Income Tax on Export of IT Services in Pakistan
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Exports are to Pakistan’s economy as oxygen is to body. According to State Bank of Pakistan’s Export of Goods & Services publication of March 2020, export of services during three quarters of financial year 2020 totaled US$ 4.2 billion. Of these, exports related to computer and information services were US$ 813 million.
The question is: is export of IT services exempt from income tax? The short answer to this is ‘YES’; export of IT services is in a way exempt from income tax. This post has been updated after replacement of “tax exemption” with “100% tax credit”.
Export of IT Services was exempt from income tax up till promulgation of Tax Laws (Second Amendment) Ordinance, 2021 on March 22, 2021.
Effective from July 01, 2021 (tax year 2021-22), export of IT services is not exempt from income tax; instead, taxpayers have been allowed a 100% tax credit against their income tax liability.
Services Eligible for 100% Tax Credit
Income from export of IT services is subject to 100% tax credit. Section 65F of the Income Tax Ordinance, 2001 (the Credit Clause) provides details in this respect.
The Credit Clause provides three types of IT services which are eligible for 100% tax credit:
1) Computer Software
The Ordinance does not provide any specific definition of computer software. So, general dictionary meaning would apply in this case.
According to Britannica, computer software means a set of instructions that directs a computer’s hardware to perform a task. Software includes system software (operating system) and application software. Application software includes word processors, spreadsheets, database management, inventory and payroll programs, and many other applications.
2) IT Services
IT services include:
- software development
- software maintenance
- system integration
- web design
- web development
- web hosting, and
- network design
3) IT Enabled Services
IT enabled services include:
- inbound or outbound call centers
- medical transcription
- remote monitoring
- graphics design
- accounting services
- HR services
- telemedicine centers
- data entry operations
- locally produced television programs, and
- insurance claims processing
Conditions for 100% Tax Credit
There are SIX conditions attached to eligibility for 100% tax credit. These conditions are enumerated below:
- The exporter of IT services (the taxpayer) is required to remit or send at least eighty percent of export proceeds into Pakistan through normal banking channel.
- 100% tax credit is available up to June 30, 2025.
- The taxpayer has filed the income tax return.
- Tax required to be deducted or collected has been deducted or collected and paid by the taxpayer. In other words, the taxpayer has discharged its duty as a withholding agent. For further details on withholding of taxes, read this article.
- The taxpayer has filed with FBR the withholding tax statements for the immediately preceding tax year.
- The taxpayer has filed the sales tax returns for the tax periods corresponding to the relevant tax year. Therefore, relevant sales tax registration (PRA, SRB, BRA, KPRA, FBR) is also must.
The exporters of IT services are eligible for 100% tax credit regarding tax payable under any provisions of ITO, 2001 including minimum tax and final tax. However, the taxpayer can be subjected to audit proceedings u/s 177 and 214C.
There is a general misconception that the exporter is required to get certification from Pakistan Software Export Board (PSEB) as well. The Ordinance does not provide any such condition for 100% tax credit under the Credit Clause mentioned above.
PSEB certification is required, however, for startups providing local services.
Comment below or contact to ask any questions.
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Hello Sir,
I am a salaried person (non IT related) but I also do freelancing and provide IT / SEO services in extra time. I always file salary returns. There is no option to add IT payments or income there. Please guide me how can I add it there so that income tax is properly filed?
Show foreign remittances in your bank in Other Revenue under the final/fixed tax column.
Hi Rizwan
I have USD account which I declared in my last year return by applying SBP exchange rates. This year I sold some exchanged some USD to PKR. Is there any tax on gain on sale of USD that I need to show in this year return?
Yes, realized foreign exchange currency gains are taxable.
Hello Rizwan, This Forum is really Helpfull. I have a question. I am working on Upwork and Recieve direct payment in my USD Wise account and from there i transfer to my local bank account through WISE partners bank mainly Bank Alfalha. The PRC is get are in the form of Home Remmitance as it comes under my name. In this how should i file my tax returns and get the tax benfits. As per PSEB they do not recognize wise payment method and they want PRC to under IT remittance. Please on this. Thanks
Then it is better to pay tax at 1% of foreign remittances.
Hello Sir
I am Vishal Kumar, working as Remotely Full stack developer in US Company and doing freelancing on Fiverr. I want to know that when I receive funds from freelancing into payoneer and then I withdraw the funds into my local bank, it doesn’t deduct the tax, it only deduct the transaction fee. and when I receive salary from US company, there is no any tax deduct yet. so will I need to pay 1% of total amount received, in the section of 154A (Export of services u/s 154A @1%) or 0.25% of total amount under section 154A (Export of IT/ITeS Services u/s 154A @ 0.25%).
This is my first question.
My another question is that after counting it to Final tax u/s 154A, will I need to mention the foreign sources section by adding US salary into Foreign Income and Freelancing funds into Foreign Other source income?
or I can consider it to like business income?
First, you need to understand both transactions separately.
Foreign source salary is only exempt in Pakistan if you have paid foreign salary tax, in this case in the USA. If your salary tax is paid in the USA, then it is exempt in Pakistan. This will be shown as a foreign source salary. If salary tax is not paid in USA, then I would suggest you to convert your salary contract into an IT service provider contract.
For foreign remittances into your local bank account, if you have PRCs and you are registered with PSEB, you can pay the final tax liability at 0.25%. If not, then better to pay tax at 1%.
Hello Mr Rizwan,
First of all huge respects to you for being such an amazing and helpful person. It is rare to see an individual helping members of the community to such extent and in such details!
I am an individual registered with PSEB as freelancer.
I provide freelance services on Fiverr and my payouts come via Payoneer.
I have an account in Faysal Bank and I receive all my payments using their services.
However the bank still deducts 1% tax on all my payments coming from Payoneer. The PRC code on these payments are 9186.
My question is that who do I contact to correct this tax percentage to 0.25%?
Or should I let them deduct 1% and apply for Tax Rebate at the end of tax year?
Thank you for your time.
Regards.
I think you should officially write an email to the bank’s head office with cc to the State Bank of Pakistan. Hopefully, it would resolve the issue.
If we use platforms like Wise/Deel to withdraw PKR to our account (which takes 5 minutes as they do local transfer) instead of USD (which takes 2 3 days). Can I ask my bank for PRC for this local transfer? (ofcourse giving them invoice + transfer statement from Deel as proof that it is a remittance for IT services) Or can banks only provide PRC for foreign currency transfers?
Banks normally provide PRCs only for foreign fund transfers. But you can check your bank.
Been receiving funds via Wise (“personal” account in my name), local bank does not deduct anything, my account occupation has been “freelancer” ever since I opened it 11 years back. I got my PRC extracted from remitting intermediary bank (Bank Al Habib) recently and they are all “home remittance” certificates, with no purpose code.
I have no qualms with paying 1% final tax BUT I don’t want to pay if my transactions are being deemed as home remittance which is not tax deductible, knowing that doing the perfectly right thing in this country can be more harm than good. Can you guide the best course in this case?
It is Ok to show the remittances as home remittances. The only issue is whenever the remittances exceed Rs.5 million in a year, the FBR can ask for source of such remittances.
Your explanation was very articulate and helpful. I have an additional question: If I am filing my income tax return as a freelancer registered with PSEB, do I also need to submit a sales tax return in Punjab (PRA)? Is it mandatory by law or optional?
It is not mandatory for now.
Hello,
I am software engineer working with a UAE based company, receiving my salary in PKR account annually exceeding 5M.
Bank is not deducting any tax and initially I submitted company contract and payslips to bank.
I am an active filer.
Please guide about tax. Do I need to pay any tax amount when I am going to file my income tax please guide,
JazakAllah khair
As per law, if your employer is deducting tax and it is being paid to the UAE government, then your salary is not taxable in Pakistan. But this is not the case, I believe. As your salary is more than Rs.5 million, it is better to convert your contract into an IT service provider contract. This can reduce your tax burden to 0.25% if you register with PSEB.
I have tried to register pseb as freelancer many times but it rejects saying my NTN document must not have business name. I have registered with FBR as individual. Let me know how to register with PSEB as freelancer. Thank you.
If you can share any written feedback of PSEB, may be I will be able to help.
I am not sure I understand your issue properly. I think you need to call and convince the PSEB people that adding business to NTN is mandatory for bank account opening, and taxation matters, etc.
Hi Rizwan,
This forum is very helpful and gained a lot of knowledge reading it.
I am an IT professional and have been receiving foreign remittance in my PKR bank account with the deduction of 1% tax (deducted on bank’s end) and I also receive PRC every time I receive the payment. Is this enough or do I need to file any other tax amount?
Secondly, I also have a USD bank account for savings purposes. I am thinking to receive my remittance in that account in future. Could you please guide me if this is possible to receive USD in the USD account instead of PKR account and what would be the conditions for it to remain eligible for 1% tax deduction?
I am not associated with PAFLA or PSEB at the moment, so it this also required?
Thank you Muneeb.
1% income tax deducted by the bank is your final tax liability. And, you do not need to register with PAFLA or PSEB to avail 1% income tax rate.
Muneeb which bank you are using which provides you the PRC ?
Dear Rizwan,
I have a question about the new FBR rule regarding submitting a balance sheet when filing sales tax return. I’m a sole proprietor and I have been exporting software from Pakistan. I don’t have any sales in Pakistan. Therefore, I file null sales tax return. However, I cannot do it anymore because of the new rule. I would like to know if it is required for me to submit a balance sheet or can I just skip filing null sales tax return altogether? By the way, I’m not registered for GST.
Kind regards, Ahmer
If you are not registered with FBR for sales tax, the said provision does not apply to you.
Dear Rizwan,
As you might know about USD retention account for freelancers allowing 50% retention in local USD account. Can you tell what will be the tax on such USDs received in Pakistan and retained in Pakistani bank? Does 0.25% / 1% Final tax apply to that USD income as well? Or it only applies to amount that gets converted to PKR and is retained in PKR? If yes what happens to USD balance then?
It applies to all moneys received in Pakistan, whether USD account or PKR account. Tax is charged on amount received, and not on the balance amount.
@Rizwan but isn’t it condition of the tax law that export proceeds must be realized into PKR? For final tax of 1% or 0.25%
This requirement was that at least 80% of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels. But now this provision has been deleted.
Hi, Hope you are fine! I moved back from Portugal to Pakistan and started working remotely for the same company, but the company told me they could not work directly with me, to do so, they hired a Remote company “Safeguard Global” and now this company is sending salary in PKR cause they say they cannot send me Euros and cutting 30% tax from my salary, which they are paying to Pakistan government!
Now my company sends my salary in Euros to this middle company they cut the tax and paid me in PKR! The issue is I am working remotely but under this remote company there only duty to send me salary thats it
My question is how should I avoid this high Tax?
You can have a services agreement with the Safeguard Global, and you will need to raise monthly invoices for your services. In this way, your maximum tax liability will be 1%.
@Rizwan Kamali,
How to raise monthly invoices for our services?
Simply prepare an invoice and sign it. Whenever the bank asks for such an invoice, just share a copy with the bank. Each remittance should match with the invoice.
Assalam-o-Alaikum
Read your article it is informative. I wanted to ask you something… I have registered a Private Limited company. We are providing Digital Marketing Services, Web, Software, and Application Development Services in Pakistan. We have also some foreign clients. We are not registered in PSEB. What would be the benefits if we register in PSEB? One of the consultants told me that there is a 29% tax on a Private Limited company… Please guide me further as we are struggling to make the company grow this is our First year of filing Returns.
Thank you
Dear Shafique, thank you for reading the article. If a person is providing such services to foreign clients, irrespective whether that person is registered with PSEB or not, the applicable income tax rate will be 0.25%. Please note that this is a final tax, and no further tax is payable at the time of filing income tax return.
If a person is providing such services to local clients, then there is an option of a kind of tax exemption for three years. But PSEB registration is required for this. If you haven’t already registered with PSEB, I would adise you to immediately get registered with PSEB.
If neither of the above cases is applicable to you, then your income will be calculated as per normal tax provisions. I doubt 29% tax is applicable to you. I suppose it will be a small company, and subject to 20% income tax.
Hi Rizwan,
I am PSEB registered freelancer. I was working for a EU company and getting EUR in my PKR bank account. Initially bank was assigning 9182 as purpose code which I requested them to change it to 9186 after PSEB’s objection.
But my another client is paying me to my personal Payoneer account. And as you know when we transfer from Payoneer to PKR account, it is transferred as PKR (Payoneer is converting EUR to PKR). ANd in this case my bank gave me 0401 purpose code. And when I raised this with bank, they said this transactions was from Personal Payoneer to personal PKR account, so that is why 0401 is assigned.
Now my concern is how do I get proper 9186 code for my inward transactions from Payoneer to PKR account. Can you please guide me ?
Thanks,
Kashif
It’s entirely up to the bank whether they change the purpose code in this case. However, if you have complete documentation, it will not affect your taxation.
Thanks Rizwan for your reply.
But PSEB objects and demands 9186 purpose code on your PRCs for renewal of your PSEB certificate.
And PSEB cert is required for tax discount.
9186 is for individual IT freelancers. If PSEB insists, you can ask bank to mention this code (if the branch is reluctant, you can email the head office).
I have emailed all the heads of the Bank, but they are reluctant to make any changes. Even raised to PAFLA, but the problem still exists. These banks have no interest in freelance payments.
You should also copy SBP Complaints Department (cpd.helpdesk@sbp.org.pk) in the email.
I am facing the same issue.
I receive my IT export payment via Wise in my local bank account. Recently the bank has started mentioning the purpose code 0401 on my PRC. I found everywhere but couldn’t understand the meaning of this purpose code. Can you help regarding this? Thanks!
I am not sure what 0401 code is. However, 9401 code’s purpose is:
“Receipt of profit/interest by private sector enterprises on money market instruments such as treasury bills, commercial and finance papers, bankers’ acceptances, negotiable certificates of deposit (with original maturity of one year or less) and short- term notes issued under note issuance facilities (NIFs).
Same problem for me.
Were you able to figure out a solution?
I also got the wrong Purpose code when transferring payment from Payoneer to HBL 9471 but need 9186. Did you find any solution? if yes please share with me.
Hi Rizwan,
Hope you are doing great, and thanks a lot for this very useful article.
Your commitment, consistency, and passion for helping others can be clearly seen in the comments section, and it should be admired. Hats off to you!
I have one question:
I am working as a “Software Consultant” with a USA-based software company and receiving the monthly remittance under the purpose code 9182. I am a filer and regularly file my returns with FBR on time. However, I am not yet registered with PSEB. The bank is deducting 0.25% tax on remittances and no other tax in addition to that.
My question is should I consider this 0.25% tax as the final tax and mention it in my tax return, or is there any other sort of tax that I need to pay and mention in my returns?
Your help will be highly appreciated.
Thanks.
Thank you Raza for such kind words.
As you are not registered with PSEB, your tax liabilty will be 1%. Difference of 1% and 0.25% will be paid along with the tax return.
Hi Rizwan,
Thanks for your reply. I have a couple of follow-up questions.
1. Does that mean I will have to pay 0.75% additional tax (accumulatively, it will become 1% as the bank has already deducted 0.25%) while filing the return, or will I have to pay 1% additional tax (accumulatively, it will become 1.25% as the bank has already deducted 0.25%)?
2. Also, what’s the best practice of calculating and paying the taxes? Should one pay the tax regularly on a monthly basis or at once yearly at the time of filing the return?
3. In case we go with a yearly option, I have seen people calculating the tax on the whole year’s amount at once instead of calculating individually for each month. For example, if a year’s taxable amount is 12000 and per month it is 1000, then people simply put 12000 in the calculator for the yearly option and get the tax that needs to be paid. Another option would be to calculate the tax for each month’s amount (i.e., 1000) separately and then pay that tax amount.
I understand that if per month revenue remains same (for example, 1000), then both options (yearly or monthly) will give the same result, but I suspect if the amount changes after some months (for example, for 3 months, it is 1000, for 6 months it is 1200, and for 3 months it is 1250) then both yearly and monthly options can give different results. Isn’t?
I would appreciate your help.
1. You will pay only additional 0.75% tax.
2. You can pay annually at the time of filing of income tax return. Quarterly tax can also be paid. Normally freelancers pay on annual basis if it is not deducted by the bank.
3. Tax is calculated on annual income, not monthly.
Hi
I have a general question.
If bank is not deducting any tax on foreign remittance and total remittance is below 5 Million in a Tax Year then why do we have to show remittance as other receipts/IT Exports etc in income tax return. Why can’t we simply add in wealth statement as FBR cannot ask source of income if total remittance during the year is below 5 Million?
The amount doesn’t affect its taxability. That is why.
AOA Sir,
I received foregin remittance in FCY account as salary equivalent to 4.9 million. It should have been received as IT exports but mistakenly i gave salary slips to bank . Can i show it as IT services in my return and pay 1% since bank did not deduct any amount on this.
Or should i simply treat it as foreign remittance and show it in my wealth statement but there are no PRCs as the amount was received directly from foreign company into my FCY account and not converted into PKR rupees. However, bank can provide encashment certificate whenever i convert this amount into PKR.
