🐈
» Forums » Freelancers » Re: Question Tax Exemption for Pakistani Free...
Page options
hussain114
Community Member

Question Tax Exemption for Pakistani Freelancers

Hi there,

 

I've a question about tax exemption in Pakistan for Pakistani freelancers offering IT services.

 

I visited my tax consultant recently to file my tax returns for tax year 2019.

IT services are definitely 100% exempted from tax till year 2025, but to my surprise my tax consultant said that any income generated through IT services is fully taxable in Pakistan 'UNLESS' membership is acquired from Pakistan Software Export Board (PSEB).

 

I consulted PSEB, they said they don't offer membership to invididual freelancers, but if an individual freelancer can form a sole proprietorship company, then PSEB membership can be acquired easily.

And then you've to open a new business bank account and report all earnings to PSEB with Form-R and few other supporting documents.

 

And this is how an individual freelancer offering IT services in Pakistan can avail 100% tax exemption. This all sounds fine, but my concern is that the same tax consultant never gave me the same information earlier and now he's saying that all previous earnings are fully taxable just because I didn't had PSEB membership, which no one ever communicated to me, not even the same tax consultant ever told me before. And in fact not even 'Income Tax Ordinance 2001 - 2019 Amendment' states this in article 133 where it talks about income tax exemption on IT services.

 

I need input from other fellow pakistani freelancers on this.

Also please tell me did you know about above information before & if you've formed a company to avail tax exemption or are you still working without a company?

 

(I'll probably add more thoughts to this post as I consult with few more people).

Thanks

243 REPLIES 243
hussain114
Community Member

Update: I just called FBR helpline and had a detailed discussion with their legal wing. They confirmed as per article 133 of Income tax ordinance, all IT services are completely exempted from tax whether you're an individual or a company. They also confirmed it is absolutely not necessary to form a company just to avail tax exemption.

 

However they confirmed there are 2 main conditions to follow in order to avail tax exemption.

1. All income must be coming through a banking channel.

2. At least 80% of the income must be encashed into PKR.

 

If you comply by both these conditions, then there is nothing to worry about. You've 100% tax exemption and if anyone asks, Upwork earnings certificate can be shown as proof.

 

Hope this information will help others as well.

Good Information

I have been searching for the same answer for past one year. The Bank told me to show PSEB registeration for getting the export Software code of PRC (proceed realisation certificate) and like you PSEB told me to setup company to get registeration.

 

My call to FBR was not fruitful, I didn't get the same reply as you did. As a matter of fact, I got the reply from FBR to get regitered with PSEB. I will give them a call again may this time I will get a different answer. 

Please keep this thread alive and keep posting on it for all of us. Thanks

PSEB website have 2 options for new business registrations. PSEB registration is mandatory if you want to run a call center. But in case you're a freelancer or a company doing design & development, then PSEB registration is not compulsory, it's optional in that case. The guy at the FBR clearly told me there is no need to form a company & get PSEB registration & things can continue as they're right now.

 

Bro when you call FBR, please ask them to connect you with their legal wing, because those guys have better knowledge of things. Let me know what they say.

Yes I am trying to link to legal wing but its constantly busy. They pick up call and then put me on hold for transfer. I will try again today. 

 

some interesting things I found on other forums:

https://www.pakwheels.com/forums/t/tax-on-remittance-income/1122809/7

OK I checked this post. Brother aziz did mentioned that "To avoid trouble one need to register PSEB as a sole company".

 

Now as per FBR legal staff, they clearly mentioned that it is NOT NECESSARY for an individual freelancer to register with PSEB at all and no need to register as a sole proprietor either, but my only concern is that in Pakistan, govt organizations like FBR don't always do things by the book & it also depends a lot on the mood of the FBR staff. So in order to avoid any possible trouble, a person can consider registering with PSEB, making a sole proprietor, open a new business account in the bank, but again we really need a solid, reliable and dependable answer from FBR as well because right now there is so much confusion about this topic.

