Today our topic is “Income from export of IT service under taxation”. The export of IT services has become one of the major revenue contributors to the economy of Pakistan as reported in last recent years. Revenue from the export of IT services for the period 2022 was Rs. 2.66 billion approx. and target revenue for the period 2023 is Rs. 5 billion with the same revenue growth of 100% or more anticipated for the following years.
Growth and edge becoming possible to the industry due to various factors including, the availability of skillful resources available with low cost, high attention, and encouragement by the government of Pakistan to Pvt Sectors, Entrepreneurs, especially freelancers managing work remotely from desired locations, creating an environment to build up training and startups, IT courses offered by academies, universities, supportive policies by the government including tax exemption, tax credit, and incentives, subsidies, etc.
Freelancing has now become an integral part of exporting IT, ranking 4th in the freelance market in the world, impacting significantly the revenue of the whole IT industry in Pakistan. Export of IT services usually offered from Pakistan are including software development, website development, support and maintenance services, mobile and customized application, graphic design, content writing, digital and social marketing, artificial and business intelligence, data engineering, science and analysis, and many more services.
Challenges Faced By IT Service Providers Including Companies and Individuals (Freelancers)
Compliance Issues in Pakistan Including Tax Compliance and Meeting Legal Requirements
Compliance with tax and meeting Legal requirements are a big challenge and should be dealt with on time by the IT service exporters including companies and individuals (Freelancers). Relief in prior years by the Government as tax exemption till the year 2021 and 100% tax credit in the year 2022 and then reduced income tax rate 0.25% for the year 30-June-2023 on inwards remittance as full and final Tax liability as per the below tax section 154 – A subject to the following certain conditions which must be fulfilled that:
- Income Tax Return must be filled.
- Withholding tax statements for the relevant year must be filled.
- Sale tax returns under federal or provincial laws must be filled, as per the law if required.
- Any tax paid in foreign will not be allowed as a tax credit.
- Duly certification by the Pakistan Software Export Board.
The government has authorized dealers and banks in foreign exchange to deduct income tax as per the below section and rate at the time of foreign inward remittance relating to IT services and IT-enabled services.
The Rate of Tax to be Deducted Under Section 154A shall be
|S.No.||Types of Receipts||Rate of Tax|
|1||Export proceeds of Computer Software or IT services or IT Enabled services by persons registered with Pakistan Software Export Board||0.25% of proceeds|
For those non-complying in current and prior fiscal periods due to lack of knowledge and non-registration of NTN, conditions as per section 154 -A not fulfilled, non-deduction of income tax at the time of foreign remittance inwards via payment channels not authorized yet by the government other than authorized ones, they need to make compliance by now before the period 30-June-2023 ends in order to show at least making due compliance later rather non-compliance and properly recording of wealth in income tax returns with a source of IT export service income that has been tax-free
Continuous Change and Advancement in IT Technology
Technology rapidly changing and evolving becomes a challenge for the IT industry to stay regularly updated to provide work or service in order to compete and survive, especially in a country where technology is not acquired with ease due to financing facilities not being easily available, import issues, lack of awareness and updates by institution, etc.
Race of Artificial Intelligence and Business Intelligence
The race of generating quickly high-quality data that is reliable, useful, and updated via AI and BI technology with accuracy, and consistency for IT service providers to customers and users for decision-making is a big challenge due to factors including data security and privacy, data quality, availability, expandability, transparency, and sensitivity.
IT industry is highly competitive due to technology evolving rapidly from time to time, therefore IT Service experts face tough competition to provide best price, updated service, catch and retain clientele.
In conclusion, export of IT Service providers in Pakistan should be aware that in case of non-compliance with tax, the export of IT service income will be treated to charge as per the normal tax regime where the applicable tax rate is significantly higher than the current reduced tax rate of 0.25% For the year 2023 under the final tax regime as per the law.
They should also have knowledge of factors impacting the industry including, the acquisition of skilled resources, competitive environment, branding, relationship with clients, adaptive to changing market dynamics, and tax compliance and legal requirement in order to perform well and succeed.