It can be treated as an export of services if you have complete supporting documentation with you such as contract with the client, invoice, etc.
AoA, I hope you are doing great.
I am working as a Content Writer, which category do I fall under? IT Services or IT Enabled Services?
I will be filing my first tax returns this year since I started working in January full time. I got my online PRCs and every single one of them has a 9471 code, even those from Upwork and Payoneer, which I’m afraid is bad news. What do I do to get correct purpose codes?
And how much tax is deducted with 9471 code? Thank you.
9471 is workers’ remittances, which can be taxable in Pakistan at salary tax rates. I think 9186 (Freelance of computer or information services) is more relevant. Max tax on 9186 will be 1%, and if you satisfy the conditions, it can be 0.25%.
Thank you for the kind response, Sir. Workers’ remittances means I am sending money from a foreign country to Pakistan, is that correct?
That may be because of my Payoneer account, which is in my name. I have never been outside Pakistan. Can I still file my taxes for 9186 now?
And request my bank to change PRC purposes code for documentation?
Worker’s remittance means remittance of a worker who is doing job in a foreign country.
I think you should file as export of services and pay 1% tax if not already deducted by the bank.
Yes, please request the bank to provide PRCs.
Hi, this is very informative article. Rizwan please help me with a confusion — i am a nonresident pakistani. I own a software house in pakistan. I have developed softwares for internation customers. They sent money from their foreign company accounts to my pakistani company (I.T SME-LIMITED). I am registered with PSEB. My bank deducted 0.25% on all Transfers. I withdrew that money from my company account to my personal account and used to buy some property.
Now the issue is that when I am trying to file return of my IT company the FBR system is showing 16% + 5% tax on my foreign income which came from foreign company accounts to my company account on which already 0.25% is paid. I have a tax lawyer who informed me this and i am very worried. Because the amount is huge. Can you please help me understand whats wrong in my accounts why as an IT exporter i have to pay this tax? Secondly if you know a better tax consultant then please get me through to him for help. Thank you very much in advance
May be your tax lawyer is not properly filling the tax return form. I don’t think this should be an issue. If you need tax services, you can contact me at rizwan@asr-ca.pk
During a second sitting with my lawyer he told me that bank transfers from foreign into my account has no tax after paying SECP supported 0.25% but when i withdraw this money from company a/c to my personal a/c to use then i have to pay 15% tax on it which is a huge amount. I am worried if there is a way out of this?
During a second sitting with my lawyer he told me that bank transfers from foreign into my account has no tax after paying SECP supported 0.25% but when i withdraw this money from company a/c to my personal a/c to use then i have to pay 15% tax on it which is a huge amount. I am worried if there is a way out of this?
15% tax is applicable only when you are doing business as a private limited company. If you are working as sole proprietor or in a partnership, this is not applicable.
Please provide a reference or court case indicating that the income of a partner in an Association of Persons (AOP) in the form of drawings is also exempt from tax. My understanding is that the 100% credit is available for the income of an AOP, not for the partners. Is the share of the partner also exempt from tax? Is this correct?
According to section 92(1), an association of persons shall be liable to tax separately from the members of the association and where the association of persons has paid tax, the amount received by a member of the association in the capacity as member out of the income of the association shall be exempt from tax.
Dear Sir
Bank is not deducting tax on export proceeds as my account is in USD. Do i need to report foreign currency in my tax return 2023 or only when the foreign currency is realized/converted into pak rupees.
All proceeds, whether converted into PKR or not, should be declared.
Dear Sir,
Thanks for your guidance.
Should i apply exchange rate on the date when foreign remittance was credited or exchange rate as on 30th june. Also should it be from buying rate from State bank website?
Best Regards
It should be transaction date exchange rate i.e. credit date. Yes, it will be buying rate.
Dear Sir
I am resident in Pakistan and providing accounting services to a foreign company. I opened bank accounts as salaried person and got first payment in PKR account with 1% tax deduction. The next payments were remitted to my USD account in the same bank but bank didnt deduct any tax but they asked for salary slips before crediting the amount. I just came to know that there is huge tax rates on foreign source salary income, so my question is
1- How do i change it to freelance income. Should i simply tell bank that the monthly remittances are freelance incomes.
2- Should i get myself registered as business and open a new account and invoice the client monthly fixed amount so i get charged 1% or 0.25% tax.
3- Do i need to get registered with PRA as well and file monthly sales tax returns.
Register a business on your NTN and open a business bank account. Share invoice with the client for monthly services. When the bank remits funds, they ask for invoice.
There is no need to get registered with PRA right now.
Hi so first of all great article second my question is i have the prc with code 9185 but bank not deducting any withholding tax not sure why …. then should i submit tax by myself or ask the bank todo this ???
Pay yourself along with the return.
Hi, a quick question I am registered with the FBR for 1% tax. I am a freelancer but in my bank account half payments come through remittance and half through local banks (clients in Pakistan) so should I declare half amount in Export of services u/s 154A @1% the only amounts which I am getting through abroad or the full amount should be declared there including the PKR amounts from local clients.
For example, If i m get $1,000 from abroad yearly and 1 million PKR from local clients so in Export of services u/s 154A @1% Should I declare $1,000 + the 10 million?
Local and export shall be separately worked out. Exports shall be taxed at reduced rate, whereas, local at normal rate.
Hello Mr Rizwan, very good article as most of accountants don’t tell you these things, and you are a very nice person to reply to people about their questions.
I am taking this opportunity to put up my details and questions as well 🙂
I am registered as business in FBR and am providing accounting, HR and database etc services to a company in Europe. I am not registered with PSEB and living in Punjab; the company cannot send money directly to my Pakistan bank account due to restrictions of FATF so it pays me in my European bank account from where I withdraw to my Pakistan bank account which shows up as IBFT in bank statement. Till now I have not taken any PRC’s because according to European bank, our local bank will have to trace the money and get PRC’s for me from the middle bank and no bank ever deducts any tax on my money in Pakistan or outside, that means the remittance might be coming in as Home Remittance because when I transfer from European bank account, it asks me if the destination account is my own, I put there “yes” as both bank accounts (source and destination) are mine.
I do initiate invoices to the company against which it pays me.
Initially I had filed the returns for past 3 years as “Foreign income” and paid a lot of tax, can I mention the income under 154A 0.25% or 1%? or just show it as “foreign remittance” in wealth statement hence no tax.
I also have 2 properties in my name should I also file form 7e this year 2023?
I am thankful to you in advance and await your reply.
Thank you for such kind words. Yes, Form 7E shall be submitted in 2023.
The income should be mentioned under 154A.
I would like to seek your guidance regarding my specific situation. As a software developer, I’ve been involved in two types of work this year and I have several questions.
1- The first work I did was provision of IT services to a company in Pakistan through an independant contractor (a friend), and I received payment for these services. How should I go about paying taxes on this income? Do I count as a freelancer?
2- I’m currently not registered with PSEB. Would it be beneficial for me to register with them, and if so, how would it help me in my situation?
3- I also work as an independent contractor for a foreign company, exporting IT services. The contract starts as ““This Freelance Contract is made as of xx.xx.xxxx, (the “Effective Date”) by and between XXXX (“Client”) and XXXX, Pakistan (“Independent Contractor”).…. “ I receive payments in my Payoneer account, which I’ve occasionally (2-3 times) transferred to my local account in PKR. Can you guide me on how to properly report and pay taxes on this income?
4- Is the work I’m doing for the foreign company considered freelancing? Would registering with PSEB have any relevance here?
5- I’ve heard from someone that independent contractors exporting IT services might have a 0% tax rate. Can you verify if this is accurate for my situation?
6- Regarding tax filing, can you advise me on which section or form in Iris I should use to file my taxes based on my income sources?
1- Yes you can count as freelancer, but freelancers are required to pay normal tax on their local source income.
2- You should get registered with PSEB because it will bring tax benefits in the form of reduced tax rate on export of services.
3- Report it as Other Revenue under Final/Fixed taxes. You will pay 1% tax on this income.
4- Yes, it can be considered as freelancing work.
5- There is no 0% tax rate for freelancers now. Yes it was earlier.
6- It is better to engage some tax consultant for tax filings.
Hello,
First of all thanks for this great article. I,m receiving payments with purpose code 9185, and i,m also registered with PSEB so bank is deducting 0.25% i want to know that where can i put the payment amount in my return so i don’t get any admitted tax in my return.
Thanks
It will be in other revenues under fixed/final taxes.
Hello, Could please guide the Code Number from the Return Form for th Other Revenue. Thanks
What do you want to know about Other Revenue?
Salam, I am providing IT services (SAP) outside pakistan, on the remittance i received here no tax is being deducted, please let me know if there is exemption on exporting IT services?
aur kya ye foreign services k head mai jayega ya normal business k column mai?
Salam, I am providing IT services (SAP) outside pakistan, on the remittance i received here no tax is being deducted, please let me know if there is exemption on exporting IT services?
aur kya ye foreign services k head mai jayega ya normal business k column mai.
Export of IT services is chargeable to tax at 0.25% whereas export of services is at 1%. It is normal service, not foreign service.
Hello, in which column i have to put my earnings for 0.25 percent i mean in which section.
Thanks
Aoa Sir
I have a question/inquiry.
I am a freelancer based out of Lahore. I provide ITeS to my client base in the US.
I started freelancing in 2020 and after one year I learned that I’ll need to register myself as a freelancer with PSEB + I need PRC for every transaction and file my taxes properly and I did all that homework completed on my end and now I have every single PRC for last 3 years and those payments are landing into my bank account directly using different mediums like Payoneer, Upwork, Remitly, world remit, Ria, etc into my Bank.
Many of my clients come from different freelance marketplaces + they are direct customers + referrals etc…
I contacted PSEB and learned that the purpose code on PRCs is 9471 which is home Remittance and they said IT services fall under 9182-9186. Which is my biggest hang-up at the moment to renew my certificate with PSEB. Whenever I withdraw my earnings I get those earnings into my bank through a 1-link transfer.
I contacted many people/law firms etc. and learned no one has any proper information. Some told me to register myself as a sole proprietor or as an SMC and open a business bank account to receive those payments. Some told me to register a company abroad and get paid through services like Wise etc. but I feel this information is not correct.
Please let me know how should I receive payments that fall under 9182- 9186. Currently, my application is on hold with PSEB and I really do not want to wake up one day and know that I have to pay 10-40% income tax on my earnings just because our system in the country is not properly set up.
This problem is pretty common among the freelancers in our country who are at a stage to do something for our country.
Just for clarification purposes, here is a list of purpose codes:
9181 Receipts on account of computer hardware consultancy services provided to non-residents.
9182 Receipt on account of data base services provided to non-residents such as development, storage, and on-line time series. Also included are the data
processing services provided to nonresidents.
9183 Receipts on account of maintenance and repairs of computers and peripheral equipment abroad to non-residents.
9184 Receipts on account of export of computer software including design, development, and programming of customized system.
9185 Receipts on account of other computer services not specified elsewhere.
9186 Remittances received by resident individuals/households from reputed overseas IT firms and online platforms on account of free-lance of computer and information systems services.
I think sole proprietor business is best for you. You just need to add a business name to your NTN. Once it is done, you can open a bank account with that business name. When you receive foreign currency payments in that bank account, you can ask the bank to use relevant purpose code. The bank would require your agreement with the client and/or the invoice you sent to the client. The description of invoice should match the purpose codes.
I hope it helps. If you still feel any confusion, you can ask.
Change your bank to askari bank or bank alflah
Hi Rizwan, I have recently joined a Dubai based IT company as a remote employee, I received my first salary directly into my PKR bank account from them and bank transaction summary says this “salary credited **.** via IBFT from xyz exchange Abu Dhabi UAE”.
Does this salary will be considered as a foreign currency, and i can avail “IT Tax benefits”?
Note: I’ve previously received salaries from former employer in Dollars and it was coming as foreign exchange. But this time I’m confused with the new employer because “they are sending salary through money exchange to my pkr account directly.”
It should not be received as salary. It should be services or IT services.
Searching for insights about Tech-Enabled Services led me to your article, which served as a comprehensive guide in this domain. The content proved to be incredibly beneficial, offering me valuable insights into this subject. I greatly appreciate your willingness to share such informative content. Anticipating eagerly for forthcoming updates. Thank you!
Thank you Ahsan.
Hi Rizwan,
Thanks for you efforts.
I am a freelancer(single individual) working from home. I am providing remote monitoring services to a foreign company. Proceeds are received through banking channel and 1% WHT is being deducted by the bank.
I am not registered in PSEB and SRB. For TY 23, can i file my returns basis 1% WHT as final tax return?
Also appreciate if you can reference the law/section which confirms 1% final Tax for non registered PSEB IT service exporters.
Thanks.
You can file ITR based on 1% final tax u/s 154A of the ITO, 2001.
Hi Rizwan,
Hope you are doing good.
I am a freelancer (single individual) working from home in Karachi. I am providing services to a US Based company. Services fall under IT enabled remote monitoring services. I am not registered in SRB or PSEB. Bank has already charged 1% WHT for all remittances for 2022-2023.
Should I file my return for 2022- 2023 considering 1% WHT deduction as Final Tax Rate?
Yes, 1% shall be the final tax liability.
Hello Rizawan Sb,
Hope you are doing well!
Thanks you for sharing the detail and responding to each question. Much appreciated !
I started working as a freelancer for Accounting services in USA which comes under IT enabled services. I am filer as well. So asking quick questions.
1- Do I need to register any Business under my personal NTN# and open bank account with Business Name
2- There won’t be any problem opening USD account in Pakistan getting remittance in same account in USD
3- My employer is sending payments through Payoneer and there onwards I am transferring into my local bank
4- Can I file SRB under my personal NTN# or have to create and file on business name .
Finally, What is preferrable, Opening Business bank account or can use existing account considering taxes
Thanks you to in advance
1. I would advise adding business to your NTN and opening a bank account with the business name.
2. A banker might advise better for opening a USD account and receiving remittances.
3. It is ok to receive remittances in the Payoneer account as long as the bank provides PRCs.
4. SRB return is submitted after a business is registered with the SRB.
Hi Sir,
I am from Punjab and I have got PSEB registration certificate as freelancer and i am providing freelance services to a foreign client against invoices on monthly fixed amount.
Should i add business name to my NTN and apply for a new PSEB certificate?
I don’t think it is necessary to apply for a new PSEB Certificate. You can add business to NTN and change particulars with PSEB.
With business name added to NTN, PSEB requires to apply for new registration under category (Company/AOP/Sole proprietorship) may be because they are charging 10 k each year for this and for freelancer just 2000 PKR.
So if i dont add business name to my NTN, do i still meet all income tax provisions to claim final tax 0.25% under IT export services.
Yes.
With business name added to NTN, PSEB requires to apply for new registration under category (Company/AOP/Sole proprietorship) may be because they are charging 10 k each year for this and for freelancer just 2000 PKR.
So if i dont add business name to my NTN, do i still meet all income tax provisions to claim final tax 0.25% under IT export services.
Hi,
Thank you for sharing the insights. I am a Software Engineer and working remotely for Foreign company and as per contract my relationship with the company is as independent contractor. So as per Pakistan rules it will come under export of IT services. is that correct ?
Secondly, where should I declare my income? Under foreign income section or business section ?
Thank you Bilal for your comments.
Yes, it looks like it will be treated as an export of IT services. It will be declared in Other Revenues (Business Section).
Dear Rizwan sb. Is there any tax to be deducted by bank on the outgoing amount in regard of marketing or commission from the retained 35% of the inward software export earning by any pseb registered it services company
Yes, the bank can deduct tax based on the particulars of the invoice.
Dear Sir
Re YE30.06.2023 ITR
I earn around PKR10m on average from providing accountancy services to a UK based firm of Accountants.
They pay me in my UK bank A/c wherefrom I transfer this money to my Pakistani bank.
I have been reporting it as “foreign income” and always claimed 100% exemption since my registration with FBR 9/10 years ago.
I do not pay any foreign tax on my foreign income.
I have no income from Pakistan but own a property with registry value of less than PKR20m, empty since the purchase date of Jul’20.
My queries are:
1- Do I have to register for Sales tax for the export of Accountancy services?
2- Do I have to declare 7e tax this year.
3- One of my friends (also a tax consultant) advised me to show Pak salary of around PKR450,000 every year. And I report this also along with my foreign income.
Kind regards
Mahmood
1) Registration for sales tax will depend upon your province of residence. In Punjab, is not mandatory for individuals, but it is mandatory in Sindh.
2) 7E is not applicable if you own only one property.
3) I don’t think there is a need to show Pakistan-source salary. Foreign proceeds can be shown as export of services instead of foreign-source income. 1% income tax applies on the export of services.
Hello sir,
I am already registered freelancer at PSEB but
When I m going for renew of certification with PSEB , they are saying purpose code on PRC should be 9186 while current purpose code is 9182 which says Software Consultancy Services.
Can you please advise ?
