Taxation of Services in Pakistan

Services are a growing component of Pakistan’s economy, contributing more than 60% to the national GDP. As the service sector continues to expand, so does its significance in the national tax structure. Taxation of services in Pakistan is a major source of revenue for both federal and provincial governments. Governed mainly through sales tax on services, income tax, and withholding tax regimes, service providers across various industries must comply with a range of tax laws and administrative requirements. This article presents a comprehensive overview of how services are taxed in Pakistan, the legal framework, applicable rates, exemptions, and compliance requirements for service providers.

Legal Framework for Taxation of Services
The taxation of services in Pakistan is governed by a dual structure involving both federal and provincial laws. After the 18th Amendment to the Constitution of Pakistan in 2010, the right to levy sales tax on services was devolved to the provinces, while the Federal Board of Revenue (FBR) retained control over income tax and sales tax on goods.

Key statutes governing service taxation include:

• Income Tax Ordinance, 2001 – Income tax and withholding tax on service income

• Sales Tax Act, 1990 – Sales tax on goods and certain services under federal jurisdiction

• Provincial Sales Tax on Services Acts:

  • Sindh Sales Tax on Services Act, 2011

  • Punjab Sales Tax on Services Act, 2012

  • Khyber Pakhtunkhwa Finance Act, 2013 (Chapter III)

  • Balochistan Sales Tax on Services Act, 2015

  • ICT (Capital Territory) Services under FED and Sales Tax

Key Authorities for Service Taxation

• Federal Board of Revenue (FBR)

• Sindh Revenue Board (SRB)

• Punjab Revenue Authority (PRA)

• Khyber Pakhtunkhwa Revenue Authority (KPRA)

• Balochistan Revenue Authority (BRA)

• ICT RTO (FBR Islamabad)

Types of Taxes on Services in Pakistan

1. Sales Tax on Services
This is the most prominent tax applied to services in Pakistan and is levied by provincial authorities or the FBR depending on the jurisdiction and type of service.

2. Income Tax on Service Income
All service providers, whether individuals or companies, are subject to income tax under the Income Tax Ordinance, 2001.

3. Withholding Tax on Services
Certain payments for services are subject to withholding tax, deducted at source by the payer and deposited with the FBR.

Sales Tax on Services – Province-Wise Overview

Sindh (SRB)

• Governed by the Sindh Sales Tax on Services Act, 2011

• Standard rate: 13%

• Services include: construction, advertisement, telecom, courier, hotels, franchises, software, event management, security services

• SRB offers online registration and e-filing system

Punjab (PRA)

• Governed by the Punjab Sales Tax on Services Act, 2012

• Standard rate: 16% (can be reduced for specific services)

• Services include: restaurants, transport, clubs, salons, consultancy, insurance, warehousing

• Reduced rates for POS integrated businesses and small service providers

Khyber Pakhtunkhwa (KPRA)

• Governed by KP Finance Act, 2013

• Standard rate: 15%

• Common services taxed include: healthcare, legal, accounting, beauty salons, hotels, travel agents

• KPRA has specific exemptions for education and healthcare

Balochistan (BRA)

• Governed by the Balochistan Sales Tax on Services Act, 2015

• Standard rate: 15%

• Scope similar to KPRA with special rules for local businesses and NGOs

Islamabad Capital Territory (FBR Jurisdiction)

• Certain services are taxed under Federal Excise Duty (FED) in Islamabad

• FED rates vary between 5% to 16% depending on the service

• FED on services treated like sales tax for telecom, insurance, and banking services

Input Tax Adjustment for Service Providers
Service providers registered for provincial sales tax can claim input tax credits on:

• Purchases related to business operations

• Utilities and rental expenses

• Marketing and advertising services

However, certain expenses are not allowed for input tax credit under provincial laws, and cross-adjustments between goods and services tax are restricted.

Exempt Services
Certain services are either fully exempt or subject to a zero rate under provincial tax laws.

