Taxation of IT Sector in Pakistan

This blog discusses Taxation of IT Sector in Pakistan after amendments through Finance Act 2021. IT services has been Exempt for many years now and clause 133 part 1 of Second Schedule of Income tax ordinance, 2001 has been abolished by the Government.

What are IT Services

Income from exports of computer software or IT services or IT enabled services as defined in clause (30AD) and (30AE) of section 2 of the Income Tax Ordinance, 2001.

(30AD) Information Technology (IT) services include software development, software maintenance, system integration, web design, web development, web hosting and network design; and

(30AE) IT enabled services include inbound or outbound call centres, 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;

Tax rate on Exports of Services – Division IVA of Part III of the First Schedule

The rate of tax to be deducted under section 154A shall be one percent of the proceeds of the export.

Pre and post Finance Act 2021

Practically the Government has converted the exempt income into final tax regime to normal tax regime. In order to claim 100% tax credit on IT Services Income you have to file tax return, submit withholding tax statements, where the person is a withholding agent and file sales tax returns.

Earlier IT services was exempt, then in March 2021 they allowed 100% tax credit and now vide Finance Act, 2021 the export of services including IT services is 100% Tax Credit/ Final Taxation/ Normal Taxation. Tax credit under section 65 is available upto the period ending on the 30th day of June, 2025.

If the provisions of section 65F are not met then section 154A will apply where the exporter of services will have to pay/ or his tax will be deducted by bank/ exchange company at the rate of 1% and if the provisions of section 65F are not met then there is no tax credit.

The tax credit under section 65F shall be available (a) return has been filed; (b) withholding tax statements for the relevant tax year have been filed in respect of those provisions of the Ordinance, where the person is a withholding agent; and (c) sales tax returns for the tax periods corresponding to relevant tax year have been filed if the person is required to file Sales Tax Return under any of the Federal or Provincial sales tax laws.

The tax deductible under section 154A shall be a final tax on the income if (a) return has been filed; (b) withholding tax statements for the relevant tax year have been filed; and (c) sales tax returns under Federal or Provincial laws have been filed, if required under the law; (d) no credit for foreign taxes paid shall be allowed.

The provisions of sub-section (2) of section 154A of the Income Tax Ordinance, 2001 shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation then section 154A will be dealt in accordance with normal taxation

A new section 65F has been introduced in the Income Tax Ordinance 2001 where 100% tax credit has been allowed, subject to fulfillment of certain requirements: –

Section 65F reads as under:

65F. Tax credit for certain persons

(1) Following persons or incomes shall be allowed a tax credit equal to one hundred per cent of the tax payable under any provisions of this Ordinance including minimum, alternate corporate tax and final taxes for the period, to the extent, upon fulfillment of conditions and subject to limitations detailed as under:-

(a) persons engaged in coal mining projects in Sindh supplying coal exclusively to power generation projects;

(b) a startup as defined in clause (62A) of section 2 for the tax year in which the startup is certified by the Pakistan Software Export Board and the next following two tax years; and

(c) Income from exports of computer software or IT services or IT enabled services as defined in clause (30AD) and (30AE) of section 2 upto the period ending on the 30th day of June, 2025:

Provided that eighty percent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels.

(2) The tax credit under sub-section (1) shall be available subject to fulfillment of the following conditions, where applicable, namely: –

(a) return has been filed;

(b) withholding tax statements for the relevant tax year have been filed in respect of those provisions of the Ordinance, where the person is a withholding agent; and

(c) sales tax returns for the tax periods corresponding to relevant tax year have been filed if the person is required to file Sales Tax Return under any of the Federal or Provincial sales tax laws.

Through Finance Act 2021 government has introduced a new section 154A which allows export of services

154A. Export of Services

(1) Every authorized dealer in foreign exchange shall, at the time of realization of foreign exchange proceeds on account of the following, deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule –

(a) exports of computer software or IT services or IT enabled services in case tax credit under section 65F is not available;

(b) services or technical services rendered outside Pakistan or exported from Pakistan;

(c) royalty, commission or fees derived by a resident company from a foreign enterprise in consideration for the use outside Pakistan of any patent, invention, model, design, secret process or formula or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided to such enterprise;

(d) construction contracts executed outside Pakistan; and

(e) other services rendered outside Pakistan as notified by the Board from time to time;

(2) The tax deductible under this section shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions:

(a) return has been filed;

(b) withholding tax statements for the relevant tax year have been filed; and

(c) sales tax returns under Federal or Provincial laws have been filed, if required under the law;

(d) no credit for foreign taxes paid shall be allowed.

(3) The provisions of sub-section (2) shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation:

Provided that the option shall be exercised every year at the time of filing of return under section 114.

(4) Where a taxpayer, while explaining the nature and source of any amount, investment, money, valuable article, expenditure, referred to in section 111, takes into account any source of income which is subject to final tax in accordance with the provisions of this section, he shall not be entitled to take credit of a sum that can be reasonably attributed to the business activity or activities mentioned in sub-section (1).

(5) The Board in consultation with State Bank of Pakistan shall prescribe mode, manner and procedure of payment of tax under this section.

(6) The Board shall have power to include or exclude certain services for applicability of provisions of this section.

Summary of the Blog on Taxation of IT Sector in Pakistan

• Practically the Government has converted the exempt income into final tax regime to normal tax regime
• In order to claim 100% tax credit on IT Services Income you have to file tax return, submit withholding tax statements, where the person is a withholding agent and file sales tax returns.
• Earlier IT services was exempt, then in March 2021 they allowed 100% tax credit and now vide Finance Act, 2021 the export of services including IT services is 100% Tax Credit/ Final Taxation/ Normal Taxation.
• Tax credit under section 65 is available upto the period ending on the 30th day of June, 2025
• If the provisions of section 65F are not met then section 154A will apply where the exporter of services will have to pay/ or his tax will be deducted by bank/ exchange company at the rate of 1%
• If the provisions of section 65F are not met then there is no tax credit for Taxation of IT Sector in Pakistan
• The tax credit under section 65F shall be available (a) return has been filed; (b) withholding tax statements for the relevant tax year have been filed in respect of those provisions of the Ordinance, where the person is a withholding agent; and (c) sales tax returns for the tax periods corresponding to relevant tax year have been filed if the person is required to file Sales Tax Return under any of the Federal or Provincial sales tax laws.
• The tax deductible under section 154A (Taxation of IT Sector in Pakistan) shall be a final tax on the income if (a) return has been filed; (b) withholding tax statements for the relevant tax year have been filed; and (c) sales tax returns under Federal or Provincial laws have been filed, if required under the law; (d) no credit for foreign taxes paid shall be allowed.
• The provisions of sub-section (2) of section 154A of the Income Tax Ordinance, 2001 shall not apply to a person who does not fulfill the specified conditions or who opts not to be subject to final taxation then section 154A will be dealt in accordance with normal taxation
• Taxation of IT Sector in Pakistan include Information Technology (IT) services include software development, software maintenance, system integration, web design, web development, web hosting and network design; and IT enabled services include inbound or outbound call centres, 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;

For more information on FBR’s new regulations / circulars/ SROs/ amendments in taxation laws in Pakistan please visit https://www.fbr.gov.pk/

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