The gig economy and digital entrepreneurship are thriving in Pakistan. A large number of individuals now work as freelancers or self-employed professionals, offering services in IT, writing, design, marketing, teaching, and consultancy both locally and to international clients. While the income potential is significant, many freelancers and self-employed individuals are unaware of their tax obligations under Pakistani law.

This comprehensive guide explains how freelancers and self-employed individuals are taxed in Pakistan, including income tax, sales tax, registration requirements, filing procedures, exemptions, and compliance tips to avoid penalties.

Who Is Considered a Freelancer or Self-Employed Individual?

Freelancers and self-employed individuals are those who work independently, not under formal employment, and earn income by offering services to clients. They may operate under their personal name, as a sole proprietor, or through a registered business.

Examples include:

• IT professionals, developers, and digital marketers

• Writers, designers, and video editors

• Trainers, coaches, and consultants

• Online tutors and educators

• Translators, voice-over artists, and SEO experts

Whether income is earned through platforms like Upwork, Fiverr, Freelancer, YouTube, or LinkedIn or directly from clients via Payoneer, Wise, or bank transfers, it is taxable in Pakistan.

Legal Framework for Freelancer Taxation in Pakistan

Freelancer and self-employed income is governed under:

• Income Tax Ordinance, 2001

• Sales Tax Laws (FBR or Provincial Authorities)

• Foreign Exchange Regulations (SBP)

• Special Export Regime for IT/ITES (PSEB and FBR)

• Relevant SROs (e.g., SRO 1160, 2021)

FBR treats such income as “Income from Business or Profession” and requires registration, documentation, and filing just like other taxpayers.

Income Tax Obligations for Freelancers

Freelancers must declare their income annually and pay applicable income tax on net profits after allowable expenses.

Income Tax Slabs for Individuals (2024–25)

Freelancers earning foreign income may qualify for tax credit or exemption if conditions are met.

Tax Registration Process for Freelancers

Freelancers and self-employed individuals must first register with FBR to obtain a National Tax Number (NTN) and enable tax filing.

Step-by-Step Process:

1. Visit https://iris.fbr.gov.pk

2. Click on “Registration for Unregistered Person”

3. Fill out basic details (CNIC, address, mobile number, email)

4. Submit form and verify via OTP

5. Log in to IRIS system

6. Complete Form 181 to register under sole proprietorship

7. Add Business Activity such as “Freelancing,” “IT Services,” “Consulting,” etc.

8. Download and print your NTN Certificate

NTN is mandatory for filing returns, claiming refunds, and registering for sales tax if needed.

Filing Income Tax Return as a Freelancer

Freelancers must file annual income tax returns via FBR’s IRIS system by September 30 (subject to extensions). The return includes:

• Income declaration

• Expense details (deductible business expenses)

• Wealth statement

• Foreign income and tax credits

Expenses that can be claimed include:

• Internet bills

• Laptop/computer purchase (depreciation allowed)

• Software subscriptions (e.g., Canva, Adobe, Grammarly)

• Marketing costs

• Travel for client work

• Professional training

Maintaining receipts and proof is essential.

Tax on Foreign Remittances – Section 111(4)

According to Section 111(4) of the Income Tax Ordinance, any foreign remittance sent through official banking channels (e.g., Payoneer to bank account, international wire, Western Union) is exempt from taxation if:

• It is received through proper banking channels

• The amount is supported by a Foreign Inward Remittance Certificate (FIRC)

• The recipient declares it in the return of income

However, income must still be declared, even if exempt, to maintain filer status and avoid audit risk.

Reduced Tax Rate for IT Freelancers – 0.25% Final Tax

Freelancers providing IT and IT-enabled services and registered with Pakistan Software Export Board (PSEB) can opt for a reduced 0.25% final tax under Clause (133), Part I, Second Schedule of the Income Tax Ordinance, 2001.

Requirements:

• Register with PSEB

• Export IT services

• Provide FIRC or export proof

• File return under final tax regime

This benefit is only available to freelancers who export services and complete the registration and compliance process.

Sales Tax for Freelancers – Federal and Provincial Laws

Freelancers may also be subject to Sales Tax on Services under:

• FBR (for Islamabad Capital Territory)

• PRA (Punjab)

• SRB (Sindh)

• KPRA (Khyber Pakhtunkhwa)

• BRA (Balochistan)

When Is Sales Tax Applicable?

• When services are provided to local Pakistani clients

• If sales exceed the minimum threshold (usually Rs. 3–5 million)

• In cases where services are not exports

Exported services are generally exempt or zero-rated, subject to documentation.

Registration and Filing:

• Register online at the relevant provincial tax authority

• File monthly returns

• Collect and deposit sales tax (13%–16%) if applicable

Withholding Tax on Payments to Freelancers

If freelancers are paid by companies or government entities, withholding tax under Section 153(1)(b) may be deducted.

• Active filer: 10%

• Non-filer: 20%

Freelancers can claim this deducted amount in their return as an adjustable tax.

Benefits of Becoming a Tax Filer as a Freelancer

Filing income tax returns and maintaining filer status offers several benefits:

• Lower withholding tax on payments

• Access to business bank accounts and services

• Avoidance of penalties and legal notices

• Eligibility for loans and credit cards

• Participation in government tenders and contracts

• Builds financial credibility

Common Mistakes to Avoid

1. Not declaring foreign income thinking it’s tax-free

2. Missing return deadlines and incurring penalties

3. Failing to maintain proof of income and expenses

4. Not registering with FBR or relevant tax bodies

5. Misunderstanding sales tax applicability

6. Using personal bank accounts for business income

Best Practices for Freelancers and Self-Employed Professionals

• Use a business bank account for all income

• Maintain digital invoices and expense receipts

• Declare all income, even if exempt

• File your return every year, even with zero tax

• Stay listed on Active Taxpayer List (ATL)

• Consider registering with PSEB for tax advantages

• Hire a tax consultant to assist with filings and compliance

Role of Tax Consultants for Freelancers

Freelancers unfamiliar with tax laws should consult a professional to:

• Register for NTN and sales tax

• Classify income correctly

• File annual returns and withholding statements

• Claim exemptions and deductions

• Respond to audit notices or tax queries

• Assist with PSEB registration and IT tax regime

Penalties for Non-Compliance

• Late filing penalty: Rs. 1,000 per day (maximum Rs. 50,000)

• Default surcharge on unpaid tax

• Audit selection for undeclared income

• Disqualification from tax benefits

Support for Freelancers by the Government

To support freelancers and the digital economy, various initiatives are in place:

• PSEB facilitation for tax exemption and export incentives

• Ease of doing business portal for registration

• SBP frameworks for foreign remittance via Payoneer, Wise, etc.

• Tax clinics and helplines by FBR for guidance

Conclusion

Freelancers and self-employed individuals are vital contributors to Pakistan’s digital economy, but they must take tax compliance seriously. Whether you earn from foreign clients or local businesses, tax registration, proper declaration of income, and timely filing of returns are essential. With the help of available exemptions, reduced tax rates, and government support, freelancers can remain compliant while maximizing their income.