according to the slab rates. Further, tax deducted by banks will be adjustable against the tax liability.

In summary, tax on freelancing in Pakistan income is taxable, and banks deduct 1% income tax (0.25% if registered with PSEB) from the payment of freelancers. Additional tax is also applicable on profits, and the rate depends on various factors such as income volume and whether certain conditions are met.

Frequently asked questions:

Q: Is freelancing income taxable in Pakistan?

A: Yes, tax on freelancing in Pakistan income is taxable.

Q: How do freelancers pay taxes?

A: From freelancers’ income, the banks deduct 1% income tax (0.25% in case the taxpayer is registered with PSEB) from the payment of freelancers when the amount is credited to their bank account. This 1% or 0.25% tax is NOT complete and final tax liability. Additional tax is also applicable on the profits of freelancers and is required to be paid at the time of filing annual income tax returns. However, additional taxes can be saved by fulfilling certain conditions such as filing income tax returns, withholding tax statements (if applicable), and sales tax returns (if applicable), and not receiving any credit for foreign taxes paid.

Q: How much is the income tax on freelancers in Pakistan in tax year 2024?

A: Freelancers must pay a minimum 1% (0.25% for freelancers registered in PSEB) income tax on remittance if they fulfill certain conditions such as filing income tax returns, withholding tax statements (if applicable), and sales tax returns (if applicable), and not receiving any credit for foreign taxes paid. If they do not meet the above, additional tax is applicable on the net income of freelancers from 5% to 45%, depending on the volume of income.

Q. Is there any relaxation for freelancer/taxpayers registered with PSEB?

A: The condition for filing monthly sales tax return is not applicable for freelancers/taxpayers registered with PSEB for claiming 0.25% tax as full and final tax liability.

Q: What is meant by IT services/IT-enabled services?

A: In accordance with the Income Tax Ordinance, 2001, IT services and IT-enabled services are as follows:

Information Technology (IT) services include software development, software maintenance, system integration, web design, web development, web hosting, network design; and

IT-enabled services include 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, local television programs, insurance claims processing.