Taxation of IT Services in Pakistan

The Information Technology (IT) sector in Pakistan has emerged as a fast-growing contributor to exports and employment. IT services such as software development, app design, business process outsourcing (BPO), data analytics, and digital marketing are in high demand globally and locally. The Government of Pakistan has introduced favorable tax policies, especially for export-oriented IT businesses, but local IT service providers must still navigate complex tax rules, sales tax laws, and withholding obligations. This article provides a comprehensive overview of the taxation of IT services in Pakistan, covering income tax, sales tax, exemptions, registration requirements, and compliance obligations.

1. Definition of IT Services in Pakistan

IT services include a broad range of technology-based offerings such as:

• Software development and support

• Website and mobile application development

• Business process outsourcing (BPO)

• Data processing, storage, and analytics

• Cloud-based services (SaaS, PaaS, IaaS)

• Digital marketing and SEO services

• Managed IT services and cybersecurity

• Technical support and IT consultancy

These services are either exported to international clients or provided locally within Pakistan.

2. Tax Authorities Governing IT Services

Several federal and provincial authorities govern taxation of IT services:

• Federal Board of Revenue (FBR) – Income tax and federal withholding tax

• Provincial Revenue Authorities

  • Punjab Revenue Authority (PRA)

  • Sindh Revenue Board (SRB)

  • Khyber Pakhtunkhwa Revenue Authority (KPRA)

  • Balochistan Revenue Authority (BRA)

• Pakistan Software Export Board (PSEB) – Certification for tax exemptions

• SECP – Corporate registration and compliance

3. Income Tax on IT Services

a. Income Tax Regime for IT Service Providers

Under the Income Tax Ordinance, 2001, the tax treatment of IT services depends on whether the income is exported or local.

Export of IT and IT-enabled Services (ITES)
Export income from IT and IT-enabled services is exempt from income tax up to June 30, 2026, under Clause 133 of Part I of the Second Schedule of the Ordinance, provided that:

• The business is registered with PSEB

• Income is remitted through banking channels

• Annual income tax return is filed

• Monthly withholding tax statements are submitted

Local IT Services
Income from local clients is taxable under the normal provisions of the Income Tax Ordinance. Tax rates vary:

• Sole Proprietor/Individual: Progressive rates up to 35%

• Company: Flat rate of 29%

• Small Company (defined under Section 2(59A)): 20%

b. Documentation for Claiming Exemption

To claim income tax exemption on exports, a company must maintain:

• PSEB registration certificate

• Income tax return

• Banking evidence of foreign inward remittances (SWIFT, FIRC)

• Withholding tax statements (even if NIL)

4. Withholding Tax Obligations

Even tax-exempt IT businesses must comply with withholding tax provisions:

• Section 149: Withholding on salaries

• Section 153: Withholding on services and contracts

• Section 155: Withholding on rent

• Section 165: Mandatory filing of withholding tax statements

Filing is done via the IRIS portal, and tax is deposited through Computerized Payment Receipt (CPR).

5. Sales Tax on IT Services

Sales tax on services is regulated provincially, not federally. The rules differ across provinces.

a. Export of IT Services

Exported IT services are generally exempt or zero-rated under provincial laws, provided the income is received in foreign exchange.

b. Local IT Services

Sales tax may apply to local services depending on the provincial law:

c. Key Notes on Sales Tax

• Export services must be validated with foreign remittance evidence

• Local services must be registered with the provincial tax authority

• Monthly sales tax returns must be filed—even if NIL

• Failure to file attracts penalties and recovery proceedings

6. Registration Requirements for IT Service Providers

a. Federal Tax Registration (FBR)

• NTN (National Tax Number) – Mandatory for all businesses

• STRN (Sales Tax Registration Number) – Only required if local services are taxable

b. Provincial Tax Registration

Depending on your location, you may need to register with:

• PRA for Punjab

• SRB for Sindh

• KPRA for KP

• BRA for Balochistan

c. PSEB Registration

PSEB (Pakistan Software Export Board) registration is essential for:

• Availing income tax exemption on IT exports

• Accessing government grants and export incentives

• Applying for reduced or exempted sales tax rates

d. SECP Incorporation

If operating as a company, SECP incorporation is mandatory. SMCs or Private Limited Companies are preferred for IT businesses.

7. Tax Filing Obligations

a. Annual Income Tax Return

All IT businesses, including sole proprietors and companies, must file their annual tax return via the IRIS system. Components include:

• Balance Sheet

• Profit and Loss Account

• Tax computation

• Statement of assets

• Statement of foreign income

b. Monthly Withholding Tax Statements (Section 165)

• File monthly or quarterly

• Mandatory even for tax-exempt businesses

• Must include CPR of tax deducted

c. Sales Tax Returns

Filed monthly with respective provincial revenue authorities:

• PRA/SRB/KPRA/BRA

• E-filing portals available for each authority

• Due by 15th of each month for most provinces

8. Audit and Recordkeeping

a. Audit Requirement

Companies with turnover exceeding Rs. 10 million or registered with SECP must prepare audited accounts. Sole proprietors may also be selected for audit by FBR.

b. Record Retention

IT businesses must maintain records for 6 years, including:

• Invoices and receipts

• Bank statements and SWIFT records

• Contracts and agreements

• Payroll and rent documentation

9. Taxation for Freelancers in IT Sector

Freelancers earning foreign income via platforms like Upwork or Fiverr are also eligible for tax exemption if:

• Income is received via proper banking channels

• They register with PSEB

• Tax returns and withholding statements are filed

Freelancers without PSEB registration or with unreported income may face regular tax assessment by FBR.

10. Special Technology Zones and Tax Incentives

Companies operating in Special Technology Zones (STZs) enjoy:

• 10-year tax holiday

• Exemption from sales tax on imports

• Relaxed customs regulations

• 100% repatriation of profits for foreign investors

To avail this, registration with Special Technology Zones Authority (STZA) is required.

11. Common Compliance Mistakes to Avoid

• Not registering with PSEB, resulting in loss of exemption

• Ignoring sales tax obligations even if income is exempt

• Failing to file withholding statements under Section 165

• Claiming exports without foreign remittance proof

• Mixing local and export income inappropriately in tax returns

• Using non-registered bank accounts for receiving export income

12. Penalties for Non-Compliance

13. Role of Sterling.pk in IT Tax Services

At Sterling.pk, we provide expert services for IT service providers and tech startups:

• Company and freelancer tax registration

• PSEB registration facilitation

• Tax exemption claim preparation

• Monthly FBR and PRA/SRB return filing

• Withholding compliance and reporting

• Audit support and financial statement preparation

Whether you are a small developer, a SaaS startup, or a growing IT company, we ensure your tax matters are fully compliant and optimized.

Conclusion

Taxation of IT services in Pakistan has been made increasingly favorable to encourage exports, digitalization, and economic growth. Export income from IT and IT-enabled services can be entirely exempt from tax—if the business is PSEB-certified and compliant with FBR and provincial laws. However, local services, freelancers, and hybrid models must tread carefully to avoid non-compliance, penalties, and unnecessary tax liabilities.

At Sterling.pk, we help IT businesses navigate these tax laws, ensuring you benefit from every available exemption while remaining fully compliant. From registration to exemption, from monthly filing to audit readiness, our specialized IT tax advisory keeps your business future-proof and investor-ready.