Thanks
I think 9182 is also fine for tax purposes.
Please guide if I can still renew my registration with PSEB with PRCs with code 9182.
Bank is deducting 0.25% since my registration is still valid but after it expires what do I need to do?
Please guide. Thanks!
I think you can.
Very informative article, not many people know about this. Thanks a lot.
I have a question, Govt announced 0.25% deduction on IT exports, is it only for PSEB registered or for all IT exports?
I’m receiving payments from freelancing websites under IT exports and my bank only deducts 0.25% and I’m not registered with PSEB. Will it be a problem for me?
Also after 0.25% deduction means that tax is exempted or its still subjected to 100% tax credit?
Thank you Abdullah for reading the article. Actually 100% tax credit is now over. PSEB registration is required for 0.25% tax on IT exports. In case of non-registration with PSEB, 1% tax will be applicable at the time of filing the tax return. It does not matter if the bank is deducting 0.25%.
Hello, for year 2022-2023 do we also need to file sales tax return?
also tell me about years
2019-2020 do we need to file sales tax? and what is the tax on IT Services?
2020-2021 do we need to file sales tax? and what is the tax on IT Services?
2021-2022 do we need to file sales tax? and what is the tax on IT Services?
2022-2023 do we need to file sales tax? and what is the tax on IT Services?
If you are in Sindh, sales tax returns must be submitted. If in Punjab, it is not mandatory for individuals.
can you give any reference in which sales tax is not mandatory in Punjab?
PRA is exempt on export of services. And if a person is only engaged in provision of export services, they are not required to be registered. Multiple sections read together along with rules will give this interpretation.
I am starting a new IT business that will serve both local and foriegn clients. I will get registered with PSEB.
Am I correct that my foreign income will be taxed @ 0.25% final and my local income will be tax exempt until three years?
its Feb 2023 so will the three years be counted uptil Jan 2026 or will they be counted in tax years which means up to Jun 2025?
Yes, if you meet the conditions, foreign income will be subject to 0.25% tax. And local income can be subject to 100% tax credit. If you get registered with PSEB in Feb 2023, you can avail tax credit till June 2026.
Wonderful article on this Topic. I have one query regarding this
I have a Youtube Channel and income is received through adsense in my Bank account with 1% deduction.
I file return in FTR category and treat this as a foreign income under FTR. I have a doubt regarding this FTR treatment as in following section of 154a it says this:
(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 if
required under the Ordinance;] and
(b) 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.
I have doubt in sales tax returns filing clause, whether i should file Sales tax returns to justify this income under FTR?
Thanks
If you are based in Sindh, you need to register with SRB and submit monthly returns. If you are based in Punjab, you can skip the PRA registration for now.
Hi Mr. Rizwan Kamil,
I hope you are doing well. I have a quick question. I’m working with a software house in Pakistan for foreign clients and receive my salary after tax deduction, which is around 17%. Should my tax be deducted? if yes, then what should be the deduction percentage? Can I submit form 3 so that my tax may not be deducted? Thank you!
looking forward to your response.
As you are receiving the salary in Pakistan, it is taxable. Tax rate depends upon the salary amount.
Sir is,t income tax on exports of goods also 0 % ?
On the export of goods, it is 1%.
Hi Sir Rizwan, I was amazed by your information related to tax and I have a few questions for you, if you can answer them then this will be really helpful for me:
1st Question:
My partner and I were freelancers, merged our services, and registered our AOP firm.
Now the payments which we earn on the freelance platform we withdraw it to our own Payoneer account and then my partner sends his amount to my Payoneer account. and from there I withdrew the amount from Payoneer to our AOP bank account. (In this process banks don’t deduct our 1% tax or 0.25% tax) because they say the amount we received from Payoneer is in PKR however it’s a remittance so they will provide us with the PRC.
My actual questions:
As of now, the bank doesn’t deduct the tax so we have to pay our firm taxes according to slabs or we can show the PRC in the end and pay 1% or 0.25% only?
2nd Question:
At the time of AOP registration, our consultant told us to register for SRB too, we don’t have to pay any taxes to SRB as we are providing services outside the country or exporting it. The SRB tax will be filed NIL. Whenever we start providing services in Sindh we will pay tax otherwise the tax will be NIL.
My actual question:
Q1. Do we continue filing NIL returns to SRB or is there any tax we should have to pay to the SRB? Because someone said that we have to pay a 3% tax on revenue whether we are exporting the services or giving the services in Pakistan (I don’t know much about this statement whether it’s true or not could you please guide me about this?)
Q2. Can we deregister our firm from SRB? As our consultant is saying that it’s possible but it would create more problems for you guys. The only solution is to break the AOP and make it again (According to him)
I will be glad if you can answer these questions for me.
Thanks.
Thank you Shehroz for reading the article.
Question 1:
By showing the PRCs, you can claim it at 1% or 0.25%, as applicable.
Question 2:
SRB now has a proper form for reporting export revenue. It will be submitted as per the new form. NULL filing is not recommended.
Question 3:
I recommend filing monthly SRB returns because they do not require tax payments. It would also help obtain a reduced tax rate for providing IT services.
very remarkable discussion about IT Services
Thank you for reading the article.
If we are registered as a freelancer with PSEB, do we still get 100% tax deduction or is it only applicable to companies?
The 100% tax credit has been replaced with 0.25% tax. And it is available to all taxpayers.
hi can you help me revising my tax returns ?
I am a game developer and I receive my earning(from google and facebook) through foreign remittance and 1% tax is deducted on all the remittances. but I didn’t find any lawyer who understands this that how to file income tax return in this case
Hello Abdul Jabbar, If you have any specific questions, please ask. If you need any services, you can contact me directly.
Thank you for the explanation.
Do you also offer accounting services? If yes, kindly contact me as I would need some assistance in future.
Yes. You can contact ask for the accounting services.
Thanks for comments.
1.Once we register with PSEB, do we have to send certificate to bank so they deduct 0.25% and not 1%? Anything to send to FBR?
Secondly
2. Sales tax registration is not required in Punjab, right?
3. Is sales tax registration required in KPK? I only do IT freelance, no local business.
1. If the bank is deducting 1%, you need to communicate with the bank and ask for what docs do they require for 0.25% deduction.
2. PRA registration is not required in case of individual and AOP.
3. Apparently, sales tax registration is required in KPK.
SO I just started freelancing client i get usually for my friends they said to me we have client work for them and usually they pay in payoneer.
So what kind of proof i need i have prc of bank with code 9186 other then that what require. I not have direct contact with client so i keep screenshoot when i am communicating with them on project i only discuss tech side.
Keep record of whatever you have including PRCs.
Thank you for detailed article. Just a question on mode of payment. I work with a company as consultant which sends me money for my IT services. Earlier we were doing transfer to my bank and they use to send me e-PRC. There use to be 1% deduction till June 21 and than 0.25%. Now for last couple of months, they are sending money to my Wise USD account and I send money from wise to my PKR account. Does that qualify for tax benifit against IT export or not? The transfer bit, From customer to wise account to PKR account.
I recently got hired by a company that is going transfer my salary to a Wise account. I would also like to know if the transfer from a Wise account to PKR bank qualifies for tax credit claims?
Also how does a PKR bank know to deduct the withholding amount? In the past it has not deducted anything for foreign remittance.
It depends on whether you get a PRC (Proceeds Realisation Certificate) when money is transferred to the local Pakistani bank account. If you get a PRC, then it can be regarded as export proceeds. Only then you can consider it as export of IT services.
Pakistani banks deduct tax based on its remittance code. If it is home remittance, no tax is deducted.
so if you have PRC with the IT Service Export Certificate code of 9185 that means there will be not tax applicable on it/
Currently, income tax on the export of IT services is 0.25% of revenue.
Kudos Mr. Rizwan,
As most of your readers have expressed, this post, and especially your answers to questions asked in comments section, are the most comprehensive resource on Internet on tax matters related to Pakistani IT/ITes service exporters. In my experience, even tax consultants are found confused in many of the points you concisely and expertly covered here.
I would also like to take this opportunity and ask my questions. I am running a small proprietorship business for export of IT services. To increase our chances of getting business, I registered an LLC in USA few years ago and am receiving payments through Payoneer. We hold payments received from our clients in our Payoneer account to cover marketing expenses from it and then transfer the gross profit to our Pakistani bank account. In our accounts here, we treat it as the earning when the funds are received in Pakistani bank account (cash basis).
My questions are:
1. Do I need to declare my US based company (which has no physical assets in US) in the FBR tax returns?
2. Do I need to declare the funds present in Payoneer to FBR at the time of filing tax returns and how/where to report these? By just declaring those funds (foreign asset), do we have to pay some kind of tax on it?
3. If the answer to any of above questions is in affirmative, how can I deal with the situation of not reporting any of these so far in my past tax returns?
Finally, please tell us if you offer tax consultancy services to freelancers/proprietors of small businesses like me?
Your guidance in this regard is highly appreciated.
Thank you Kamran for your kind words.
1. You need to declare your investment in the US based company in the FBR tax return.
2. Funds present in Payoneer account also need to be declared in the FBR tax return. You can simply show it as Cash at Payoneer (it will not be a foreign asset). I assume this Payoneer account is in your personal name, not the USA based LLC. If it pertains to the LLC, its taxation is different.
3. My advise is to take proper tax consultancy for dealing with the situation.
If you want to discuss it further, my contact details are given in the Contact section.
Rizwan, thanks for the detailed article and even more thanks for the replies.
I provide IT services (customer support) my remittance is from that.
I have one confusing question.
If I dont want to claim 100% tax credit from 1 July 2021 to 30 June 2022 in tax return, will I pay max 1% tax on each remittance I get? Just file return right nothing to pay additionally?
Actually, my bank has deducted 1% on mostly all payments, BUT did not deduct 1% on two remittances received after 1 July 2021.
So, is there anything to do for those 2 payments where bank did not deduct 1%? One was in November 2021.
Or its not my fault and bank has to do it?
Tax credit was introduced I think in March 2021? Did it start applying actually from 1 July 2021 or some other date?
Thank you Samir for reading the article. Tax credit actually started applying from 1 July 2021.
If you don’t claim 100% tax credit, your maximum tax liability will be 1% of total export proceeds minus the amount deducted by the bank.
Any amount the bank has not deducted will need to be paid along with the tax return.
Assalam o Alaikum,
Sir, first of all, a big thumbs up for your reply to the queries, which ultimately makes this article a Wikipedia for the issue related to Freelancer taxation.
My question is, after all this debate and the latest happenings, what is update on Registering in Sales Tax for Freelancers who operate from their Homes, with No business Activities in Pakistan, and all the income originated from foreign sources, plus registered in PSEB? Should they still need to be registered in Sales Tax?
Thank you for reading the article and such kind words.
If you are in Punjab, sales tax registration with PRA is not required. However, if in Karachi, registration with SRB is mandatory.
Hi Rizwan.
I have been working for a Dubai-based IT company and I received a monthly salary directly credited to my PKR bank account as a remittance with purpose code (9471). I am also registered as a Freelancer with PSEB and also received my certificate.
Is my income is exempted from tax or I have to pay tax in this case?
Apparently it is salary. Foreign source salary is not taxable if you have paid the foreign income tax. However, if you can arrange a contract for provision of IT services (other than as an employee), it can be taxed at a reduced rate of 0.25%, which shall be a final tax. You will not be required to pay any other tax on this income.
If I am paying 1% under (FTR) do I still need SRB (Sindh Revenue Board) registration?
Yes.
Dear Rizwan
I provide IT Services to a foreign country for last 4 years (no local services, only 100% remittance). My questions are
1. Bank deduct 1% tax on foreign remittance , I am in Punjab and not a member of PRA or PSEB. I only file return every year. How can i get this reduced to 0.25% ?
2. Can I get a refund from FBR ?
3. Your bullet point 6 says that one must register with PRA or any other and file Sales tax . If i do that , do i have to pay 16% tax to save 0.75% from bank , is it true ?
Thank you in advance
Thank you for reading the article.
For 0.25% tax, you must register with PSEB.
You can apply for the refund. But it is not easy to get refund from FBR.
If you register with PRA, you will not have to pay any sales tax. However, sales tax return will be submitted to PRA each month.
Do we have to file nil sales tax return or mention the amount in return?
Nil would be sufficient.
I am unable to register with PRA for the sales tax. they insist that i need to apply as a business and provide a bank account that’s not on my name but on my business name. That’s stupid.
I am an IT Freelacncer, registered with PSEB and file my tax returns regularly for past several years.
how do i get the PRA issue sorted out to get 0.25% as the final tax on my income from export of IT enabled services?’
I would appreciate a response.
Waqas.sethi@gmail.com
Simply add a business name to your NTN (a simple process). It will appear in your NTN. Using that, you can open a business bank account. It will be your personal account but account title will be a business name instead of your personal name. Then get registered with PRA.
Note: Registration with PRA is not mandatory for an individual if his/her sole source of income is export of services.
Adding into this, Sir Export of Services are exempt from tax in PRA, so, still i have to get registration in PRA for availing tax credit? your response shall highly be appreciated.
If your business is not registered as a private limited company, registration with PRA is not required in such case.
Asalam O Alaikum,
I have few queries if you can kindly help.
Introduction
I’m doing a full time job as a software developer in a IT company in Islamabad. Apart from my job I have also developed some apps and make some earning from them. I’m getting the earning as wire transfer in to my bank account.
I’m going to file for the first time.
For salary return I’m clear but I’m having confusion regarding my apps earnings
Please correct me if wrong
In foreign income i should put the amount I earned through my apps for example Rs1000 Pkr leaving the tax exemption column empty then i should go to tax credit and in section Certain person (coal mining, startup, It/it enabled services) 65f I should put Rs 1000.
Then I should go to final/fixed tax section and infront of Export of service s 154A I should put receipt value Rs. 1000 and tax 20.
Please note I don’t file sale tax return as I don’t have any company or permises, I worked in my individual capacity.
Many Thanks and Best Regards
It will not be filled this way. And it is difficult to properly explain here.
AOA
Sir,
We are providing IT Enabled Services through a liaison office of a Foreign Client. Client’s liaison office does not qualify for being considered as PE, we believe. Client’s liaison office has obtained registration from SECP for the same well. We provide our services to foreign client and for which client’s liaison office receive foreign remittance in its account and then it pays us in PKR.
My question is, do we qualify for the the definition or concept of export of IT Enabled Services, if yes then who will deduct tax at rate of 1%.
Further, shall we be required to add SRB on our related invoice or not ?
Regards
Salman
As you receive payments and are rendering services in Pakistan, it would be difficult to establish it as export of IT Services.
IF IT exporter got a exemption of the 1% WHT under 154A then how to enter the amounts in the tax return.
When I enter the total amount in Final tax tab and calculate the 1% tax payment payable and it goes to admitted tax and I enter the same amount in the tax credit section it do not decrease the admitted tax.
But you said The exporters of IT services are eligible for 100% tax credit regarding tax payable under any provisions of ITO, 2001 including minimum tax and final tax.
I want to make the 1% Final tax to 0 but the credit is not applying to that final tax.
There seems to be an issue while entering data in correct fields. Please use correct fields.
I used the correct fields that is why tax is calculated but the tax credit is not getting applied to the Final tax IRIS only apply the tax credit to Normal Tax where the The exporters of IT services are eligible for 100% tax credit regarding tax payable under any provisions of ITO, 2001 including minimum tax and final tax.
Suppose Final Tax on 1 Million is 10,000 and I enter 10,000 in tax credit field related to 65F but still IRIS is showing the same 10,000 payable.
If you have some other correct fields in mind then please tell me.
You need to enter the amounts in normal tax instead of final tax. Whatever tax liability is calculated, you will enter tax credit against all that tax liability. Whatever tax you already have paid is adjustable tax, not final tax.
A little bit off topic, but let me still ask please. I have a registered partnership and we provide marketing service to foreign clients. All our income and expenses are done through business bank account. We are now planning to spend on FB Ads to gain clients
I am exploring credit cards with some reward programs but I have a concern regarding taxes. The credit cards will be personal and if we spend on fb through it using our personal account, can we claim these as an expense from our business?
Your response will be highly appreciated, thanks
Dear Osama, thank you for reading the article. Yes you can claim it from business. I would suggest that you and the partnership firm enter into an agreement for incurring these expenses on behalf of the partnership firm. Also, you would need to provide all the details and documents to the firm.
Hi Rizwan,
First, I appreciate the effort and your precious time that you put into answering all the queries on this blog. This has been really helpful to a lot of people like me.
I’m a sole proprietor and I have the following questions regarding the filing of the statements for the withholding tax, specially for a sole proprietor.
1- In the last financial year, I had a few employees for a few months. I paid their salaries and withheld the tax. I paid the withheld tax to the FBR and also filed the first quarterly 165(1) statement. But then I stopped working with my employees which means I didn’t have to withhold any tax. I also didn’t file the next 165(1) statements. Was I supposed to file those statements? If so, what can I do about it now?
2- I have been told that I have to file the 149 and 165(7) statements now. Should I file them even I skipped a few 165(1) statements?
