Software development companies in Pakistan are taxed under the Income Tax Ordinance, 2001, and Sales Tax Act, 1990. These laws apply to all types of software development companies, including those developing and selling software products, providing software development services, and outsourcing software development work.
Income Tax for Software Development Companies:
Software development companies are required to register with the Federal Board of Revenue (FBR) and obtain a National Tax Number (NTN) to pay income tax on their profits. The income tax rate for software development companies is the same as that for other businesses, which is currently 29% for companies and 31% for sole proprietors.
In addition to income tax, software development companies are also required to pay a 0.5% turnover tax if their annual turnover exceeds PKR 50 million (approximately USD 320,000). The turnover tax is levied on the gross amount of sales made during the year, regardless of whether the business made a profit or not.
Sales Tax for Software Development Companies:
Software development companies are also required to register for sales tax with the FBR and obtain a Sales Tax Registration Number (STRN). The sales tax rate for software development companies is currently 17% on the value of software products and services sold.
However, there are some exemptions for software development companies. If the annual turnover of a software development company is less than PKR 5 million (approximately USD 32,000), it is exempt from sales tax. Additionally, if a software development company is exporting software products or services, it is also exempt from sales tax.
Examples:
Let’s take a look at some examples to better understand the tax implications for software development companies in Pakistan:
XYZ is a software development company that develops and sells software products online. It has an annual turnover of PKR 20 million (approximately USD 128,000). XYZ is required to register for income tax and pay tax on its profits at the rate of 29%. It is also required to register for sales tax and charge its customers 17% on the value of the software products sold.
ABC is a software development company that provides software development services to clients online. It has an annual turnover of PKR 3 million (approximately USD 19,000). ABC is exempt from sales tax as its turnover is less than PKR 5 million. However, it is required to register for income tax and pay tax on its profits at the rate of 31%.
PQR is a software development company that outsources software development work to other countries. It has an annual turnover of PKR 50 million (approximately USD 320,000). PQR is required to register for income tax and pay tax on its profits at the rate of 29%. However, it is exempt from sales tax as it is exporting software development services.
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Conclusion:
In conclusion, software development companies in Pakistan are subject to income tax and sales tax, just like other businesses. They are required to register with the FBR, obtain a National Tax Number and Sales Tax Registration Number, and pay taxes on their profits and sales. The tax rates and exemptions vary based on the annual turnover and nature of the software development business. Therefore, it is important for software development companies to comply with the tax laws and regulations to avoid penalties and legal consequences.
