Taxation of Engineering Services in Pakistan

Engineering services form a crucial part of Pakistan’s infrastructure, industrial, and technology landscape. From civil and electrical engineering to mechanical, telecom, and project management services, engineers play a central role in the country’s development. With the increasing demand for technical expertise across the public and private sectors, the taxation of engineering services has become a key area of interest for professionals, consulting firms, and tax authorities alike. Engineering services in Pakistan are subject to income tax, sales tax on services, and withholding tax, administered by the Federal Board of Revenue (FBR) and Provincial Revenue Authorities. This article provides a comprehensive guide on the taxation of engineering services in Pakistan, covering registration, applicable rates, compliance obligations, and relevant exemptions.

Scope and Definition of Engineering Services
According to tax authorities, engineering services include the professional activities of

• Civil, structural, and mechanical engineers

• Electrical and electronics engineers

• Software, telecom, and IT engineers

• Environmental and industrial engineers

• Engineering project managers and supervisors

• Surveyors, planners, and designers working under engineering contracts
  These services may be rendered by independent consultants, engineering firms, construction contractors, or corporate entities.

Governing Tax Authorities
Engineering services are taxed by both federal and provincial bodies

• FBR (Federal Board of Revenue): income tax and excise duty in Islamabad

• Punjab Revenue Authority (PRA)

• Sindh Revenue Board (SRB)

• Khyber Pakhtunkhwa Revenue Authority (KPRA)

• Balochistan Revenue Authority (BRA)
  Each authority levies taxes based on its jurisdiction and the location of the service provider or recipient.

Income Tax under the Income Tax Ordinance, 2001
All providers of engineering services are liable to pay income tax on their earnings under the Income Tax Ordinance, 2001.

Taxation of Individual Engineers (Sole Proprietors)
Freelance or sole-proprietor engineers are taxed as individuals under progressive tax slabs. For tax year 2025, the following illustrative slabs apply

• Up to Rs. 600,000: 0%

• Rs. 600,001 – 1,200,000: 5%

• Rs. 1,200,001 – 2,400,000: 10%

• Rs. 2,400,001 – 4,800,000: 15%

• Rs. 4,800,001 and above: 20% to 35%
  They must register with FBR, obtain a National Tax Number (NTN), and file annual income tax returns.

Taxation of Engineering Firms (AOPs and Companies)
Engineering firms operating as partnerships (AOPs) are taxed at the firm level and profits are distributed among partners. Each partner declares their share in their individual return.
Firms incorporated as private limited companies are taxed at the corporate tax rate of 29% as of 2025. These companies must also

• Maintain audited accounts

• File income tax returns along with financial statements

• Deduct applicable withholding taxes

Minimum Tax under Section 113
Engineering firms must pay minimum tax of 1.25% of turnover under Section 113, even if they declare a loss or negligible profit, unless exempted.

Advance Tax under Section 147
Engineering firms with significant tax liability must pay advance tax quarterly. Failure to comply can result in default surcharge and penalties.

Allowable Business Expenses
Engineering professionals and firms can deduct the following from taxable income

• Salaries of technical staff

• Equipment and tools

• Project-related travel and logistics

• Rent and utilities

• Insurance and professional indemnity

• Training and certification costs
  Proper documentation is essential to claim these deductions during audits.

Sales Tax on Engineering Services
Engineering services are classified as taxable services under provincial sales tax laws. Every provider must register and charge sales tax at the applicable rate depending on the jurisdiction.