3- The 165(7) statement has a section about the data regarding the 149 section. Do I need to fill in that data in 165(7) as well?
4- If I don’t have any employees in the current financial year, do I still need to keep filing said statements? Is it necessary for a sole proprietor?
Thanks in advance!
Regards, Ahmer
Dear Ahmer,
Please first understand that if you are a sole proprietor or the business is run by a partnership firm, you become withholding agent (in case of procurement of supplies and services) when the annual revenue is Rs.100 million or above. However, in case of salaries, every employer is a withholding agent irrespective of the revenue. Therefore, if annual revenue is less than Rs.100 million, you are not required to deduct tax from payments for supplies and services. In such case, 165 statement shall only cover salaries portion (section 149).
1) 165 statement is required to be submitted even where no withholding tax is deducted during the period. You should submit the pending statements now.
2) Yes, you should submit the 165(1), 165(6), 165(7) and 165(8) statements now.
3) Yes. 149 data also needs to be filled.
4) The statements are required to be submitted as long as you are doing the business.
Thank you, Rizwan, for the detailed answer! However, there are a couple things you mentioned which are not yet very clear to me.
1- I don’t see any form related to section 165(6) in Iris. If I read the tax ordinance, it seems that it is related to form 149. Is my understanding correct?
2- I cannot find form 165(8) in Iris either. Could you please explain briefly how and when I should submit it?
Thanks again!
Ma Sha Allah, you’re doing marvelous. I have read out the above and got some questions. I’m a sole proprietor doing the freelance IT Services business; registered with PSEB many years ago and then didn’t renew the membership. I’m an income tax filer and bank has been charging 1% on receiving foreign remittance since last year. I’m not registered with PRA, WHT or Sales tax etc. Is there a way, can I claim my 1% tax deduction at this stage?
And what are the requisites to avail 0.25% tax feature? If you can advise some link having such details would also be great. Thanks and best Regards
Thank you Ahmad for reading the article.
1% tax deduction can only be claimed after filing the tax return for tax year 2022. After filing the tax return, if it is established that you have refunds available for claim, only then you can claim the refund.
To avial 0.25% tax, you need to activate your PSEB registration and file income tax return.
Dear Riwan Sb
Thanks a lot for a your guidance. I got my membership renewal from PSEB and banks are charging 0.25% tax on remittances. But I’ve receiving emails from FBR in my IRIS account with the subject: 147 (Intimation to Pay Advance Tax )
They put heavy estimates for me to pay while I don’t understand what to do. Please advise. Thank you
You can simply reply them that your income is subject to final tax u/s 154A, and applicable tax at 0.25% is already deducted by the bank from every foreign currency receipt. Further, that you do not have any other source of income.
very helpful article, Thank you for sharing this.
I will highly appreciate your guidance on my case which is stated as:
I have registered as Sole Proprietor and along with I am earning from Freelancing as well. I have four employees with following salaries 120k, 60k, 50k and 40k respectively. The questions are:
1) Do I need to deduct any tax from their salaries?
2) Should I declare my earning as whole or separately (i.e. from company & Freelancing)?
3) Can I pay employees in full and they are free to pay their taxes themselves?
4) Do I need to apply in PSEB as well to avail 100% tax credit?
5) Is there any other registration or certificate I need to get for 100% tax exception?
Thank you!
Thank you Adil for reading the article.
1) You need to deduct tax from salaries which exceed Rs.50,000 per month.
2) As you are a sole proprietor, there will be single tax return for all businesses.
3) You should deduct tax from salaries.
4) 100% tax credit has been withdrawn. However, you must register with PSEB.
5) I am not aware of any other registration, other than FBR and PSEB for freelancing business.
Hi Rizwan,
Thank you for guiding everyone in this regards. I as a freelancer having difficult time to register pseb, they said i am already register with fbr NTN which is under my name.
So they ask to register as sole propetier, I tried but there are lots of irrelavent columns like call center address etc. I am just freelancer and dont know if i have to fill this or not.
Second is, if i am register with fbr, will.it be enough to have 0.25% avail tax. previously it was 1% on me bank charge for remittance.
Kindly guide in this thanks
Thank you Atif for reading the article. You will register as sole proprietor. If such columns are not mandatory, you can skip those columns.
If your income is regarding export of IT services, you will be subject to 0.25% tax. Yes, NTN is sufficient based on available information. Finance Act, 2022 is not yet available. So final opinion as to applicable conditions can be given once it is shared by FBR.
Wonderful article Rizwan Sir. I have YouTube income and bank deducts tax @ 1% as i am filer. My question is should i have to register with PRA for sales tax return filing to qualify for FTR as mentioned in Section 154A. Thanks
Registration with PRA is not mandatory to qualify for 1% FTR.
Thanks Sir
Assalam o alaikum rizwan sb can you confirm that if a company Export Engineering services from Pakistan to Saudi Arabia how much tax is charged on it??
Engineering services means programing of PLCs.
Dear Abdul Haseeb, thank you for reading the article.
I think you asked this on phone also. Apparently it comes under export of engineering services which is taxable at 1% of export proceeds. If it can be included in software development services, then it will be taxable at 0.25% of export proceeds from 1 July 2022. For detailed discussion, you can come visit my office.
Thank you for the details. I have registered a sole proprietor IT company and its registered also under PSEB. Since March 2022 I am receiving remittance, my all proceed are foreign remittance 100%. I am bit confused regarding the exemption and tax credit. Tax credit is from 01 July 2022 onwards. How I will fill my return for tax year 22 and later for 23
Tax credit is available till 30 June 2022. From 1 July 2022, it is proposed to be replaced with a nominal tax of 0.25% of export proceeds.
Tax Return for 2022 will be based on tax credit, whereas, that of 2023 will be based on new Finance Act when it is promulgated.
Dear Rizwan,
Indeed a marvelous job by helping the community by such detailed guidance. I have few points which need your kind input:
I was overseas Pakistani and recently I returned back to Pakistan with a Freelance/Contract work for a foreign company as Software Professional. I am getting my earnings in my FCY bank account in Pakistan. Currently it is being sent into my RDA (Roshan Digital Account) which was opened by me as a non-resident. However, I believe I will turn into a resident status after staying 183 days in Pakistan.
My questions:
* Can I continue getting my payments in RDA and in that case will It be fine from Tax point of view?
* I tried to pen Freelancer Digital Account but that account has limit of maximum 5K USD in a month but my earnings are higher than that. How can I deal with that?
* If I register a sole proprietorship, how that can help dealing with above issues and how I can avail tax exemptions being IT Freelancer in that case?
Thanks and keep up the good work. Cheers
Thank you Hussain for asking these questions.
1) Even if you become resident, as per prevelant SBP guidelines, you can continue to use RDA. I would also suggest to continue the use of RDA because of its “repatriation without SBP approval” feature. Please note that having “foreign assets” is pre-condition for continuous use of RDA. Foreign assets means any movable or immovable assets held outside Pakistan and includes real estate, stock and shares, bank accounts, cash, jewels, paintings, accounts and loan receivables, and few other assets.
2) Freelancer Digital Account comes with some restrictions as you mentioned. A normal business account as a Sole Proprietor can avoid the restrictions.
3) Registering as Sole Proprietor is easy. It just needs to include the particulars of Business in the NTN. I think you should register as sole proprietor. FBR has already proposed to remove exemption/100% tax credit for the IT exports. If the proposals are approved, and the approval is very likely, IT export proceeds will be taxed at 0.25%. Even if the service does not fall under ‘IT exports’ category, export of services is taxable at only 1%, which is not a big deal.
Dear Rizwan Bhai,
Is income from youtube can be termed as Export of IT services. Please guide.
I am afraid it would be difficult to cover under IT services.
But banks deduct tax @ 1-2% U/s 154A of YouTube receipts.
1% is for filer, and 2% is for non-filer of income tax. If you file income tax return, bank will deduct 1%, which shall be final.
Assalamoalikum Sir,
First of I would like to admire your efforts to publish this informative article and then value response to every one thoroughly and legally.
Secondly Sir, we are software development company registered with PSEB and Pasha. We are selling our service to our client out side the Pakistan( Means Exporting IT Service) and our bank deduct 1% Tax U/S 154 on every proceeds of our export where IT industry is exempt from tax. please explain how we can save this 1%.
further it is request can you please explain the 100% tax credit against tax liabilities meaning.
what would be changes in Finance Act related to IT Industry in context of Sales Tax and Income tax Post Budget and Finance Act 2023.
Your Kind Cooperation in this regards help us a lot. looking forward to hear from your side.
Muhammad Ashfaq
Thank you Ashfaq for such kind words.
Your first question is regarding 1% tax deducted by the bank from export proceeds. This tax was imposed by the Govt. in last finance act (2021) on all exports of services. So anyone who receives proceeds from export of services is subject to deduction of 1% tax. For IT exports, the Govt. has given an option to avail exemption certificate from FBR. Application for exemption can be submitted to the FBR through IRIS portal. On production of this exemption certificate, the bank will stop deducting 1% tax.
Your second question is regarding 100% tax credit. 100% tax credit means your income is not exempt from tax. You will be required to calculate the tax liability; however, you will get 100% tax credit against that liability meaning thereby, your net tax liability will become zero.
Obtaining tax exemption from FBR was difficult. Therefore, on request of IT sector, the Govt. has proposed income tax of 0.25% on export of IT services. This will be a nominal tax, and the IT sector will get rid of this requirement to obtain exemption certificate. I will share a separate post on post-budget scenario in next couple of days.
Hi Rizwan
Thanks for the good work you are doing. May Allah bless you!
While submitting the form “159(1) / 154 (Application for reduced rate of withholding on Export)” I get the following error:
“Mandatory data in CC Tab must be entered before submission.”
Any Ideas what is missing? I have attached the PRCs.
Thank you Nadeem for the comments. Sorry I am unable to understand the issue. If you can share your login details, I can check the issue.
Thanks!
How do I send you a snapshot of the problem?
What am I supposed to enter in the CC and Data tabs?
You can share the details at rizwan@asr-ca.pk
Hello Sir, Hope you are doing well,
First of all thanks for such a helpful article, I just need one assistance as you have mentioned export of IT services is not taxable under PRA but in Punjab Sales Tax on Services Act 2012 IT services are taxed at the rate of 5% and there is no mention of export so can you kindly share some notification/circular reference on the same as I could not find it anywhere.
I shall be highly obliged.
Regards
The exemption is mentioned in the Rules.
Is the exemption being restored for IT exporters or are we still under tax credit regime? I was told by someone that IK had restored the exemption status for IT Exporters and also allowed them to open and operate FCY accounts. Is it true?
If FCY accounts are allowed, is it only for Freelancers in personal name accounts or sole proprietor business accounts too are allowed now?
Please advice. thanks.
Tax credit regime is still applicable. Had the PTI government been in power till announcement of the next federal budget, exemption might have been restored.
Yes, freelancers can open “Freelancer Digital Account” in any bank in PKR or FCY. This facility is only allowed to natural persons i.e. in individual name or sole proprietor name. Partnerships and companies are not included in the definition of natural persons.
Hi Rizwan Kamali, Thank you for sharing knowledge.
i have one question.
– shall i transfer individual account amount to my aop company account ?. because that individual amount come from online bidding platforms. we are tech startup recently registered our aop. my consultant saying don’t transfer.
Thank you Imad for reading the article.
It is better to keep sole proprietor business money separate from AOP business.
but this is not sole proprietor we are working like company with two partners.
“Individual account amount” suggests that the amount in individual account relates to some sole proprietor business. If this amount actually belonged to the AOP business, but received in individual account, then it may be transferred to the AOP account. However, I would strongly suggest to receive all amounts relating to AOP business in the AOP bank account.
Dear sir Rizwan, I m impress the way you are expalining to every one. May Allah give you the best reward of this.
I need your words on followings.
1- We are registere as a private limited comapny
2- We are getting proceeds only from IT export services. No Local Services
Do we require to register in PRA and file Nill Return.
Does Registation with Pakistan Software Export Board is manidatory, or registration helps us in any way to get benifit or future Income Tax exemption.
regards
Thank you Khawar for such kind words.
Yes, private limited companies are required to register with PRA at least as a withholding agent. I would suggest you to get registered as a withholding agent if you are not providing any taxable services in Punjab. Export of services is not a taxabale service in Punjab.
Registration with PSEB is not mandatory for export of IT Services. However, you can get any benefits that would be available to such registered persons.
Hi
If a person move from abroad to pakistan and been living in pakistan for 3 years after the move..what will be tax implications on him receiving digital service fee into his account abroad..personal or business.. if person gets paid in dollar or aed etc..
Thanks
If it is IT service or IT enabled service, it may be eligible for 100% tax credit. Otherwise, it will be chargeable to tax at 1%, which shall be considered final tax liability of the person.
Assalamukum sir,
Main ne 2021 main jab iris per portal banaya tu by mistake sales tax ka registration form bhi fill krdiya . According to the FBR website: Sales tax ki registration krwane k baad biometric verification bhi krwani hoti hai 30 days k under otherwise sales tax nonactive hojata hai. Main ne koi verification nhi krwai tu usooli tur per tu meri registration 30 days baad null and void hojani chahiye thi lakin mjhe jan 2022 main suspension ka notice agaya . What should I do now?
You need to apply for cancellation of registration to the Commissioner on the grounds that you are not making any taxable supplies.
Can I contact you? What is your mobile number?
0333-4853599
Hello Rizwan Sb.,
We are newly startup in ITeS and will be getting remittances against export of our services to foreign clients. We are not planning to provide services to clients in Pakistan. My questions are:
1) Do we still need to register with SRB?
2) What will be consequences under law if we purchase equipment from non-sales tax registered person and don’t get sales tax invoices from them?
3) What if we pay them through cash instead of issuing checks (under 75k per transaction)?
We are not operating from big cities in Pakistan hence it is hard to find person having registered with SRB.
Kindly advise
1) Registration with SRB is mandatory.
2) I think you are not a private limited company. If this is the case, I don’t think there will be any consequences.
3) 75K limit is per transaction per vendor in a year for supplies. If your purchases exceed 75K in a year from a particulary suppier, the payment must be made through banking channel.
Thanks for your response Rizwan Sb., in continuation to your response to question 2, we are a private limited company. What would be the disadvantages for us being a private limited company and not buying equipment from registered person.
Even though if we get ourselves registered with SRB we wont be able to claim refund as there will not be any SST invoice we will raise. Will there be any tax benefit for us if we register with SRB and we pay SST on services?
Will we also be able to claim GST which we pay on purchase of equipment?
If any vendor does not provide us SST/GST invoice, will he be liable for penalties or we being private limited company?
I know these might a lot to answer but would highly appreciate your kind and generous support as usual you do,
Regards,
Sultan
A private limited company is withholding agent in income tax as well as sales tax. When you buy from unregistered person, you are required to deduct income tax and sales tax at higher rates. By not doing this, you would be making non-compliance of the income tax and sales tax law.
You will register with SRB for making compliance of filing sales tax returns only. You will not get any sales tax refunds.
The equipment will be used for making sale of exempt services, therefore, you will not be entitled to claim it.
If a vendor does not provide sales tax invoice, there won’t be any penalty. However, there can be consequences as a withholding agent.
Thank you so much Rizwan Sb for valuable response and your time. I get it what you mean by non-compliance being withholding agent if we don’t get GST invoices i.e. deducting income tax withholding at cost + 17% than just cost.
Thanks again!
Regards,
Sultan
Yes, more or less the same.
Sir,
Thank you for this useful post – I have a question – I’m a freelancer working on upwork.com and until 2019 they were wiring money directly through SWIFT so i could get PRC immediately and the PRC had correct code (9185) however since 2019 they switched from direct Swift to Pakistan Remittance Initiative and therefore the PRC has to be requested through intermediary bank. Now the problem with the new PRC’s is that they show Home Remittance instead of proper reporting code – This has happened across the board – Freelancer, Upwork, Payoneer. They all use PRI and the PRC shows Home Remittance – is that going to cause any issues with FBR – Are they going to ask why the PRC is showing Home Remittance (Same Sender/Receiver name) and If do they ask, how should I respond? Or is that PRC enough?
Lower level staff of FBR unfortunately won’t be able to understand this. If the matter of “Home Remittance” is stuck at lower forum, it would need to be brought to the higher forum. For now, i think you should keep PRCs and all your correspondence with upwork.com.
Continuing the question of Ali, if bank is treating our remittances coming from Wise/Payoneer as Home remittance (and not deducting 1% tax) even though we are providing IT services, are we liable to pay the 1% tax when we file our return?
Yes, you only need PRCs and invoices, agreements, other correspondance with the client.
I am a freelancer from Karachi and I have already filed my income tax return for 2021. Do I need to register for sales tax as well?
Yes. Registration with SRB is required.
what is SRB?
Sindh Revenue Board. SRB is the authority for registration for sales tax on services in Sindh.
I belong to Karachi Sindh and I am working as a freelancer on Upwork and fiverr. I already filed my income tax return for 2021. Do I need to register for sales tax as well?
