TAXATION PROBLEMS FACED BY IT & IT ENABLED SERVICES EXPORT SECTOR/ FREELANCERS IN PAKISTAN | TAXCAST

Exporting IT and IT-enabled services has become an integral part of the country’s exports. The IT exports of Pakistan for the fiscal year 2021-22 were estimated to be around USD 3.5 billion, which is 66% higher than the fiscal year 2020-21, and is estimated to reach USD 5 billion in the fiscal year 2022-23. A significant part of IT exports comprises IT services and IT-enabled services which are generally exported by freelancers.
Freelancing has now become one of the most common means of IT Exports in Pakistan, and due to the Covid-19 pandemic, its volume has increased drastically over the last few years. Pakistan currently ranks 4th among the world’s fastest-growing freelance markets and it significantly impacts Pakistan’s economy.
Before March 2021, the export of IT services and IT-enabled services/ Income of freelancers was exempt from tax with the condition that eighty percent (80%) of the export proceeds are remitted through normal banking channels to Pakistan as foreign exchange.
On March 22, 2021, the Government of Pakistan issued Tax laws (Second Amendment) Ordinance, 2021, in which tax exemption was withdrawn from the export of IT services and IT-enabled services and introduced 100% tax credits on the export of IT services and IT-enabled services subject to the fulfillment of some conditions for proper documentation of the economy and freelancers.
In the Finance Act 2022, effective from July 01, 2022, the clause for a 100% tax credit was omitted, making freelancers and IT service exporters liable to pay taxes.
Every foreign exchange authorized dealer/ bank is required to deduct tax at the following rates from the remittance proceeds:
The tax-deductible above by the authorized dealer/bank is the final tax. This means no further tax will be required to pay if the taxpayer/ freelancer fulfills the following conditions:
The annual income tax return has been filed,
Withholding tax statements have been filed (if applicable),
Federal or provincial sales tax returns have been filed (if applicable); and
There shall be no credit for any foreign taxes paid.
If any of the above conditions is not fulfilled, additional tax will be required to pay by the taxpayer on the applicable tax rates i.e. 29% in case of a company and 5% to 35% in case of an individual or AOP according to the slab rates. Further, tax deducted by banks will be adjustable against the tax liability.
In summary, freelancing income is taxable in Pakistan, and banks deduct 1% income tax (0.25% if registered with PSEB) from the payment of freelancers. Additional tax is also applicable on profits, and the rate depends on various factors such as income volume and whether certain conditions are met.

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