Sales Tax in Punjab (PRA)
Under the Punjab Sales Tax on Services Act, 2012, engineering services are taxed at 16%. This includes

• Design and supervision

• Consultancy and feasibility studies

• Project execution advisory
  Engineers in Punjab must

• Register with the Punjab Revenue Authority

• Obtain a Sales Tax Registration Number (STRN)

• Issue tax invoices and file monthly sales tax returns

Sales Tax in Sindh (SRB)
The Sindh Revenue Board (SRB) taxes engineering services at 13% under the Sindh Sales Tax on Services Act, 2011.
Engineers and firms in Sindh must

• Register with SRB online

• File monthly returns

• Maintain records of service contracts, invoices, and bank receipts

Sales Tax in Khyber Pakhtunkhwa (KPRA)
KPRA imposes a 15% sales tax on engineering services under the KP Finance Act, 2013. Consultants and engineers working in KP are required to

• Obtain KPRA STRN

• Submit monthly returns

• Retain all supporting documents

Sales Tax in Balochistan (BRA)
BRA taxes engineering services at 15%. Professionals and companies in Balochistan must comply with BRA’s registration and monthly filing procedures.

Sales Tax in Islamabad Capital Territory (FBR)
In ICT, engineering services are taxed as federal excise duty (FED) at 16% under the Federal Excise Act, 2005, administered by the FBR.
Service providers must

• Register with FBR’s IRIS system

• File monthly FED returns

• Pay tax on a monthly basis through prescribed banks

Determination of Tax Jurisdiction
Sales tax jurisdiction is based on the location of service recipient or beneficiary. For example

• If a Lahore-based firm provides engineering services in Karachi, SRB may have jurisdiction

• Clear contracts, invoices, and project addresses are necessary to prove the correct place of provision

Withholding Tax on Engineering Payments
Engineering fees are subject to withholding tax under Section 153(1)(b)

• Companies and government clients deduct 10% withholding tax before payment

• Withheld tax is adjustable against the final tax liability of the engineering service provider

• Withholding tax certificates must be retained for reconciliation

Withholding Tax Obligations of Engineering Firms
Firms are also required to deduct and deposit tax when making payments such as

• Salaries – Section 149

• Rent – Section 155

• Payments to subcontractors – Section 153
  Failure to deduct or deposit tax can result in penalties, disallowance of expenses, and additional assessments.

Export of Engineering Services and Tax Relief
Engineering services provided to foreign clients may qualify as exported services, and may be

• Zero-rated or exempt from sales tax, depending on the province

• Eligible for foreign tax credit under double taxation treaties
  To qualify

• The service must be delivered outside Pakistan

• Payment must be received in foreign currency via banking channel

• Supporting documents like contract, invoice, and SWIFT receipt must be maintained

Registration Requirements
To operate legally and avoid penalties, engineering professionals and firms must

• Obtain NTN and register on FBR’s IRIS portal

• Register with PRA, SRB, KPRA, BRA, or FBR (ICT) for sales tax

• Maintain proper books of account

• File monthly sales tax returns and annual income tax returns

• Comply with all withholding tax provisions

Invoicing and Recordkeeping Requirements
All engineering service providers must

• Issue sales tax-compliant invoices with STRN and service description

• Maintain records for minimum six years

• Retain supporting evidence for deductions and input tax claims

• Use accounting software to streamline records and tax filings

Common Challenges in Taxation of Engineering Services

• Determining correct sales tax jurisdiction when serving nationwide clients

• Client reluctance to pay or bear sales tax

• Difficulty in managing withholding tax reconciliations

• Lack of awareness among sole practitioners

• Audit risk due to poor documentation or non-filing

Penalties for Non-Compliance
Failure to comply with tax obligations may lead to

• Suspension of STRN or NTN

• Heavy fines under tax laws

• Disqualification from government tenders

• Rejection from Active Taxpayer List (ATL)

• Legal proceedings and business disruption

Conclusion
Engineering services in Pakistan are subject to a comprehensive tax framework involving income tax, sales tax on services, and withholding tax obligations. Whether you are a freelancer, a partner in a consulting firm, or a private company, understanding your tax liabilities is critical for legal compliance and financial sustainability. Registering with FBR and the relevant provincial authority, filing accurate and timely returns, and maintaining proper records are essential steps for engineering professionals to operate successfully in Pakistan’s formal economy. With the right tax strategy and awareness, engineering service providers can not only avoid penalties but also gain a competitive edge in public and private sector projects.