Yes. Registration with SRB is required.
Hi Rizwan,
Great job on clarifying all the questions. I checked and still have one that hasn’t been asked yet. We are looking to hire 2 Pakistani sole proprietors who will be working for my Dutch company remotely from Pakistan. Now we use the platform Deel (https://letsdeel.com/) to organise the contract and pay our contractors worldwide. We would love to go through Deel again, but I’m not sure if this is then classed as a ‘normal banking system’.
So in a nutshell, we pay in Euro to Deel and the contractor can then move the money to his local Pakistani account. Deel told me: ‘we just facilitate the payment (we use PKR local in Pakistan via Payoneer)’. so they’re not a bank.
Do you think this would mean the contractors will be eligible for the tax refund? Would love to jump in a call to discuss as we’ll be looking to hire more people in Pakistan.
Thank you,
Marc van Ginkel (Marc@Qlick.nl)
There are two important questions:
1) Providing evidence that the income relates to export of IT services.
2) Remittance of export proceeds into Pakistan through normal banking channel.
I think the more important question here is regarding export of IT services rather banking channel. What I understand is that banking channel can be proved in this case. If Deel transfers money from Payoneer (PKR) to local bank (PKR), export proceeds coming into Pakistan may not be verifiable. Because in such case the freelancer won’t get any PRC from the bank. Without PRC, the tax department will not recognize it as export proceeds.
Great article, thank you very much.
I am receiving 100% of my income from foreign clients in Payoneer and I withdraw from there to my bank account. I have 2 question.
1. Is there any limit on foreign income, after which we have to pay tax? a consultant told me if annual income is above 10m, then have to pay 1% tax.
2. Do I need to file sales tax return?
Thanks.
Thank you for reading the article.
1. There is no such limit of Rs.10 million for applicability of 1% tax.
2. Requirement to get registered for sales tax purposes is different for different persons in different provinces. However, it is better to get registered and file sales tax returns.
Sales tax return kin ko file krna hota hai
Sales tax return kin ko file krna hota hai. I am from Karachi and earning through freelance work
Hi guys,
So even if the money comes in through Payoneer, you fall under the Tax Credit scheme?Payoneer allows foreign companies to provide local bank transfers in Pakistan right, so technically the money is coming in from inside the country then no?
I’m struggling with the ‘normal banking system’ criteria.
Thanks for your help,
Marc
Tax department requires proof of foreign proceeds coming into Pakistan in the form of a Proceeds Realization Certificate (PRC). PRC indicates the amount of foreign currency and PKR exchange rate used for currency conversion. So, if PRC is available, the normal banking criteria for export proceeds would meet.
Dear Rizwan,
I had applied for tax exemption certificate via iris system and got this response after few months. Please guide what to do next.
You are informed that the Honourable Supreme Court of Pakistan vide their judgement dated 15/05/2019 in CAs Nos 1262 of 2018 and 507 of 2018 have ruled that “tax credit” and “exemption” are conceptually two different things and that “exempt” as used in section 159(1)(a) does not include “tax credit” , and, therefore, no exemption certificate can be issued under section 159 in respect of the later.
It clearly follows from the above ruling of the Honourable Supreme Court that persons entitled to 100% tax credit cannot be issued exemption certificate under section 159 of the Income Tax Ordinance 2001.
I think the tax representative has erred in understanding the law. Section 159(1)(c) clearly states that where the Commissioner is satisfied that the amount is subject to 100% tax credit under the Income Tax Ordinance, 2001, the Commissioner shall,upon application in writing by the person, issue the exemption certificate. Had this not been the case, why would FBR issue Form 159(1) / 154A (Application for reduced rate of withholding on Export of Services) on IRIS portal?
Brilliant article.
Can you confirm if PRA Sales Tax registration is still required for sole proprietors with 100% foreign income? Do you know anyone who got the exemption certificate for 1%?
Most of the tax consultants are telling me PRA registration is required with NULL filing.
Thank you Asad.
PRA sales tax registration is not required if 100% of your income is export of services. However, FBR people don’t exactly understand the legal requirements. That’s why tax consultants advise PRA registration and NULL filing.
Hi Rizwan,
I work as a Freelancer (Software Engineer) on Upwork, and from there I directly transfer funds into my Bank Account. Is it considered proper banking channel? Can I get tax credit with this?
Yes, you can get tax credit. You would need PRCs from the bank for this purpose.
Thanks. Can you let me know the procedure of filing sales tax. Should I create a company for that
You don’t need to register a private limited company for that. First you need to register with sales tax authority. Then you can file sales tax returns.
Hi Rizwan, thank you for this informative article. Is it necessary to encash foreign currency in Pak Rupees to avail 100% credit on IT export services?
Atleast 80% of your income must be brought into Pakistan, either in foreign currency account or PKR account. This is the criteria. If you receive the remittance in FCY, it is not necessary to convert into PKR.
Hey Rizwan. If a freelancer from Punjab kept over 50% of their foreign remittance earned in Tax year of July 2021 to June 2022 in their Payoneer account in USD, what tax rules will be applicable on them? Technically, they didn’t remit 80% in local bank account so they can’t be given tax credit right? So what will their tax / tax rate be? Which tax category do they fall in?
Also, what if they remit the foreign remittance kept in Payoneer in their local bank account in the next tax year (e.g., September 2022), can they now get tax credit?
In such case, the tax rate of 1% will be applicable on total export income in that year.
In case of subsequent remittance into Pakistan, the decision will be based on all remittances during the year 2022-23.
Thanks for replying and for this post. Some follow up questions if you don’t mind:
1. Total export income would be income withdrawn in local bank account in PKR + USD held in Payoneer right? I noticed my tax consultant didn’t declare the USD held in Payoneer in the Foreign remittance while filing the return (they probably think it can be declared in the next tax year). Did they do it all wrong?
2. I heard from a tax consultant that freelancers should declare their foreign remittance as a “business individual” to avoid issues with FBR. All of my tax returns declare the foreign remittance in the “foreign remittance” row of “Reconciliation of Net Assets” table in the “Wealth Statement”. Is this the correct way?
1. Without looking at all the facts it may not be suitable to declare that your tax consultant did it wrong. However, as a general principle, whatever you earned during the year whether local income or export income, it should be declared in the tax return. Further, from this earning, if you didn’t bring any amount into Pakistani local bank account, it still needs to be declared as an asset (e.g. cash at payoneer).
2. This is not the correct way. You should declare it properly as export of services.
Greetings Rizwan, i appreciate you for this article and seek help. I run website blogs and these blogs are monetized by Google Adsense Advertisements for which i get paid by Google in my Meezan bank. But i noticed bank deducted 2% on my remittance and issued PRC. So can you please let me know if bloggers and web owners displaying google advertisements are also exempted from Tax?
Your response will be highly appreciated.
Thank you for reading the article.
Advertisement services are not subject to exemption or 100% tax credit claim. The bank will deduct tax on this. However, if you submit your income tax return annually, this rate will be reduced to 1%.
Sir we are a few freelancers working together, we are willing to register or business, please guide whether llp or llc would be better, And if we register as llp, our income would fall under 100% tax credit while all of our income comes through banking channel as remittance, Also please mention the documentation required
You can form:-
1) Normal partnership (under Partnership Act, 1932 with Registrar of Firms)
2) LLP (under LLP Act, 2017 with SECP)
3) Private limited company (under Companies Act, 2017 with SECP)
I would suggest normal partnership or an LLP. Both have their pros and cons. 100% tax credit can be claimed in all three forms.
AOA,
Thanks, Rizwan Saab for your kind time and all the explanation here. I have few questions:
1. After reading everything, I have applied from the Tax Exemption document on IRIS (159(1)/154A but got this answer:
As per your business address, your jurisdiction, prima facie, falls within Zone-V, RTO, Lahore. Since your application is out of jurisdiction, the same cannot be processed.
What do you think the solution could be?
2. I was told that we MUST have “App v 13” statements from the bank (https://www.sbp.org.pk/epd/2018/FEC2-Annex-A.pdf). But my bank (Meezan) not giving it saying that it is given only when you provide us invoice as well as some export document which the bank will provide before the arrival of any remit, only then they can provide it.
3. It is a must to have sales tax registration. I am not doing any local business and all my remits are foreign and i am from lahore.
Thanks for your time and guidance.
Thank you Naveed for reading the article.
1. It seems your business address is different from your concerned Regional Tax Office (RTO). You need to submit an application to transfer your jurisdiction to relevant Regional Tax Office i.e. Zone-V, RTO, Lahore, or meet the relevant DBA at FBR to transfer online application to concerned officer’s login.
2. You need to provide software services agreement and the sale invoice that you sent to your customer. That is mandatory requirement from banks.
3. If you are working as an individual or a partnership firm, and only provide export services, sales tax registration is not required in Lahore.
For tax ememption or in general, can we receive software services remittance in foreign currency account in pakistani bank or does it have to be PKR bank account?
It can be received in either of the two.
Hi,
I’m working from Pakistan, I went to bank for opening of Foreign currency account so that I can bring my earnings in USD but the bank said that as per State Bank Policy. We can’t bring USD directly into our account it will be converted to Pkr.
So I don’t understand what’s the purpose of Foreign Currency Account?
As per my knowledge, this happens in the case of PKR account. However, the bankers can better guide in this matter.
Assalam-o-Alaikum Rizwan Sb.,
I hope you are doing fine. I have few question to seek your attention. We are startup company (incorporated in June 2021) with vision to export ITeS from Pakistan. To avail tax credit and 1% tax exemption on remittances, what would be the better option for us 1) Apply exemptions under exporter of ITeS or 2) ITeS startup company?
Secondly, what documents need to be submitted to FBR in other to claim exemption through 159(1) / 154A (Application for reduced rate of withholding on Export of Services) application? We are not making payments currently which could trigger deduction of WHT. Do we still need to register with Sales Tax if do not intend to provide services to local market?
Thanks in advance!
Regards,
Sultan
Regards,
Sultan
Thank you Sultan for reading the article.
You should apply exemptions as export of ITeS, not as a startup company.
You would need to provide previous tax returns (1-2 years), export contracts, and PRCs when remittance is received.
Sales tax registration depends upon province. Difference provinces and ICT have different requirements for registration. If you are from Punjab, you don’t need to register for PRA unless you are providing local services (full registration required), or you are a private limited company (registration at least as a withholding agent is required).
Perfect!
This makes things a lot clear. Thanks for guidance and valuable time.
Regards,
Sultan
Im from Rawalpindi offering IT services 100% to foreign clients. To avail exemption do I need to register for sales tax or witholding tax? Zero local service and im an individual not a company or partnership.
You are not required to register with PRA. Only NTN is required. However, FBR people decline exemption certificates in case of non-registration with PRA. I would suggest you to get registered with PRA.
I filed as salaried individual for the tax year 2021 as I was on salary but in later months I received a few remittances in 2021 tax year. I have received 1 PRC just a few days ago in my email inbox from my bank. Am I eligible to get tax exemption certificate right now if I provide all PRCs of current tax year and maybe the previous year’s PRCs also or would I only be able to get tax exemption certificate after filing return for tax year 2022 after June 30, 2022 as business person and then submit new exemption application with all the PRCs of 2022? The following is reply from fbr when I applied without submitting any PRC but I attached the pdf of freelance contract.
Mr ZEESHAN AZIZ NTN/CNIC # xxxxxxx is registered as IND. The taxpayer applied for exemption from 1% withholding tax on exports of IT services and claimed 100 derives % tax credit u/s 65F of the Income Tax Ordinance (ITO), 2001. The application of the taxpayer along with relevant data has been perused and the following has been observed:
1. Taxpayer has not provide the Proceed realization certificates which are required under law. Therefore, this office is unable to ascertain the nature of business carried out previously and it cannot be determine based on previous record that the taxpayer will bring at least 80% of the export proceed into Pakistan through normal banking channel.
2. The main activity of the taxpayer as per ITMS Profile is salary income which does not fall within the purview of IT or IT Enabled Services.
In the light of above facts, issuance of exemption certificate under section 159/154A /65f of the of the Income Tax Ordinance 2001 is regretted.
First of all, you need to change your status from salaried individual to business individual. This can be easily done through change in particulars of NTN. Once the status is changed, you will have to re-submit the application for exemption along with the PRCs and freelance agreement, etc. If exemption certificate is provided, it will be applicable for 2022.
Hi Rizwan!
This is one of the best page I have come across! May Allah bless you!
I am going to start a software freelancing for a European company from start of next year. I have few questions:
1. Would it work with being Sole Proprietor? ( From your previous answers, it should work)
2. I have a personal bank account already? Do I need to open one on company’s name?
3. Do I need to get apply for tax exemption? Or bank take cares of it since there will only be foreign remittances mentioning “consulting services”?
4. What is the tax ratio? Is it 1% ? Is it all the tax I need to pay or I need to pay Income tax later?
5. Can sole proprietor be registered online along with tax exemptions?
Thanks in advance
Thank you for your kind words.
1) Sole proprietor would work fine.
2) It is better to open bank account in the name of business. You just have to add the business name in your personal NTN.
3) Bank doesn’t take care of it. You will have to apply it yourself through IRIS portal of FBR.
4) Tax rate is 1%. Bank will deduct it from the amount of foreign remittance received. This is final tax. At the time of filing income tax return, you will not be required to pay any further tax if this is your only source of income. 1% tax will not be deducted by bank after providing tax exemption certificate to the bank.
5) Yes sole proprietor can be registered. You only need to update business details in personal NTN.
Thanks a lot for the prompt answer!
Due to the time limitations I would like to continue with my personal account initially. What could be the drawback?
I have NTN already, do I just need to update the business details to become the sole proprietor?
How do I apply for tax exemptions?
Thanks a lot! May Allah bless you!
You can continue with foreign remittances in personal account untill the bank requires you to open a business bank account.
Yes, you would only need to update the business details in personal NTN.
If you are conversant with your FBR’s IRIS portal, you can apply for exemption certificate there.
Thanks Rizwan! May Allah bless you!
I have updated the business, source of income etc. Now I can see that my Activity Type Business shows up in the certificate. How do I get the business name (Sole Proprietor) on the certificate?
OBS: I have not uploaded any documents (Bill, Rent Agreement, etc yet). Do I need to upload those? If i upload those, do someone needs to be notified or approve?
Thanks
JazakAllah Khair!
Just like you updated the activity type, you need to add business name.
These documents are only uploaded. The rest process lies with FBR.
AOA Rizwan bhai,
Thank you for great article.
I am having a question if you can address that will be highly appreciated.
I am a sole proprietor and providing IT export services in USA foreign companies. I have been doing this for last 3 years and everything was working fine never had a tax issue. But payment i received Dec21 had a WHT 1%. As with your article I am assuming this I can get a 100% return.
How can I do this do I need to submit any certificate into the bank? If Yes from where I can get that and how I can get it.
Thank you Aamar for reading the article.
To avoid 1% WHT you need to obtain tax exemption certificate from FBR. Application for exemption can be submitted to FBR through IRIS portal.
Dear Rizwan,
Thank you Rizwan for the very important information you are sharing.
I have got the exemption from FBR under section 65F till Dec. 31, 2021 but now it is expired. I want to know that can I apply for the exemption again and kindly if you can tell about the procedure to apply online because when I applying for it through “159(1) / 154A (Application for reduced rate of withholding on Export of Services)” they shows the comment “Transaction not allowed, as same transaction has already been completed and next task has also been started.”
Kindly if you can tell that if I am missing any thing?
Thank you Nisar for reading the article.
The exemption is period specific. You would need to obtain it again through IRIS portal. It seems you already have an application in the Drafts folder. Either delete it or use the same for submitting the renewal application.
Hello Rizwan sb,
Thank your for a very good article and your time to answer questions for different queries. We have a setup in Abbottabad KP and KPRA is asking us to pay 2% of sales tax even if we are providing services to foreign clients. We are providing IT services to foreign clients and our payments are through proper banking channels. Do we have to register with KPRA and pay them 2% sales tax? Can you please explain on this when you have time?
Thanks
Thank you Zia for reading the article.
Apparently, I couldn’t find any reference for exemption of sales tax on export of services. In the absence of such exemption, you are required to pay 2% sales tax on IT Services income whether local or export.
Rizwan sb, thank you very much for taking the time and clarifying.
Thanks Rizwan for such a great and informative article. Please would you mind answering my query? We have a registered partnership exporting surgical and dental goods to the UK and we pay 1% WHT on receipt of money from overseas. We are now starting a new business activitiy providing support to our customers (handling Amazon accounts) which I think is either IT enabled or Consultancy services. We would like to provide this service from our partnership as well and would be be paying 1% WHT on this as well?
Thank you Furquan for reading the article. I have provided a list of IT enabled services in the article. If the Amazon services can fit under “remote monitoring”, it can be covered under the IT enabled services. Otherwise, it is consultancy or commission based service, and will be subject to 1% income tax.
