Taxation of Software Development Companies in Pakistan

Pakistan’s software development sector has grown rapidly over the past decade, contributing significantly to IT exports and creating employment for skilled professionals. Recognizing the importance of this sector, the Government of Pakistan offers a range of tax incentives and exemptions to software development companies, especially those engaged in export activities. However, tax compliance and reporting remain critical, as companies must navigate between Federal Board of Revenue (FBR) regulations, sales tax laws, and sector-specific policies by the Pakistan Software Export Board (PSEB). This article provides a comprehensive overview of the taxation of software development companies in Pakistan, including exemptions, tax filing obligations, and registration requirements.

1. Legal Structure of Software Companies in Pakistan

Software development companies in Pakistan can operate under various legal structures, such as:

• Sole Proprietorship

• Single Member Company (SMC)

• Private Limited Company (Pvt Ltd)

• Public Limited Company (for large-scale operations)

While sole proprietorships may benefit from easier compliance, Private Limited Companies and SMCs offer better tax planning and credibility—especially for export-oriented tech businesses.

2. Regulatory Authorities Involved

The key regulatory and taxation bodies governing software companies in Pakistan include:

• Federal Board of Revenue (FBR) – for income tax and sales tax

• Pakistan Software Export Board (PSEB) – for registration and certification

• Pakistan Revenue Automation Limited (PRAL) – for online tax filings

• Provincial Revenue Authorities (e.g., PRA, SRB, KPRA) – for sales tax on services

• SECP – for corporate compliance (if incorporated)

3. Income Tax Obligations

a. Income Tax Rates

Income tax is levied under the Income Tax Ordinance, 2001. The applicable rate depends on the legal structure:

• Sole Proprietorship/Individual: Progressive tax rates (up to 35%)

• Private Limited/SMC: Flat corporate tax rate of 29% (for FY 2025)

• Small Companies (fulfilling section 2(59A) criteria): Concessional rate of 20%

b. Exemption on Export of Software and IT Services

As per Clause 133 of Part I of Second Schedule to the Income Tax Ordinance, 2001, software export income is 100% exempt from income tax up to June 30, 2026, provided the company is:

• Registered with PSEB

• Filing income tax returns regularly

• Submitting Withholding Tax Statements under Section 165

This exemption is applicable to:

• Software development

• IT-enabled services (BPO, support, SaaS, etc.)

• Export of mobile apps and digital solutions

c. Conditions for Claiming Exemption

To retain the exemption status:

• Register with Pakistan Software Export Board (PSEB)

• File a true and complete tax return

• Submit withholding tax statements even if NIL

• Ensure income is foreign-sourced and receivable through banking channels

Failure to comply results in the withdrawal of exemption and taxation under regular rates.

d. Local Revenue Taxation

Income earned from local clients is taxable under normal provisions of the Ordinance. Exemptions only apply to export income.

4. Withholding Tax Obligations

Even tax-exempt software companies must comply with withholding tax provisions. They must:

• Withhold tax on employee salaries (Section 149)

• Withhold tax on rent (Section 155)

• Withhold tax on services, payments to contractors, etc. (Section 153)

Withholding tax statements must be filed monthly via the IRIS portal, and tax deposited via CPR (Computerized Payment Receipt).

5. Sales Tax Obligations

a. Sales Tax on IT Services

IT services are generally exempt from federal sales tax, but provincial sales tax on services may apply based on jurisdiction.

b. Exported Services

Export of services, including software and IT support, is treated as zero-rated or exempt, depending on the province. Companies must:

• Register with the relevant provincial authority

• File monthly sales tax returns (even NIL)

• Maintain banking proofs of foreign remittances

c. Sales Tax Registration

Required if:

• Supplying taxable services

• Earning revenue from non-exempt local services

• Crossing Rs. 10 million turnover threshold

6. PSEB Registration and Certification

To qualify for tax exemption, a company must register with Pakistan Software Export Board (PSEB).

a. Documents Required for PSEB Registration

• SECP Certificate (for companies)

• NTN and STRN Certificates

• Bank account details

• Ownership information

• Proof of export revenue (SWIFT, inward remittances)

b. Benefits of PSEB Certification

• Income tax exemption on exports

• Reduced or exempted provincial sales tax

• Access to IT parks and tech zones

• Government grants and project participation

7. Income Tax Return Filing

Software companies must file annual income tax returns electronically via FBR’s IRIS Portal.

Documents to prepare:

• Balance Sheet and Profit & Loss Account

• Statement of Foreign Income

• Tax computation and depreciation schedule

• Withholding tax summary

• Wealth Statement (for proprietors)

The due date is:

• September 30 for individuals/AOPs

• December 31 for companies with special tax year approval

8. Audit Requirements

a. Mandatory Audit

Companies with revenue above Rs. 10 million or registered under SECP must get accounts audited by a chartered accountant.

b. Audit Reports

Must be submitted along with:

• Tax return

• Auditor’s opinion

• Directors’ report (for companies)

9. Special Economic Zones and Tax Holidays

Software development companies established in the following zones may receive additional tax breaks:

• Special Technology Zones (STZA)

• Export Processing Zones (EPZ)

• Software Technology Parks (STPs)

Incentives include:

• 10-year tax holiday

• Customs duty exemption on equipment

• Reduced withholding taxes on imports and payments

10. Common Mistakes in Tax Filing by IT Companies

• Claiming export exemption without PSEB registration

• Ignoring withholding obligations on salaries and rent

• Missing sales tax filing even if exempt

• Not reconciling bank receipts with export income

• Assuming freelance income is automatically exempt

11. Taxation for Freelance Software Developers

Freelancers offering software development or related services can claim tax exemption if:

• Foreign income is received via banking channel

• PSEB registration is secured

• Annual return and withholding statements are filed

Otherwise, they may be taxed under Section 114 of the Income Tax Ordinance.

12. Tax Planning and Compliance Tips

• Maintain separate export vs. local income records

• Use accounting software (e.g., QuickBooks, Xero, Wave) for accurate bookkeeping

• Maintain proper documentation of SWIFT receipts and client contracts

• Register with PRA, SRB, or KPRA even if exempt—helps in compliance

• Hire a tax consultant to manage filing and audit support

13. Penalties for Non-Compliance

14. Role of Sterling.pk in IT Tax Compliance

At Sterling.pk, we provide complete tax and compliance services for software development companies, including:

• Company registration and PSEB facilitation

• NTN and STRN registration

• Tax exemption planning

• Monthly withholding and sales tax return filing

• Audit support and annual return submission

• Financial statement preparation for fundraising or investor due diligence

Conclusion

Taxation of software development companies in Pakistan is favorable, especially for exporters who comply with PSEB and FBR regulations. However, the benefits of tax exemption can only be availed with proper registration, accurate reporting, and consistent filing. With increasing focus from tax authorities on digital businesses, software companies must be proactive in their compliance strategy.

At Sterling.pk, we help IT and software businesses optimize tax benefits, remain compliant, and scale operations confidently. Whether you’re a freelance developer, a local SaaS startup, or an international outsourcing firm operating in Pakistan, our expert tax advisory ensures that you stay focused on growth while we handle the compliance