Over the recent years, the Government of Pakistan has realized the need and importance of the IT sector to boost the economic progress in the Country. Numerous Software houses, Call Centres and other IT businesses are being registered day by day to export IT services in Pakistan. According to a recent report of the State Bank of Pakistan, the US 4.2 Billion dollars in three (3) quarters for the year 2020 on account of the Export of IT services was received in Pakistan by IT sector businesses. USD 813 Million dollars in this was only received on account of export-related to computer and information services by IT businesses in Pakistan.
The government of Pakistan to promote Export of IT Services had previously declared complete Income Tax exemption on amounts received on account of Export services in Pakistan till the year 2025. However, in March 2021 by introducing an amendment in Income Tax Ordinance, 2001, the Government of Pakistan has replaced the word “exemption” with “100% tax credit” on Income Tax on IT services in Pakistan in relation to proceeding from the export of IT services to clients outside Pakistan.
Does this mean that tax will be payable by the IT sector on amounts received on account of the export of IT services in Pakistan?
It is correct that benefit of exemption of Income Tax on IT services in Pakistan against Export of IT services outside Pakistan will not be available to IT businesses but that amount of tax as may be chargeable on such export will still be refundable to IT businesses.
Now the question is why this shift of Tax policy in the IT Sector?
Most of the IT businesses considering the benefit of the exemption on Income Tax on IT services in Pakistan did not bother to file their income tax return. The government in order to enforce the compliance of income tax returns and so as to broaden the tax base, introduced a shift in policy. In order to avail of 100% tax credit, all you need to do is to file an income tax return which has become mandatory for persons engaged in exporting IT services not limited to computer software, transcriptional services to avail 100 percent tax credit.
Which IT sector businesses in Pakistan will be required to file Tax Return?
Succinct reading of Section 10 of the Income Tax Ordinance, 2001 clearly provides that every income whether taxable under the Ordinance or which is otherwise exempted is still required to be declared in the Income Tax Return. Section 114 of the Income Tac ordinance 2001, on the other provides a list of all personnel required to file Income Tax Return. Persons, as mentioned under Section 114, include as follow:
- Every Partnership Firm
- Every individual doing business in Pakistan
There are several other categories of persons stated under Section 114 of the Income Tax Ordinance, 2001 however, it is not possible to provide detail of each person in this article. For what is mentioned hereinabove, no matter if it is a Software House, Call Centre, E-commerce business or any other Allied IT services business that you are running you are required to file an income tax return.
Whether Tax Credit can be claimed by the IT sector without filing Income Tax returns? No, it is not possible to claim Tax credit without declaring the number of proceeds received on account of the export of IT services in Pakistan in your tax return to be filed with the Federal Board of Revenue.
What are the Services Eligible for 100% Tax Credit?
Income Tax on IT services in Pakistan is now subject to 100% tax credit where income has been derived on account of export of IT services. Section 65F read with other provision of the Income Tax Ordinance, 2001, classify two types of IT services which are eligible for 100% tax credit as follow:
IT services include but not limited to following:
- Software Development
- Web Development
- Network Design
- System Integration
- Software Maintenance
- Web Design
- Web Hosting
IT Enabled Services
IT services include but not limited to following:
- Inbound or Outbound Call Centers
- Graphics Design
- Insurance Claims Processing
- HR Services
- Data Entry Operations
- Telemedicine Centers
- Remote Monitoring
- Medical Transcription
- Accounting Services
- Locally Produced Television Programs
What are the conditions for claiming 100% Tax Credit
Under the law, there are seven conditions required for claiming 100% tax credit, which are stated herein below:
- The IT service provider or IT enabled service provider export services outside Pakistan and atleast 80% of export proceed must have been received in Pakistan through banking channel.
- 100% tax credit will be available up till June 30, 2025 on Income Tax on IT services in Pakistan.
- The taxpayer must have filed his income tax return for year in which 100% tax credit is to be claimed.
- Any Tax required to be deducted or collected must have been accordingly deducted or collected and paid by IT service provider or IT enabled service provider. This means that he has paid tax as may be required to be paid on services rendered in Pakistan or withhold any tax which under the law is required to be deducted as withholding agent and paid to National Exchequer.
- The IT service provider or IT enabled service provider had duly filed withholding tax statements with FBR as may be required under the law for particular year for which 100% tax credit is claimed.
- The IT service provider or IT enabled service provider must have filed sales tax returns for the tax periods for which 100% tax credit in a particular tax period is claimed. Sales Tax Return means to include return filed with provincial sales tax authority for example Punjab Revenue Authority established in Punjab.
- The IT service provider or IT enabled service provider/ exporter is mandatory required to be registered with Pakistan Software Export Board (PSEB)
Any tax paid by the Exporters of IT services including IT service provider or IT enabled service provider on account of minimum tax and final tax will now be claimable in the shape of a 100% tax credit.
Hamza and Hamza Law Associates is the best law firm in Lahore. Expert tax lawyers at our law firm have the decade-long experience to assist and resolve the tax concerns of IT sector businesses in Pakistan.
We being the best law firm in Lahore over the period of time have gained ample experience to manage and resolve concerns relating to Income Tax on IT services in Pakistan.