Thansk Rizwan for asnwering this question. Please could you confirm if there is any other tax we would pay in Pakistan on export of goods/services once we have paid 1% income tax? Do we need to prepare tax return and show export income if so, what is the point of doing this if no further tax is due after 1% tax is paid. I was trying to find this on FBR website but was unable to find any information on taxes on export of goods/services, please could you guide?
1% tax on export of services is final without any other income tax liability. Tax return is to document the economic activity. That’s why it is required to be submitted, though 1% tax on export of services is final.
Dear Sir,
i am working as freelancer and providing my service to usa clients since 10 years, this year i got notice from fbr as : as per your wealth statement, filed for the year under consideration, you have shown xxxx amount as foreign remittance exempt from tax, you are requested to justify your claim as envisaged under section 111(4) of the it ordinance 2021m else the same shall be chargeable to tax u.s 103
asking me to furnish reply with supportive documentary evidences.
so can you help me here as all my payments is coming through proper banking chanel and i have prc for all of my payments. do i have to submit these and the matter will be cleared?
looking forward for your kind reply.
Thank you
Thank you Kamran for reading the article.
You haven’t mentioned the tax year regarding which you have received the above notice. I assume it relates to tax year 2021 (i.e. last income tax return).
Section 111(4) states that compliance of Section 111(1) is not required for any amount of foreign exchange remitted from outside Pakistan through normal
banking channels not exceeding five million Rupees in a tax year that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.
I think you should submit PRCs and bank certificate to the FBR in reply.
AA.
Hope you are well.
I have a sole prop IT export only small setup. I just registered with SRB to comply with the new ammendments. I am also reg with PSEB.
I offer no local services giving rise to any sales tax. They are now asking me to submit sales returns for all previous years too.
Am I liable to do it? And if so how many of previous hears I have to submit it?
Also for export only, am I liable to submit invoices or Null should be filed?
Isn’t there any agreement between PSEB and SRB in this regard?
Regards,
Jibran khan
As a sole proprietor, you were not required to get registered with SRB. Now that you are registered, you are required to submit sales tax returns with SRB. You should file sales tax returns at least from the period when you registered with the SRB. It is better to submit detail of invoices instead of Null returns.
I started filing withholding tax statements and sales tax from July 2020 onwards, I am properly filing tax return since 2016 and all my income is from IT Export. Can i apply for exemption certificate? I am not able to understand term “for the immediately preceding tax year”.
Yes, you can apply for tax exemption certificate.
Tax year starts from 1 July and ends on 30 June. For example, tax year 2022 has started on 1 July 2021 and will end on 30 June 2022. For tax year 2022, the immediately preceding tax year is 2021 (i.e. 1 July 2020 to 30 June 2021).
Hello Rizwan,
Thanks for a great article and this is really helpful.
I am based in Karachi. My question is, as an individual active income tax return filer and exporter of IT enabled services, HR services. How is it possible to avoid deductions of 1% withholding tax on foreign direct remittances received each month in my local Pak. Rupees individual bank account? Also as I don’t have any other sources of income so it would be difficult to adjust withholding against any other tax liability except to claim refund like I do for withholding on my cellphone, ISP bills or on property transfers transactions. Keeping all this in mind don’t you think this new decision, converting 100% tax exemption on IT services export to 100 % tax credit will just add extra burden of record keeping and books maintaining on individual like me? I mean if that is going to be adjusted or refunded in the end why to charge or withhold in advance.
Dear Aamir,
Thank you for reading the article. You can avoid 1% withhoolding tax by obtaining tax exemption certificate from FBR. Application for exemption certificate can be submitted to the FBR through IRIS Portal. For this purpose, a new application form 159(1)/154A (Application for reduced rate of withholding on Export of Services) has been added under the Withholding/Advance Tax tab.
You are right. Converting exemption into 100% tax credit has caused documentation problems for individuals. But, primary objective of this shift was to document the economy. I personally think that exemption should have been maintained for individuals. Anyhow, this is what law is all about.
I hope I have answered your query.
AOA,
I used to provide IT service for Software maintenance for a company outside Pakistan till last year. Now, I again started the same work to provide IT Services for the same company from November, 2021. I talked to my bank regarding the 1% tax deducation law change this year and I have questions as per my BAHL says. Kindly, explain them.
1. BAHL says, The State bank will deduct 2% on your income even if you have the tax exemption certificate. Is it correct?
2. I used to provide Invoices to bank whenever I get the payments every month so I had to mention the Code Web services to satisfy State bank that I don’t own a software, I just provide maintenance for their owned software. What code Should I use now to satify the State bank that I provide only IT Services and need tax exemption?
3. Can I get the tax exemption certifcate from FBR as I don’t have payments since last year And how long it take to get the certificate?
Kindly, answer them.
Thanks,
/Danish
1) If you have exemption certificate, bank shall not deduct any tax. If you do not have exemption certificate, tax will be deducted at 1% in case of filer and 2% in case of non-filer.
2) You should ask your bank about the code for Software services. If you have the option to select from multiple codes, you can share those options here and I can guide you about the most appropriate option.
3) For exemption certificate you first need to establish the eligibility for exemption certificate. For that, you must show that your annual income tax return has been filed and you are bringing foreign exchange into Pakistan. Exemption certificate is an online process, and requires continuous follow up from FBR. It may take a month or two, but with continuous follow up.
Hello Rizwan,
I applied in IRIS for 159(1) / 154A (Application for reduced rate of withholding on Export of Services) with following details on 1st Nov-2021:
Dear Respected Sir,
I am an individual active income tax return filer from last more then 5 years. I have started now working as an individual exporter of IT enabled services, HR services to foreign client. Effective from 1st. December 2021, I will be getting direct foreign remittances each month in my Pak. Rupees individual bank account on the prevailing interbank exchange rates.
Therefore you are requested to kindly grant me a tax exemption certificate in order to avoid 1% withholding tax deductions by my bank on foreign direct remittances I will be receiving to my Pak Rupees bank account. In light and consideration of that, I am an compliant individual and will be bringing 100% of my earning from IT enabled services, HR services in foreign exchange remitted directly to my Pak Rupees bank account.
I have attached my agreement with my foreign client I signed for IT enabled services – HR services as well as the last 3 years of acknowledgement slips of filled returns.
Now after 2 months 18 days FBR responded on my application like this:
With reference to your application for the issuance of exemption certificate under section 159(1) / 154A of the Income Tax Ordinance, 2001, you have not submit the following documents as under:-
1. Provincial Sales Tax Return for the period 1st July 2020 to 30th June 2021.
2. Proceed Realization Certificate
However, you have failed to submit the same. Hence, your request is herby rejected due to non submission of relevant documents required for ascertaining your eligibility for Exemption or Lower Rate Certificate.
Although as per your opinion an individual do not need to provide Provincial Sales Tax Returns. As far as the PRCs are concerned I have just started getting remittances from Dec-2021. I can provide the same but they there is no option to respond them using the IRIS.
Any further advice/suggestion will be really appreciated.
Best regards,
Aamir
Thank you Aamir for reaching out. You would need to re-submit your application along with PRCs. Yes, the individual is not required to get registered with PRA. However, I am not sure what type of income you have mentioned in your income tax returns. If you have mentioned any Pakistan source services income, then you will need PRA registration. Otherwise, you will need to mention the relevant provisions of law regarding exemption from PRA.
Thank you Rizwan. I will retry with PRCs. Can you please identify the provision of law regarding exemption from PRA? So, I can refer that to FBR in my application. My foreign income from IT enabled services just has started w.e.f. 23-Nov-2021. Prior to it I was a full-time employee of a local firm and have been paying income tax along with regularly filling the income tax returns each year till last tax year 2021. Now, from 23-Nov-2021, I am a part time employee of same Pakistani firm and the income I draw from it is being paid to me after deduction of applicable income tax as usual and I will continue to show it in my tax return for the upcoming tax year 2022 along with my foreign income which has recently started w.e.f. 23-Nov-2021 from IT enabled services. I am requesting them, FBR to issue me an exemption certificate for my bank to not withhold 1% on the foreign source of income which is after all 100% allowed for tax credit against my any other income tax liability. Whereas I won’t have any such liability left and will end up paying extra income tax in current tax year (2022) and will have to ask FBR to refund it later. I mean this is unfair for people like me who not only pay revenue to government on their local income but also bring foreign exchange for our country and still paying taxes on that too.
As per Section 25 of the Punjab Sales Tax Act, 2012, a person is required to register under the act who provides any taxable service from his office or place of business in Punjab. Further, as per rule 12 of the Punjab Sales Tax on Services (Adjustment of Tax) Rules, 2012 a taxable service exported shall not be liable to payment of tax in the Punjab. By virtue of this, export of services is not liable to sales tax in Punjab.
In your case, you would need to update your NTN from salaried individual to business individual. As you would also be deriving local income, I would recommend to get registered with PRA and file NULL returns.
Hi Rizwan,
Thank you for the article, and especially for the guidance you’re providing in the comments section. Almost all of my questions have been answered but one:
My bank has started giving me e-PRC having purpose code 9185 – Other Computer Services. Is this sufficient to get tax exemption (till 2021) or 100% tax credit (after 2021) or do I need to ask the bank to change it.
I receive income on hourly basis so I am not an employee but a contractor. I am guessing 9182 would be more appropriate but I will leave it as-is if it does not matter.
Dear Kashif,
Thank you for reading the article. I think existing code is appropriate, and you don’t need to change it.
Regards,
Rizwan
Hi Rizwan,
Could you please tell me how someone who only has a Pakistan Origin Card (POC) can register for the sales tax? For that, you are supposed to do biometric verification but NADRA keeps no biometric records of such people. Do you think it is even possible?
Regards, Ahmer
Hello Ahmer
I think you have a sole proprietorship business. Normally, when the legal status of a business is a partnership firm or a private limited company, a principal officer in Pakistan is appointed. The biometric part is done through the Pakistani principal officer for sales tax registration. The same process may be tried for a sole proprietorship business.
Regards,
Rizwan
Hi Rizwan,
Thanks for such a helpful article. There’s a lot of confusion among the IT export community and this article is one of the few that actually provide some useful information.
I have a few questions:
1. What exactly is the difference between tax credit and tax exemption? For an individual exporting IT services, are they the same for all practical purposes? I don’t see what I should do differently while filing my taxes.
2. My contract with my employer defines me as a contractor receiving hourly wages. Unfortunately I didn’t know that salaries from aboard could be taxed in Pakistan so while filing my taxes I submitted my foreign income under “Foreign Salary Income 6011”. Could this have any consequences for me? Is there any way this can be changed once the taxes have already been filed?
3. My bank is not charging 1% and I am not sure why? Could it be that they recognize my income as IT export? Are there any steps I need to take?
4. In addition to getting PRCs from my bank what other steps can I take to be on the safe side?
Thanks once again!
Thank you Hassan for such kind words.
1) Tax exemption means your income is not subject to tax, whereas, tax credit means your income is subject to tax but you will not have to pay any tax due to availability of an equal amount of tax credit. For example, if your tax liability is Rs.10,000, you will get Rs.10,000 tax credit and net tax liability would be zero.
2) If you have submitted your tax return, I won’t advise revising it. It will not have any consequences for now, but if you get any notice from FBR you may have to provide evidence of taxes paid abroad. Otherwise, your salary would become taxable in Pakistan. For future, I would advise entering into a consultancy contract with the employer.
3) I am not sure why the bank is not charging 1% income tax. May be they are considering it as export of IT services. If the bank is not deducting tax, it is okay.
4) In addition to PRCs, you should maintain record of transactions with the client including correspondence, just in case you need it to produce before FBR in future.
Do I need to do something differently while filing my taxes to avail the tax credit? Right now I just enter the whole incoming amount in the field titled “Amount Exempt from Tax / Subject to Fixed / Final Tax” bringing “Amount Subject to Normal Tax” to 0.
Because that’s what we used to do before. Not sure if the procedure is different now.
I have not seen your tax return. However, as per my understanding, you should declare under code 3009 with same value in both columns i.e. total amount and amount exempted from tax.
Asslam o Alaikum
Rizwan,
A sole / indvidual carrying business of IT services like software House with 100% Foreign export
also have employees & office w.h.T statement filed
question is this how I will treat Revenue & expenses of Sole Properitorship business in Tax Return
Wa alaikum assalam
Your income and expenses will be shown as business income and expenses, but in exempt column. Please note that this will not be shown as a Foreign Source Income. Foreign Source Income is that income that is generated from a business established outside Pakistan.
Assalam-o-Alaikum.
Thank you for this very useful and informational post. I have some queries related to your reply.
[1] Under what FBR Code (Gross Revenue [3009], Fee for Technical / Professional Services [3101], Others [3128], etc.) a Sole Proprietor will enter his foreign software export income?
[2] If all the income is only from software export, would we enter the same value in both columns, i.e. Total and Exempted -OR- would we enter it only in the exempted column?
Once again, thank you for helping everyone. Jazak-Allah.
(1) Declaration under 3009 is better presentation.
(2) Same value will be entered in both columns i.e. total amount and amount exempted from tax.
Assalam-o-Alaikum.
Thank you for this very useful and informational post. I have some queries related to your reply.
[1] Under what FBR Code (Gross Revenue [3009], Fee for Technical / Professional Services [3101], Others [3128], etc.) a Sole Proprietor will enter his foreign software export income?
[2] If all the income is only from software export, would we enter the same value in both columns, i.e. Total and Exempted -OR- would we enter it only in the exempted column?
Once again, thank you for helping everyone. Jazak-Allah.
(1) Declaration under 3009 is better presentation.
(2) Same value will be entered in both columns i.e. total amount and amount exempted from tax.
Asslamoalaikum. Sir your answers are very informative and made many things super easy for me. I am a freelancer working from receiving payments from USA, filing return first time for the period of 2019-20 and 2020-21. One thing I want to ask. I invested in 2018 through broker 4 lac in stock exchange and in the period of 2019-20 I withdrew 2.25 lac after heavy loss. In which category I can show this inflow.
Thank you in advance for your help.
Regards
Dear Asif,
Thank you for reading the article. When you made this investment, you would have shown it in the assets side of the tax return (wealth statement part) as investment in stocks. Now that you have divested this amount, the investment in stocks would become zero.
The loss shall be reported in the Capital Assets tab of income tax return separately showing the cost of investment and the proceeds from disposal of stocks.
Thank you for your answer.
One more thing. I have been providing medical transcription service to client for last four years. It started from Upwork, continued a year, then he agreed to pay outside of upwork direct in my Pakistani bank account. It started from $300 and gradually he added few tasks and increased my pay, now for last 10 months I am receiving $1000. There is no written contract. Will it be considered Foreign salary or Foreign other source income.
Regards,
It depends upon the terms of payment. If the service you are providing is of advisory nature, it will not be considered as salary. “Salary” means you are in employment. Your employer decides when you work, there is fixed timing, etc.
Aslam u Alaikum sir, I went through the blog, really amazing but I still have a query regarding treatment of any of following services,
Digital marketing
Consulting
Education
E-learning
Coaching
Digital courses
YouTube Education
Video marketing
Can we link these services to IT enable or IT services in any context.
Thank you Sohail for reading the article. Apparently, these services do not meet the definition of IT enabled services. However, if we treat digital marketing services as IT enabled, the matter may have to be attain finality in superior courts.
Hi,
I am a sole proprietor and totally involved in export of IT services(No local service), my office is located in Rawalpindi, Punjab, Pakistan.
What would be my requirement/liability for PRA Registration and sales tax returns filing?
In case I don’t want to go for CTR(Credit Tax Regime – 100% credit on Tax) and just want to continue with 1% advance tax deductions by banks on proceeds under FTR(Final Tax Regime), also not seeking exemption certificate from FBR.
Your help would be appreciated.
Thanks!
Since you are in Punjab as an individual/sole proprietor, export of services is exempt from sales tax in Punjab. You are not required to get registered with PRA.
If you don’t claim 100% tax credit, whatever tax has been deducted at 1% by banks shall be final tax liability. You won’t be required to pay any income tax at the time of filing income tax return.
Same question for SRB (Sindh Revenue Board) registration? I am paying 1% FTR and not willing for 100% tax credit.
SRB registration is mandatory.
As Salaamu Alaikum
I work for a US-based company as an independent contractor (from Pakistan) and my services fall under the 3rd category: IT Enabled Services. I receive the payment from the company via Payoneer and Payoneer transfers the funds to my bank account via JazzCash or BAF.
I have already submitted a W8BEN Tax Form as required by the US-based company. The company does not deduct any tax from my income.
Am I eligible for 100% tax credit when I file my tax return?
If you can get PRCs evidencing receipt of foreign currency converted into Pakistan Rupees, you will be eligible for claiming 100% tax credit.
You have done a good job! I have read the complete thread and get my all answers.
Thank you.
Thank you Moeed.
Hello Sir. A very informative article. Wanted to ask one thing. I’m working for a foreign based company as an employee giving It services from Pakistan. My payment is coming directly into local bank here. So will I be exempted as well since I’m on salary and not working as a Company but as an individual?