 

Please let us know if you were able to contact with FBR support.

 

Thanks

I haven't been able to contact the legal wing of FBR yet. It is always busy but what you mentioned above is 100% True. There is no legislation/rule how to go about this(free lancing). I met with my Tax consultant who also recommended to make sole proprietary company as what(free lancnig) we are doing is Kind of a business and more legal support is avaialble with a business name.

 

The down side of sole is the another headache of sales tax, regular updating PSEB and State Bank related issue after every payment i.e. to furnish invoices etc.. 

 

I talked with a lahore based tax consultant Anthony Williams, He told me if you looking for long term free lancing, then the best way is the sole proprietary company. If that guy was near Karachi I would have hired him. He has a youtube channel and also seems very learned in this IT stuff.

Update:-

 

I didn't get to talk directly with legal wing but the Tax assistant guy went personally to legal wing (while i was on hold for 20 mins) and confirm that registering a company is not necessary but the invoices and proof of software work should be with you. 

 

The earning is tax exempted as long as the condition in second schedule are met mentioned above.

 

My personal take is, If ever someone get audited, it would be better if sole company is formed because all the other stuff PSEB and PRC get streamlined and things are easier to proof. 

Zero Tax policy beneficial for Banking transaction. when you transfer money from Paypal/Payoneer to you Bank account non filer pay 1% and Filer pay 2% now after registration with PSEB no tax on transection.

non filer pay 1% and Filer pay 2% - Filer pay more or less? 

Ok so it looks like to be safe, this is suggested to get registered with PSEB.

I visited with PSEB office, so overall it's not a complex process.

 

First a sole propriter business needs to be setup.
Then a new business bank account needs to be opened.

And then using this information, one can get PSEB registration which I believe is mainly an online registration process. You just have to visit PSEB office for the payment procedure.

I think for startup company, it's Rs. 5,000 for first time.

 

Even if all this is not necessary, but still like several people have said so far that to be on the safer side and to get some credibility of working as a freelancer, this can be done & there is no harm doing so.

 

Please let me know what you're planning to do?

Thanks

I will gonna setup sole propriety company for sure. The steps you mentioned are probably the steps I am going to do. It would be good if we (You and I) documents our steps and then post it somewhere more reachable for the guidance of others.

Ok sounds good. Are you already a filer? And do you've an NTN already?

 

I already have a personal NTN. I was told for a sole proprietor, the business name can be added to the same NTN. I'll look into what is process. I'll keep posting all steps here.

 

I'll also try to contact FBR again & see if they can give more insights on the need of making a sole proprietorship company.


Please keep sharing your experience as well down the road when you proceed with the process. I'll contact with my tax consultant as well and see are steps from here.

Yes I am already a filer due my salaried income And yes with the same NTN a sole propriety business can be established. Most likely I will not be doing anything myself will ask my consultant to do it, because I want to make this perfect. Currently in process of submitting my tax return for 2019 so it might take a bit of time till I am able to setup everything.

Right Ok. Any idea how much it will cost to form sole proprietorship & how much time it normally takes?

Just looking at FBR-IRIS, I am guessing it will cost nothing to establish sole company. Like I said, I will have to pay the consultant for gettting these few clicks done, which will cost some fee.

 

Time wise is guess a day max but I will update as I get to that step in few weeks.

Ok, please let me know how much your consultant will charge for it.

 

Although I think it might be something really simple for anyone to do. I'll do some research how this is done.

Previously a consultant ask me to do this for Rs 5000.  

I have registered a sole proprietor company and opened a company bank account since last 2 years, I have yet to register with PSEB. Please tell me,

 

1- What documents do we need to submit to PSEB in  case of a sole proprietor company?

2- Do i need to file sales tax return every 3 months after being registered? what else?

 

Thanks.

similar response by S.ali.Me . 

**Edited for Community Guidelines**

How i can file return as a Freelancer using FBR IRIS, if any one has any experience with IRIS. Please share.

