The IT sector is a growing industry in Pakistan with a lot of potential and scope. For taxation purposes, mostly the export proceeds are exempt. Whether one should register its business as a Partnership firm, Association of Person, or a Company depends on tax planning.
First, it is essential to consider all the IT and IT-enabled service providers. When companies incorporated in Pakistan providing services outside Pakistan receive their income via a banking channel, then that income is charged to tax at the rate of one percent. This rate is applicable under section 154A of Income Tax Ordinance 2001. However, for non-filers, that rate is 100% more, i.e., 2%. Under section 65F, if companies fulfil the prerequisites, then their income will be exempt.
Under section 159, companies applying for exemption to the Commissioner must answer the application within fifteen days of filing, whether accepting it or rejecting it. However, this time limitation is not available for individuals. Individuals can avail the exemption upon verification of the business and income by the Commissioner.
In the case of a Company, another benefit available to directors is that they can withdraw a salary. For salary, the slab rates are relatively lower than that of business income. So, in the case of an AOP, the drawing of salary will be taxable as business income.
In conclusion, it is recommended that to avail of tax benefits, one must opt for a company to save tax. By registering as a company, IT businesses can benefit from the reduced tax rates on income received from services provided outside Pakistan and can withdraw salaries at lower slab rates. It is essential to carefully consider tax planning options to make the most out of the tax benefits available to IT companies in Pakistan.