It depends on your contract with the employer. If you receive fixed amount of salary each month, and FBR can establish that it is salary, then you are receiving foreign source salary. Such salary will be exempt from tax if you have paid foreign income tax in respect of that salary. If this is not the case, such salary is taxable in Pakistan.
AoA Mr. Rizwan Kamali, this article and your Q&A with the commentators is by far the most helpful information freelancers and IT exporters can get over the internet. Thank you very much for such valuable information. I need to ask just one question: I am a freelancer and the PRCs I get from my bank mentions 9186 which translates to Purpose (Freelance of computer and information services) and Description (remittances received by resident individuals/households from reputed overseas IT firms and online platforms on account of fee-lance of computer and information systems services.) Now is this purpose acceptable for 100% tax credit?
Thank you very much Hadi for such kind words.
Yes, this purpose should be sufficient for claiming 100% tax credit as it clearly mentions it as an IT Service.
9186 was the purpose code on the PRC that was from MMBL but last week I got PRC through BAFL into my same account maintained in HBL. Now that PRC just mentions “PRI/Home Remittance” under type of remittance. Now would that be an acceptable PRC?
This is so annoying that payoneer uses two intermediary banks and they provide different types of PRCs.
PRC can be acceptable if it mentions the foreign currency received and the exchange rate used for conversion into PKR. You should also maintain record of all correspondence with Payoneer and customer invoices etc to prove it export of IT services.
AOA
Is anyone aware of the new WHT that is applicable on IT exports from this financial year?
(1% on Filer and 2% on non-filer)
Banks deduct income tax (1% for filer and 2% for non-filer) as final tax on export of all types of services, except for those services that are exempt from tax. This tax is not applicable on export of IT services. However, you have to provide an exemption certificate to the bank to avoid the tax.
How to obtain said exemption certificate?
Application for exemption certificate can be submitted to the FBR through IRIS Portal. For this purpose, a new application form 159(1)/154A (Application for reduced rate of withholding on Export of Services) has been added under the Withholding/Advance Tax tab.
Hi from where to get IT services tax exempt certificate?
Application for exemption certificate can be submitted to the FBR through IRIS Portal. For this purpose, a new application form 159(1)/154A (Application for reduced rate of withholding on Export of Services) has been added under the Withholding/Advance Tax tab.
Assalamuaikum Rizwan,
[Question 1]
I am a freelancer and receive all payments through Payoneer. On my Bank Statement, it says that Money was Received from Muhammad Haris BAF – Stan…
I asked my bank for PRC; they told me that PRC is only applicable for Foreign Remittance. However, this is a Local Transaction meaning that Payoneer sent your payment to another bank, receiving direct credit within Pakistan.
Now, what proof do I have that my income is through IT Export?
[Question 2]
When we file tax returns individually, do we have to worry about Sales Tax?
[Question 3]
If in the future, I form a Sole Proprietor Company and file tax returns under the same NTN. Now, do I have to register with SRB as well and file Sales Tax Returns to SRB?
I also found out that Service Businesses have to submit Monthly Withholding Statements. What is your comment? How do we find if we meet withholding conditions or not?
Someone told me that Services exported to Foreign are exempt from tax in SRB, but we still have to file a Sales Tax Return?
[Question 4]
When we form a Sole Propreitor Company, do we have to register with SECP as well? What is the drawback if we don’t register except for our name reservation?
[Question 5]
Since you mentioned that PSEB membership is not required, what is the role of PSEB in the first place? I was told that we have to submit an R- form to PSEB from SBP to prove that our income is through foreign remittance. If we are ever asked for an audit than this will help us better proving the authorities.
Question-1: Encashment certificate/PRC is a must. FBR won’t accept it otherwise. I am afraid you will have to receive remittances through direct bank transfers, or money exchange companies, or money services businesses.
Question-2: Sales tax registration is not required in Sindh for individuals.
Question-3: Unless you are registered with SECP, you are not required to get registered with SRB. I assume export of IT services is your only source of income. As you are a freelancer, I assume you don’t have any employees, and you don’t have any rented office place. If this is the case, you are not required to submit withholding tax statements.
Question-4: As a sole proprietor, you are not required to get registered with SECP. You simply have to update your particulars with FBR. There is no harm in name reservation with SECP. It automatically expires after some time.
Question-5: PSEB registration is required to avail tax credits as a startup. Although PSEB registration is not mandatory for export of IT services, it can have benefits otherwise. So I normally recommend PSEB registration even though it is not required in every case. And yes, you are right. Not all FBR people understand this thing. In case of any tax audit, etc. it can definitely help in closing the matter.
Thank you for your detailed answer.
I have been able to collect PRC for my Remittances after contacting the Home Remittance Department of my bank and PRI.
So now for this year, I will file as an individual.
In future if I have Employees and a Rented office. Then should I add a Sole Proprietorship?
If yes, then I will have to submit withholding statement to FBR, right?
Nothing to do with SRB?
If all the employees receive below taxable income and the Rented Office Space owner collects the sales tax from me and gives me an invoice. Do I have to still submit a withholding tax statement?
Under what condition am I liable to register with SRB?
When you show the foreign remittance as business income, you are a sole proprietor. Individual and sole proprietor are the same thing. Only difference can be that your income tax profile (NTN) does not show business name. Business name can be added by updating the profile.
If annual salaries you are paying to the staff, and the office rent is above taxable limit, then you would be required to submit WHT statements. Otherwise, WHT statements are not required to be submitted.
You will be required to register with SRB if:
(1) You register a company with SECP, or
(2) You are providing services to local clients.
Were you able to collect PRC for the payments transferred in your local bank account through payoneer? Can you share which bank was it. I have a similar situation and I transfer into meezan bank from my payoneer account. Thanks!
Aoa, i have a question. If a software house in Lahore is providing services to Outside Pakistan, is it required to register under Punjab Revenue Authority and pay Provincial sales tax ?
Thanks
Umer
If your only source of income is “IT Exports” then obviously you don’t need to register with PRA. However, if you are a private limited company, I would advise to get your private limited company registered as a withholding agent with PRA.
Asa,
Thank you for the great article, this is the only place where I found 100% of the information. JazakAllah.
Can you please reference where in “Punjab Sales Tax on Services Act, 2012” does it say that an individual freelancer does not need to be registered with PRA, and/or does not need to file ST return. I am asking as I could not find it, and want to reference it for the exemption certificate.
Thank you Waqas for your kind words. I have given reference in your previous comment.
Your article is quite helpful. Can you please write a guide to submit “159(1) / 154A (Application for reduced rate of withholding on Export of Services)” form at FBR. No official instructions from FBR about this.
What documents we need to submit and instructions to avoid errors. Thanks in advance.
Thank you for reading the article and providing valuable feedback. I will try to write an article on exemption certificate soon.
Thanks for sharing all the details. Waiting for the article on the exemption certificate.
Thank you for giving us such wonderful information about Income Tax on Export of IT Services. We are IT services providers & receives remittance from our client against IT Export services under code 9182 (Software Consultancy Services). Now our bank says us to provide FBR exemption certificate or undertaking of Tax credit under Section 65F of Income Tax Ordinance, 2001. We are providing undertaking. We have following questions.
Is it necessary to register in PSEB/PASHA for all Private Limited companies which are just giving export services?
Does FBR issues tax exemption certificate to the IT companies for local services? Is it necessary for the export services remittances?
If a company based in Karachi giving only IT export services, is it necessary for the company to files sales tax return under Section 65F?
Thank you Iftikhar for reading the article and taking out time to ask these questions.
1) Registration with PSEB/P@SHA is not mandatory for claiming tax credit under export of IT services. It is mandatory though when claiming tax credit as a startup.
2) Exemption certificate is only required for export of IT services.
3) Software or IT based system development consultants’ services exported are exempt from tax in Sindh. Therefore, sales tax registration with SRB is not mandatory.
Rizwan bhai:
3) Please re-confirm this. I filed my returns and I am just confused about registering with SRB (Sindh Revenue Board) and filing sales tax returns. (You are saying it’s not mandatory for 100% Tax Credit?)
If your only source of income is “IT Exports” then obviously you don’t need to register with SRB. However, if you are a private limited company, I would advise to get your private limited company registered as a withholding agent with SRB.
Dear Rizwan,
Thank you for taking time out and explaining regarding WHT tax for IT export Service. I have a question in this regard if you can clarify it will be a great help, I don’t have any taxable income source other than consultancy services, so where shall I use this credit then?
Thank you Kashif for reading the article.
Any tax that is deducted from your income is know as advance tax. And, this is adjusted against any taxable income of current and future tax years. If a person does not have any taxable income, then he/she can claim from FBR refund of that amount.
I am a Freelancer and a software engineer. I am working with a US client and have been receiving payments using payoneer. I have filed all the previous tax returns with no tax as my income is coming from abroad. The PRC from payoneer shows home remittance.
I have the following questions:
1- What is the proper banking channel I need to follow to receive the payments from client.
2- I need to file the tax returns for this year, can I do the same and put them in the IT exports category and pay no tax?
3- For next year, what is the proper way for me to get the tax credit and tax exemption, do I need to register a sole proprietor company?
4- Does tax credit system applies to 2020-21 as well (this year)
Thank you Asim for reading the article.
1- For now, the payments received directly into your bank account are considered ‘received through proper banking channel’ by FBR.
2- Yes, you can declare this revenue as IT exports. You should retain copies of all PRCs as well as any other correspondence with the client that can provide that it is revenue from IT exports.
3- I think it is better to register a business name in your NTN as a sole proprietor (you may call it a sole proprietor company).
4- The tax credit system applies from tax year 2021-22.
Regards,
Rizwan
Dear Rizwan,
Looks like this article is getting very popular. Congrats!
I’m going to file the withholding tax statement (form 149) for 2020-21 (last financial year) for my employees. I have a question regarding the 10% medical allowance deduction rule. Can I still make use of this rule? Is it still applicable? I have received conflicting information. One tax consultant told me that I could make use of this rule while some people say that it was allowed in the past but not anymore. Could you please clear the confusion?
P.S. My sole proprietorship is registered in Islamabad.
Dear Ahmer,
Thank you for your kind words. Medical allowance exemption is still valid.
When the finance bill 2021 was initially shared, it was suggested to remove the 10% medical allowance exemption. However, the suggestion finally was not acceded to, and the exemption was retained. For your information I am sharing the exemption clause wording:
“any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment” (shall be exempt from total income).
Thank you for this detailed article. I have a question about sole proprietorship. Is there any limit on salaries and expenses of sole proprietorship? I am a freelancer and i want to register a small IT firm which will only deal with IT export services. Here are objectives. Please let me know if sole proprietorship is right choice as i will not have too much business in the start.
1. Open a bank account on name of company. All of my transactions are through banking channels only.
2. Get a tax exemption certificate from FBR for both my company bank account and personal bank account.
3. I will be paying salaries for freelance work to local employees.
Thank you.
Thank you Azam for reading the article and commenting.
1) There is no limit on salaries and expenses of sole proprietorship. However, the sole proprietor himself cannot charge his salary as per FBR. Whatever you take from business will be considered as your profit share (drawings).
2) I think sole proprietorship would work fine for you. You may face some difficulty while openening a bank account but I think that can be managed.
If you still have any questions but don’t hesitate to ask.
Regards,
Rizwan
First of all I would like to thank you for such a helpful post, not many people in Pakistan are addressing this issue. Mostly are not fully aware of the Law as well.
I’m a sole proprietor giving IT Export services and receive payments in USD. I also obtain PRC under 9182 code from Meezan Bank as well. I have few queries as well.
1) – You wrote that law is “Effective from March 22, 2021”, does that mean that payments after that date is not exempted from Tax and will be subjected to Tax Credit? or its applied on the payments after 1st July 2021 (because Banks have started to deduct after 1st July 2021)
2)- You said that registration and filing of Sales Tax is not required if we are only exporting services, some other consultant told me that in Islamabad you are required to register for Sales Tax since its Zero Rated even if you only do exports? Does that apply to us in Punjab with PRA? Do we have to register with PRA even we only do exports to get Tax Credit?
3)- I received 2 payments one in July worth 1400 USD and one in August 700 USD, my 1% is deducted by Bank on 1400 USD but not on 700 USD, is law changed or the amount only higher than 1000 USD is subject to 1% deduction?
4)- Banks do not provide PRC easily, have to repeatedly ask them and they delay it for months. Can you guide us for any authority we should contact even if they don’t resolve our complaints?
Dear Abdullah, thank you for reading the article.
1) The tax credit was introduced on 22.03.2021, however, in the Finance Act, 2021, it was made applicable from July 01 2021 i.e. tax year 2021-22. In this budget, the government also introduced 1% tax on export of services, that is why, banks started deducting 1% income tax from export proceeds.
2) Sales tax registration is not required in Punjab, as export of services is not taxable under Punjab Sales Tax on Services Act, 2012. Yes, in Islamabad, it is zero rated, and you would be required to register with FBR for sales tax purposes.
3) 1% tax deduction does not relate to the value. It is applicable on all exports of services. May be the bank has issued some instructions in this behalf to respective branches. Or may be, somehow, the banker new it was export of IT services.
4) You can contact SBP and bank’s head office. Simply email the complaint to bank’s head office with cc to SBP.
Thank you for the response and clarifications
The document by PSEB is confusing at following link
https://pseb.org.pk/images/PSEB-Advisory-on-Tax-Ammendments.pdf
They are stating under the FAQs Question 1 that Tax Credit will apply from 1st July 2021
Yes it is applicable from July 01, 2021 i.e. tax year 2021-22.
Can you please reference where in “Punjab Sales Tax on Services Act, 2012” does it say that an individual freelancer does not need to be registered with PRA, and/or does not need to file ST return. I am asking as I could not find it, and want to reference it for the exemption certificate.
It is not specifically written for freelancers. Anyone providing taxable services is required to register with PRA for sales tax purposes. As export of services is not a taxable activity as per Rule 13 of the Punjab Sales Tax on Services (Adjustment of Tax) Rules 2012, sales tax registration with PRA is not required.
Thank you, and that makes perfect sense.
But, I have gotten this response from FBR, when I asked is I should file ST with PRA or not:
“Thank you for contacting the Federal Board of Revenue. This is in reference to your Case number FBR-xxxxxx
Your services are taxable and required to get registration of sales tax in your province.
individual having turnover above 100million required to file withholding statement.
Please feel free to contact us for any further queries. ”
I asked the same question to PSEB via email, and there tax person replied this:
“You are right that export of such services is exempt from sales tax in Punjab and generally filing of sales tax returns is not required for exempt services. However there is some ambiguity in Provincial sales tax laws and considering the stakes involved (100% tax credit), it is advisable to register and file NIL returns. Please note that PSEB is making efforts to seek clarification in this regard from Provinces to resolve the matter in favor of IT sector however it may take some time.
I hope you will find the above useful. Kindly inform if any further clarification is required.”
So I guess to be on the safe side one should file the NIL return with PRA.
FBR’s response shows that the person responding to your queries didn’t have any idea of Sales Tax on Services in Punjab. However, the response from PSEB is reasonable. Actually there are two criteria for registration with PRA:
1) The person is providing taxable services. Export of services clearly is not taxable. So, this criteria is not satisfied in this case.
2) The person is required to get registered under any of the provisions of the Act or Rules. This means that although the services provided by the person are not taxable, the person is required to get registered as a withholding agent. So, who is a withholding agent for PRA? Only a company registered with SECP is a witholing agent under the Rules, and is required to get registered as withholding agent with PRA. An individual or partnership firm/AOP are not withholding agents if their only source of income is export of services.
So, if you are not registered with SECP, registration with PRA is not required. If you still want to get registered with PRA, you can do it.
Asa Rizwan,
I am trying to submit the “159(1) / 154A (Application for reduced rate of withholding on Export of Services)” but it’s asking to attach evidence. What evidence do I need to attach?
Also, may I please have your email address / contact info?
You can contact me at 0333-4853599.
Hi Rizwan sir,
I have been receiving money using inward telex payment(wire transfer), for the last 2 years by exporting IT services. But this month the bank transfer 2% of the amount to some pak gov account under WHT EXPORT SERV. Why do you think they deducted this 2%. Any help will be much appreciated.
Thanks
It seems you are not an active taxpayer as per bank’s record. So, they are deducting 1% income tax on export of services (plus 1% additional income tax due to non-filer status). If you file your income tax return(s), this would become 1% instead of 2%. Further, if you want to avoid 1% tax deduction, you will have to obtain tax exemption certificate from FBR. Application for tax exemption certificate can be submitted online through IRIS portal of FBR.
Thank you very much for reply. Really appreciate you help.
worthful information by Mr. Rizwan!
kindly can you suggest on below?
i am thinking to open a company in pakistan that will provide the commissioning service to foreigner companies during the startup/commissioning of their project.
To offer this service the employee (of this pakistan based company) will travel to that country to be present there and modify the plc softwares and to do other commissioning activties.
Is this type of service can be considered as IT Extended services or startup company to avail the tax relief.
As physically nothing is being saled from pakistan but only the services that have major part as software modifications (development in some cases) , configuration of some industrial instruments as a part of the commissioning services.
