Taxation for Freelancers and IT Professionals

Taxation for Freelancers and IT Professionals

Have you ever wondered why freelancers are now regulated by the strict measures taken by Tax Authorities in Pakistan, despite their very positive contribution towards the economy? According to a recent story published by Tribune, the Pakistani Freelancers brought approximately $400 million in the last fiscal year.

Why IT Sector is Regulated: Previously, all IT businesses were exempt from taxation and other compliances, but according to the latest Income Tax amendments, IT Professionals are required to report their earnings. This is due to the misuse of the IT industry by some ill-minded people, which has tarnished the image of Pakistan internationally. To help reduce the bad implications of the exemptions, the exemption has been removed, and new schemes have been introduced which are beneficial for both taxpayers and the Government.

What are IT and Enabled Services? According to Income Tax Ordinance 2001, these services are defined in Section 2 – Definitions:

• Information Technology (IT) Services: Include software development, software maintenance, system integration, web design, web development, web hosting, and network design.
• IT Enabled Services: 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.

Forms of Doing Business: According to Section 80 of the Income Tax Ordinance 2001, the term “Person” includes:

• An individual
• An association of persons or a body of individuals
• Company

Tax Implications for Individuals: An individual involved in IT services in Pakistan will be liable to different tax rebates if registered and duly certified by the Pakistan Software Export Board (PSEB).

Two Streams for Taxation:

1. Fixed and Final Tax Approach:

   • Banks are liable to withhold 1% of the amount of export proceeds from IT Services. However, with PSEB registration, this is reduced to 0.25% of export proceeds, and this will be the final tax. Businesses can intimate banks to withhold 0.25% by providing the registration certificate. No further tax will be demanded while filing the annual tax return.

2. Tax Credit for Full Tax Liability:

   • If the IT business is a startup (commenced on or after July 1, 2012, registered with PSEB, turnover less than PKR 100 million in each of the last five tax years), a tax credit of 100% of the amount will be allowed on all remittance and business income, provided:
     • Registered with PSEB
     • Certified freelancer
     • Annual tax returns are filed
     • Compliance with all requirements of law
   • No monthly sales tax returns (Provincial or Federal) are required.

How to Distinguish Between Final Tax and Tax Credit? Assume you are a freelancer, duly certified by PSEB, and compliant with all income tax laws. If you have intimated the bank to deduct tax on your receipts, the bank shall deduct 0.25% of your total receipts and deposit it to the Tax department on your behalf, with no further tax demanded. If not intimated, the earnings will be reported to the Tax department with proofs, and you will be allowed a tax credit based on your annual tax return (applicable only for startups as defined under Section 2(62A)).

Why Register with Pakistan Software Export Board? PSEB is an apex Government body mandated to promote Pakistan’s IT Industry. An individual not registered with PSEB will face:

• Normal taxation (slab rate from 5% to 35%)
• Banks withholding 1% of export proceeds
• No tax credit on remittance and business income
• Requirement to file monthly sales tax returns
• Potential penalties for non-compliance

Benefits of PSEB Registration:

• Reduced tax rate (0.25% final tax)
• Tax credit for startups
• Enhanced credibility and compliance

How to Register with PSEB and FBR? Contact info@at-co.ca or book a free consultation via WhatsApp @ +923002645248.