ISLAMABAD/KARACHI March 14: The Pakistan Software Houses Association (P@SHA) has called for a more balanced and supportive taxation system to encourage the growth of the IT sector.
In its Budget Recommendations for 2025-26, P@SHA pointed out the disparity in tax rates between local salaried employees (up to 35%) and remote workers (1%), which has contributed to the migration of skilled talent and difficulties in retaining professionals.
The points sent by P@SHA Chairman Sajjad Mustafa Syed also suggested to the government to streamline the Federal Board of Revenue (FBR) systems for IT and software industry which is the future of exports and earnings.
The association also proposed reforms in the Federal Board of Revenue (FBR), including the appointment of commissioners to address IT industry-specific tax concerns.
It emphasized the need to restore the Final Tax Regime (FTR) for IT exports and remove double taxation on corporate debit card transactions.
Additionally, P@SHA suggested introducing a tax deduction scheme for R&D activities to promote innovation within the IT sector, thereby enhancing Pakistan’s competitiveness in the global market.
Layers of Taxation on IT and Software Industry in Pakistan
The IT industry in Pakistan is subject to several taxes, both at the federal and provincial levels. Here are the main types of taxes that the IT sector faces:
-
Income Tax: IT companies are subject to corporate income tax, which generally falls under the tax laws for businesses in Pakistan. The tax rate can vary, but many IT and IT-enabled services (ITeS) companies benefit from special tax exemptions or reductions under the Final Tax Regime (FTR), particularly for export-related income.
-
Sales Tax: In Pakistan, the sales tax is applied to goods and services. However, IT services are treated as services in most provinces, and some provinces, like Sindh and Punjab, impose sales tax on these services. The sales tax rate can vary by province.
-
Withholding Tax: IT companies may also face withholding taxes on various payments such as dividends, interest, and payments to contractors. For instance, payments made to vendors or for services may have a withholding tax deducted, and companies must account for it when filing returns.
-
Customs Duties: Importing IT-related goods, such as hardware, software, and equipment, may attract customs duties. These duties can impact companies involved in hardware manufacturing or selling imported tech products.
-
Export Tax Regime: For IT and ITeS exports, the Final Tax Regime (FTR) allows companies to pay a nominal tax (typically 0.25%) on their export earnings. However, there have been proposals to continue this favorable regime for a longer period to ensure stability in the sector.
-
Corporate Debit Card Tax: For companies with Exporters’ Special Foreign Currency Accounts (ESFCA), there is a 5% tax on transactions made via corporate debit cards, which can be considered double taxation, as these companies already pay the FTR on export proceeds.
-
Provincial Taxes: Different provinces have their own taxes that may apply to the IT industry. For example, provinces like Sindh and Punjab impose a sales tax on services provided by IT companies within their jurisdiction.
-
Double Taxation Issues: There is often confusion and overlap between federal and provincial authorities regarding the taxation of IT products and services, especially concerning software.
-
This is sometimes treated as goods by federal authorities and as services by provincial ones, resulting in double taxation in some cases.
Overall, while there are several taxes on the IT industry in Pakistan, there are also tax incentives aimed at encouraging growth, particularly for IT exports. However, the sector faces challenges with complexity, double taxation, and inconsistent policies across provinces.
PASHA Role in Pakistan for IT and Software Industry
The Pakistan Software Houses Association (P@SHA) is the leading trade association that represents the information technology (IT) and IT-enabled services (ITeS) sector in Pakistan.
P@SHA’s primary role is to support and promote the growth of the IT industry in the country. It works as a bridge between the government, businesses, and other stakeholders to address the challenges faced by the IT sector.
Key functions of P@SHA include:
-
Advocacy: P@SHA advocates for policies and regulations that support the growth of the IT industry, including tax reforms, infrastructure development, and improving ease of doing business.
-
Networking: The association provides a platform for IT businesses to network, collaborate, and share knowledge, which helps foster innovation and growth.
-
Training and Development: P@SHA organizes events, workshops, and training programs to help businesses and professionals stay updated with the latest trends, technologies, and best practices.
-
Promotion of IT Exports: It plays a key role in promoting Pakistani IT products and services in global markets, helping local companies expand their reach internationally.
-
Policy Support: P@SHA works closely with the government and relevant bodies to ensure that the needs of the IT sector are addressed, including regulatory support and infrastructure improvements.
Overall, P@SHA aims to strengthen the IT industry in Pakistan, making it a key driver of economic growth and technological innovation.
