Pakistan’s IT industry has seen significant growth in recent years, and the government has introduced various tax incentives to support the industry’s expansion. Until recently, IT and IT-enabled services were exempt from taxes in Pakistan. However, with the 2nd amendment in tax laws via Ordinance 2021, these services are now subject to the tax credit regime. In this article, we will discuss the new tax credit regime, compliance requirements, and how to avail tax credit.
The New Tax Credit Regime
Under the new tax credit regime, IT and IT-enabled services are not exempt from taxes. Instead, service providers can avail of tax credit on fulfillment of certain criteria. The Federal Board of Revenue has expanded the definition of IT-enabled services to include inbound or outbound call centers, medical transcription, remote monitoring, graphics design, accounting services, Human Resource (HR) services, telemedicine centers, data entry operations, cloud computing services, data storage services, locally produced television programs, and insurance claims processing.
How to Avail Tax Credit
To avail of tax credit, service providers must ensure that more than 80% of proceeds from IT and IT-enabled services are brought in Pakistan through normal banking channels. Additionally, service providers must fulfill the following compliance requirements:
- File an income tax return
- If the person is a withholding agent, they must file withholding tax statements
- If the person is liable to be registered in Sales tax, they shall register and file sales tax under Federal and Provincial laws.
100% Tax Credit for Startups
The law provides that startups are allowed a 100% tax credit. Startups are exempt from withholding tax under section 153/159 on presenting the exemption certificate to the withholding agent.
Final Tax Regime for Freelancers
Freelancers providing IT and IT-enabled services have the option to opt for the Final Tax Regime (FTR) where tax credit is not available. The FTR rate is one percent on the value of exports, and all compliance requirements for filing must be met. No tax credit shall be allowed, and the condition of bringing 80% proceeds does not apply here. The person can also file a return under the Normal Tax Regime.
In conclusion, the new tax credit regime for IT and IT-enabled services in Pakistan provides service providers with the opportunity to avail of tax credit upon fulfillment of certain compliance requirements. Startups are allowed a 100% tax credit, while freelancers have the option to opt for the Final Tax Regime. Service providers must ensure that more than 80% of proceeds from IT and IT-enabled services are brought in Pakistan through normal banking channels, and must also file income tax returns, withholding tax statements (if applicable), and register for sales tax under Federal and Provincial laws. By complying with these requirements, service providers can take advantage of the new tax credit regime and contribute to the growth of Pakistan’s IT industry.