Thank you Abdullah. Please note the service should be technology driven. If it actually involves software development, and if it can be confirmed from the agreement with the client and invoice raised, then yes, it will qualify as a startup company. Neverthless, it would be export of services, where there will be final tax of 1%. Plus, export of services is exempt from applicablity of sales tax.
Thank you very much for the answer.
The agreement will have the title of commissioning engineering services as major, however in the description it will have the software modification mentioned in it and the electrical work supervision as well.
Hence it will be a more engineering service agreement than a simple software development. As i understand from your reply, if FBR consider it not a software development service instead they consider engineering services export, still it is in catergory of export of service and will be taxable 1% (not more hopefully) and also will be exempted from sales tax.
The thing to consider is that there will be resource temporary movement from pakistan to European countries for each project (the client is having power plant manufacturing projects) to offer this service on site and not remoltely in most cases.
Thanks (it would be great if you share your contact details on provided email so that we can get assistance for registration process)
Yes, it will be an export of services contract taxable at 1% (final tax liability). I have shared my contact details at your email ID.
Aoa.
Sir hope you’re doing well.
As you defined in you article for 100% tax credit of IT related services person/company must meet the 6 criteria. One of criteria is Sales tax return filing.
My question is If someone is offering ONLY IT export services under SMC pvt limited and offering NO domestic & other services. So he’s required to get registered with SRB and file monthly returns in order to gain 100% tax credit?
A person is only required to be registered with SRB when that person is providing a taxable service. As export of IT services is not taxable, the person providing those services is not required to either get registered or file sales tax return.
Please we are filing return through consultants but not satisfied with him.
All previous returns till 2020 period has been filed and now current period return we want to file ourselves
Please assist with necessary details and procedures.
Thanks
You can share your details at rizwan@asr-ca.pk
Noted sir and will do.
Hi
Sir, My question is that we understand that all our income through foreign sources and we do not have any local business.
But we are still registered with PSEB and paying fee fopr annually basis as well.
If we do not register with PSEB then what will be the consequences in our case.
Hello Rehan
It will not have any tax consequences. However, for operational purposes, I would suggest you to retain PSEB membership. You may need it for seed funding, or a qualitative sign in profile, etc.
Hi,
I enjoyed nice & informative thread.
My question is, If IT export is above 1 or 1/5 cror do we have to pay any turnover tax?
Considering that all revenue is from IT export brought through normal banking channels.
Regards
The exporters of IT services are eligible for 100% tax credit regarding tax payable under any provisions of ITO, 2001 including minimum tax and final tax. Turnover tax will not be payable.
Sir turnover tax is only exempt if all six conditions are met? Or in all circumstances turnover tax related to IT export is exempt?
100% tax credit against turnover tax liability is available only after meeting the given conditions.
Thank you very much for this informative article. I have read all your comments and the article, awesome info.
1. I have a website and earn income from Google Adsense (online ads).
2. I receive all USD foreign remittances under purpose code 9185 (other computer services) which are encashed into PKR at local bank and I get PRC every time.
3. My bank started deducting 1% withholding tax on remittances from July 2021.
4. I am an individual (remittances in personal bank account). I don’t have any company/AOP/Sole-proprietorship, no employees.
Questions:
1. Can I avail 100% tax credit for IT service exports?
2. Do I have to file withholding tax statement?
3. Do I have to file sales tax return?
Dear Khalid,
Thank you for your kind words. I have answered your questions in seriatim below:
1) Yes! You are eligible for 100% tax credit.
2) You are not a withholding agent. You are not required to submit withholding tax statements u/s 165.
3) You are not required to file sales tax returns.
Banks are deducting 1% income tax after Finance Act, 2021. The issue can be resolved if FBR issues a clarification in this regard. However, till then, you will have to face this difficulty. If the amount of tax being deducted by the bank is significant, you can resolve the issue by obtaining tax exemption certificate and submitting the same to the bank.
Thank you for your help 🙂
How can one get such a tax exemption certificate? Could you please explain the procedure? Thanks
Application for exemption certificate can be submitted to the FBR through IRIS Portal. For this purpose, a new application form 159(1)/154A (Application for reduced rate of withholding on Export of Services) has been added under the Withholding/Advance Tax tab.
Thank you very much, Rizwan, for spending your precious time to answer all the questions! I really appreciate it.
How to get this exemption certificate? How to fill that form? 159(1) / 154A
Application for tax exemption certificate can be submitted online through IRIS portal of FBR.
Salam u alikum Bro,
I have applied for exemption certificate since 3rd of September 2021 after passage of almost 18 plus days system still no issue my exemption certificate, can you please guide what should i do next??? Thanks in advance
Which bank are you using? They generally do not put Google payments in 9185 but some random advertising receipts code. Cause Ad sense payments generally have narration ‘Google Advertising Payment’ within the transfer.
Hi Rizwan,
Thanks for such a helpful post. If the bank is deducting 1 % from the proceeds of software export, can one avail 100 % tax credit if all income is only from proceed of software export through banking Channel. Further if 100 % tax credit is approved, this amount will be refunded on application to FBR. Thanks.
Yes! If there is only one source of income i.e. export of software, you can avail 100% tax credit.
Tax deducted by bank can be refunded; however, refund procedure is cumbersome in Pakistan, and is really difficult to obtain without the help of a good tax consultant.
Hi Rizwan,
First, thanks for the nice article. I am a sole proprietor exporting software from Pakistan. I get paid once every month by my client from Europe. I receive the money through my bank in Pakistan. A couple of days ago, I received a payment and my bank deducted 2% as Withholding tax on services. This is the first time that my bank has done something like this. I suspect this has to do with section 154A and 65F. The proceeds realization certificate (PRC) that I have received for the bank transaction clearly states the purpose of the remittance as Software Export with the code 9184. My question is: how can I make use of the 100 percent tax credits which are available to software exporters. By the way, I file my tax returns every year. Thank you in advance for your help.
Regards, Ahmer
I think your banker is assuming you are not an active taxpayer. That is the reason that 2% tax is being deducted u/s 154A. So first of all you need to reach out to your bank on this issue. It is better to email the issue to bank’s head office with CC to State Bank of Pakistan. Once your status is updated from non-active taxpayer to active taxpayer/filer you can ask your bank to not deduct any tax because of application of 65F.
I had to face the same issue with MCB. My firm is active taxpayer but the bank was considering otherwise. Unfortunately, the bank couldn’t resolve the issue and I had to close that bank account.
Thank you very much, Rizwan, for taking the time to answer my question. I’m sure this information will be helpful for others as well who are facing similar problems. I have a few more questions:
1- What is the procedure for getting the withholding tax back? Do I need to contact my bank or does the FBR facilitate such procedures?
2- Regarding point 6 of the Conditions for 100% tax credits section in your article: I’m a sole proprietor and I don’t provide any services to the local market. Do I still need to file my sales tax returns considering I’m not making any sales in Pakistan?
3- I think points 4 and 5 of the above mentioned section don’t apply in my case since I’m a sole proprietor. Is my understanding correct?
Thanks in advance for your help.
1) If the bank has wrongly deducted tax, you can get the money back through involvement of SBP. Otherwise, tax deducted by bank can only be refunded by FBR; howeve, the procedure is cumbersome and you would need the help of a good tax consultant. I won’t advise this if the amount is not significant.
2) Sales tax registration will not be required in such case.
3) Points 4 and 5 will only apply if you are giving annual salary of more than Rs.600,000 to any of your employee, and annual rent of your office is more than Rs.1,500,000.
What does tax law says for full time software developer remote work. I work as a software developer for a foreign company remotely from Pakistan. I get monthly salary payment foreign remittance directly in my Pakistan bank account. Am I am eligible for claiming exemption.
It depends upon your contract with the foreign company. If the contract suggests that it is employment, then it is your foreign source salary. Otherwise, it may be treated as export of IT service. Contract is the basic document that will decide category of income.
If it is foreign source salary, it will be exempt in Pakistan based on one condition i.e. you have paid foreign income tax in respect of that salary. If this is not the case, it will be taxable in Pakistan.
If the contract says that i am working as a contractor and not employee, would it fall under employment or export of IT service?
Export of IT Service; however, terms of the contract need to be evaluated.
Respected sir,
In IT enabled services it mentioned that ” locally produced television programmes ”
Do youtubers of Pakistan come under this clause. As they are making videos on different topics like Cooking , fun etc.
Are freelancers who earns from abroad and take earnings from proper banking channels…. tax exempted
Locally produced television programmes contains two conditions:
(1) Local
(2) Television
So it must be produced in Pakistan and should be telecasted on television. Social media channels do not come under the ambit of television.
Income of freelancers can be exempt if they meet all the conditions as mentioned in the article. However, freelancers MUST obtain “Encashment Certificate” from their bank which shows foreign currency remitted, exchange rate used by the bank, and equivalent rupees.
Where to report gross income related to Exported IT services
In income tax return under amount exempt from tax.
Dear Rizwan Sir, A new section 154A has been inserted through the latest finance bill; it is extracted from there that every authorized dealer will deduct 1% at the time of realization of proceeds on exports of computer software or IT services or IT enabled services in case of tax credit under section 65F is not available. I would like to know about the “tax credit under section 65% is not available”. Can you please through light on it? Thank you
As mentioned in the Article, three types of services are eligible for tax credit u/s 65F:
(1) Computer software
(2) IT Services (list provided in the article)
(3) IT Enabled Services (list provided in the article)
Export of any IT Service that is not listed above, was chargeable to normal tax earlier. Through Finance Act 2021, export of such IT services has been made chargeable to tax at 1% rate, which shall be final discharge of tax liability. Authorized dealers, e.g. banks shall deduct this 1% tax at the time you receive funds in your bank account. SBP will provide procedural details regarding such tax deduction.
Hi Rizwan, Are services like payoneer and transferwise considered proper banking channels since at the end money is withdrawn into local bank accounts ?
Based on one of the SBP’s clarifications, foreign currency received through following channels can be considered as received through normal banking channel:
(1) Foreign exchange remitted from outside Pakistan through normal banking channels;
(2) The remittances received through Money Service Bureaus (MSBs)/currency Exchange Companies (ECs) e.g. Dollar East, NBP Exchange, etc; and
(3) The remittances received through Money Transfer Operators (MTOs) such as Western Union, Money Gram or Ria Finance.
However, documentary evidence in the form of Encashment Certificate is “MUST”. Encashment Certificate will show the amount of foreign currency and exchange rate used for conversion into Pak Rupees as well. If you have Encashment Certificate for payoneer, etc, you can declare it as received through proper banking channel.
Hi Rizwan, are payoneer and transferwise considered proper banking channels.
Did you found out if Transferwise is considered proper banking channel or not. I am doing a bit of research and it seems that since there is no PRC, it might not be considered proper banking channel for the purpose of tax but i am not sure.
Without PRC, FBR will not consider it as export proceeds.
Thanks for reply. So what does that mean for cases where you 100 rs during tax year. 75 is remitted to Pakistan via normal banking channel (PRC available) and 25 is remitted through Wise type services (which uses local bank transfer to make transfer into your PKR account in Pak). Does that mean you will pay full tax on 25 and 0.25% on 75? What about that 80% condition that is being talked. Does that still apply in this specific scenario above?
As 80% condition is not met in this case, you will have to pay 1% tax on Rs.100.
Thanks once again. But just so i am clear with this description, i can get all of my money via Wise (and dont have PRC) and pay 1% on it or have to pay regular income tax? which would be slab base?
1% will be paid and it will be final tax. Slab rates will not apply.
Thanks for reply.
Scenario 1: So what does that mean for cases where you earn 100 rs during tax year via IT services from abroad. 75 is remitted to Pakistan via normal banking channel (PRC available) and 25 is remitted through Wise type services (which uses local bank transfer to make transfer into your PKR account in Pak). Does that mean you will pay full tax on 25 and 0.25% on 75? What about that 80% condition that is being talked. Does that still apply in this specific scenario above?
Scenario 2: you earn 100 rs from IT export during tax year, 20 from local income (IT consulting) as individual. 75 is remitted through normal banking channel, 25 through wise/payoneer. How much is your taxable income for normal tax in Pakistan? 45 (25+25) or just 20 you earned from local consultancy. Also what would be export taxable amount (0.25%)? 100 or 75?
Scenario 1: You need to pay 1% tax on Rs.100 because 80% PRCs are not available.
Scenario 2: If you have at least 80% PRCs regarding export income, Rs.100 will be taxed at 0.25%. Otherwise, it will be taxed at 1% of Rs.100. Rs.20 is your local income. It will be taxed at normal tax rate as applicable to the income level e.g. using appliable slab rate.
Hi!
I wanted to ask that if i start freelancing and start providing VA services do I get tax exemption under this policy?
It depends on the actual services being provided as VA.
Superb Article. Very educative.
I am a sole proprietor offering IT enabled services since 2014. Previously the local clients used to deduct 10% WHT under 153-1(b) of services as i was filer. I am a filer with FBR and used to attach all the CPR tax challan received by the clients i work with. I also offer IT export services to foreign client for which as per my knowledge the income obtained was exempted. As of now, i have a couple of local clients and a few foreign clients.100% of my foreign income is transferred to local banks here. I have few questions:
1. Do i charge any tax to local client now if i am not registered with PSEB? What percentage?
2. If i am registered with PSEB, then I don’t need to charge any tax under my invoice and simply declare that income under tax exempted when filing the return?
You are a sole proprietor, and providing IT services to local as well as foreign clients. As a sole proprietor, you will not be considered a withholding agent. So, from income tax viewpoint, you are only required to file income tax return.
Your income and expenses will be segregated into local and export services. Net income from exports will be exempt from tax.
As you are not registered with PSEB, your net local source income will be subject to tax. And you will have to pay income tax based on applicable slab rates at the time of filing income tax return.
Plus, your local corporate clients (i.e. only companies registered with SECP), will deduct 3% tax u/s 153(1)(b) at the time of making you any payment. Please note that, it is 3% for IT and IT enabled services, not 10%.
But, when you register with PSEB, you local source income will also become tax exempt. You will not pay any tax at the time of filing income tax return for three year, and your local corporate clients would no longer deduct 3% income tax.
So, if you are not registered with PSEB, you can inlcude some percentage of income tax (may be 3% to 10%) as part of your fee in your billing. When registered, there is no need to do that.
Please also note that, by law, you are also required to register for sales tax purposes and charge sales tax to local clients.
Thank you so much Kumail sahab for such a detailed reply. Can you kindly share income tax slabs as well??
Income tax slabs are different for different persons. There are slabs for salaried individual, and for business individuals/partnership firms. For companies, tax rates are 21% and 29%.
Dear Rizwan sb, if one is providing IT services on monthly basis to a company in a foreign country, will it come also under the IT services exempted for 100% tax exemption?
Regards and thanks
Yes, IT Services can be provided on periodic as well as one off basis.
Hi Sir, I have threequestions :
1) I have to provide the IT services for a company based in a foreign country. Can I do it on individual basis or I have to make a company to do that ?
2) If I have to do as an individual, then do I have to resister myself in PSEB?
3) How will I get tax exemption for these services as an individual basis ?
Hello Omar,
1) You can provide IT services to foreign company on individual basis. Registration as company is not mandatory.
2) As long as you are not providing IT services to clients in Pakistan, you are not required to register with PSEB. When you have local source of income, registration with PSEB is must for income tax credit.
3) You need to register with FBR i.e. obtain NTN, and file your annual income tax return. You will be eligible for 100% tax credit as an individual.
May thanks Rizwan sb for your prompt and detailed reply.
This was a very helpful article. However, I have question. I am a freelancer and provide IT enabled service on Fiverr. Now I want to transfer my earnings to my bank account in Pakistan. At which stage will the tax get deducted and where do I have to mention that this money is earned from IT exports?
Thank you Talha for reading this article. You can transfer your earnings into your bank account in Pakistan without deduction of any taxes. However, you need to file annual tax return. The income from export of IT Services shall be declared in the income tax return.
Sir under which form do I need to mention my income from foreign IT export? I have been filing my tax under form 114(1) for my income from my permanent job.
Income from export of IT services is also reported in Form 114(1).
What is tax on E-com services company
Taxation (income tax and sales tax) of an e-commerce services company is just like a normal services business depending upon its legal status i.e. sole proprietor, partnership or private limited compmany.
If payment is transferred by client in foreign currency through proper banking channel and withdrawn in foreign currency rather getting it encashed in PKR by bank, is it acceptable to FBR. As in normal remittance case you have to get encashment certificate from bank.
It is perfectly acceptable as payment is received in Pakistan through normal banking channel.
According to FBR registration with PSEB is a must! See https://download1.fbr.gov.pk/Docs/2019430124658611IncometaxOrdinanceAmendedupto11-03-2019.pdf
Page 24
Point 62A
Yes it is must, but not to avail exemption on export of IT services.
Hi Rizwan, thank you! Very useful summary of the tax rules in this area. I am also impressed with rich content of your blog. It takes a lot of effort to research and publish and kudos to you for doing it.
Thank you Javed for these kind words.