Examples of Exempt Services Include:

• Educational services

• Health and hospital services

• Services provided by government departments

• Charitable organizations (subject to approval)

• Export of services (zero-rated in some cases)

• Specified IT and software development services

Income Tax on Services
All income from services is taxable under the Income Tax Ordinance, 2001, regardless of the taxpayer’s registration with provincial authorities. The income tax structure includes:

• Tax on net profits after deducting allowable business expenses

• Minimum tax on turnover (Section 113) in case of low or no profitability

• Advance tax on services (Section 147)

• Presumptive tax regime for small service providers

Withholding Tax on Services
Payments to service providers are subject to tax deduction at source under Section 153(1)(b). The rates are:

• Individuals/AOPs: 10% (adjustable)

• Companies: 8% (adjustable)

• Non-filers: Higher rates apply

The payer (withholding agent) must:

• Deduct tax before making payment

• Deposit tax using CPR through FBR portal

• File monthly withholding statements (Form 165)

Filing and Compliance Requirements for Service Providers

1. Provincial Sales Tax Filing
Registered service providers must:

• File monthly or quarterly returns

• Generate STRNs (Sales Tax Registration Numbers)

• Maintain invoices and e-invoicing records

• Deposit tax within the due date (usually 15th of each month)

• Face penalties for late filing or short payment

2. Income Tax Filing

• Obtain NTN from FBR

• File income tax returns and wealth statements annually

• Maintain books of accounts for at least 6 years

• Face audits under Section 177 or 214C

3. Federal Excise Duty (For ICT or Specific Services)

• File FED returns through FBR’s online portal

• Maintain records of transactions, customers, and contracts

Sector-Specific Tax Rates on Services

Penalties for Non-Compliance

Provincial Sales Tax

• Late return filing: Up to Rs. 10,000 per return or 1% of tax due per day

• False invoicing: Fine + imprisonment in extreme cases

• Unregistered business: Penalty + retrospective liability

Federal Income Tax

• Non-filing: Penalty of Rs. 1,000 per day or Rs. 40,000 total

• Underreporting: 100% of tax avoided as penalty

• Withholding failures: Additional tax, default surcharge, and fines

Recent Reforms and Developments
To modernize service taxation, the following changes have been introduced:

• POS integration for real-time transaction monitoring

• Digital payments tracking

• Harmonized classification codes (HS codes) for services

• Joint audits between FBR and provincial authorities

• Launch of e-invoicing systems in Sindh and Punjab

Challenges in Taxation of Services

1. Multiple Registrations and Returns
Service providers operating in multiple provinces face the burden of multiple tax registrations, returns, and audits.

2. Overlapping Jurisdiction
Conflicts often arise between the FBR and provincial revenue authorities regarding classification and tax collection rights.

3. Lack of Uniform Rates
Varying tax rates across provinces create confusion and compliance issues for national service providers.

4. Informal Sector Evasion
A large part of the services sector remains unregistered and untaxed, affecting competition and reducing revenue.

5. Limited Input Tax Adjustment
Service providers dealing in both goods and services often face input tax disallowances, increasing their cost of compliance.

How Sterling.pk Supports Service Businesses in Tax Compliance

At Sterling.pk, we offer end-to-end tax advisory and filing services tailored to service-based businesses. Our services include:

• Sales tax registration and filing with SRB, PRA, KPRA, and BRA

• Income tax planning and return filing with FBR

• Withholding tax compliance and e-filing of statements

• Assistance with audits and tax notices

• Guidance on tax exemptions for IT and export services

• Reconciliation of input/output tax and refund claims

Whether you’re a freelancer, IT company, logistics firm, or large corporate, our tax experts ensure full compliance and strategic tax savings.

Conclusion
Taxation of services in Pakistan is a dynamic area that has gained increasing importance in the national tax policy framework. With services contributing a major portion to the economy, both the federal and provincial governments have developed comprehensive laws and administrative mechanisms to tax this sector. While the system faces challenges of fragmentation and duplication, ongoing reforms and digitization are improving transparency and compliance. For service providers, understanding the full scope of their tax obligations and staying compliant with both federal and provincial laws is critical for long-term success. Sterling.pk stands ready to support service businesses across Pakistan with expert tax compliance and advisory services.