 

Thank you for great infomation. Really appericiated. 

 

Well you can hire a tax consultant, they normall charge a small fee to file your tax returns. Or you can do it yourself but it might be a bit complex for a person doing for the first time.

I will strogly recommend to hire a consultant for the very first time so that you have an idea how to proceed in coming years. IRIS is pretty easy for salaried person but complex for other stuff. Specailly for wealth statement.  

Hi,
Thank you so much for sharing the detailed information. Actually i was also looking for the same information but it’s pretty clear now.
I am filling return and mentioning the freelancer income for the first time, what i have actually searched out and extracted from community discussion, we shouldn’t go for the registration until unless return is not being audited and ITO doesn’t say to register for taking exemption.
However 30th is last date, so please keep the form updated to come on one page.
Further kindly inform in which section this income will be recorded, means in IRIs where we have to mention this income, in foreign remittance?

Well registration of sole proprietor is definitely not compulsory to get tax exemption on IT work but if someone can form a sole proprietor and setup a business bank account, then the freelance work they're doing will look much more authentic. And in case of audit a freelancer who had formed a sole proprietor will be in a better position to convince the authorities that all their income is tax exempted instead of a freelancer who is working as an individual. For example a sole proprietor income will be coming in a business account & the owner will provide relevant documents to the bank in order to receive the money, for example business invoice, Form-R & a few more documents as well. While for an individual person, this doesn't happen, so no documentation work is done in most cases.  

 

This is what I've realized so far is the main difference.

Hi,
Yes you are right, there is no issue to form a firm but if you are doing
any other job then it will be violation of code of conduct of pak employer.
Further to form a firm means you have to get it register with FBR for NTN n
etc.
If freelancers have no any other job then they can register the firm but
for already employed person its not possible.
Please keep posted.

I mentioning this again here:

 

The easiest way to show your IT income from software export in case of your audit is the PRC (Proceed Realization certificate). 

PRC has code on it which tells under which circumstances the remittance came into your account. The code to get IT exemptions are: 

 

1 Hardware consultancy services.Receipts on account of computer hardware consultancy services
provided to non-residents. 9181
2 Software consultancy services. Receipt on account of data base services provided to non-residents
such as development, storage, and on-line time series. Also included are the data processing services provided to nonresidents. 9182
3 Maintenance & repairs of computers. Receipts on account of maintenance and repairs of computers and peripheral equipment abroad to non-residents.9183
4 Export of Computer Software. Receipts on account of export of computer software including design,
development, and programming of customized system 9184
5 Other computer services. Receipts on account of other computer services not specified
elsewhere

 

When you ask your bank for PRC, they will give you PRC without these codes and hence the problem for Audit. In my case, I asked bank to put in the correct code, they told me they only do it for Bussiness not individual. I am currently in small tussle with bank to provide me the PRC. So for this reason I will make sole business. just to have a peace of mind for future.

For PRCs:

What if the codes are not mentioned on the PRC?

These codes are defined by PSEB & in Income Tax Ordinance 2001, there is no such thing mentioned to register with PSEB or to use these codes.

 

PSEB codes only cover a few categories. There are a ton of fields in freelancer  & PSEB don't cover them all.

For example in which category code these freelancers would fall?

- Copywriter/Article Writer

- Virtual Assitant

- Video Editor

- Audio/Video Transcriber

etc.

 

Even graphics designers don't fall under any category, because 9184 talks about 'design' of the 'computer software' . It doesn't mention website design & other graphics design work at all.

 

So again, this is all really messed up & confusing.

 

Also brother how do you acquire PRCs from your bank? Also which bank you use?

Good point. I'll call FBR again next week & discuss this matter again, will keep posted here.

Yes messed up is the right word. I am, like you, learning all these stuff for the first time. I am very dissappointed that even PSEB is not making any efforts to help out the free lance community.

 

There is NO requiremnt from FBR to :

1. Form a sole propriety company.

2. Have the relevant code on PRC

3. Registeration from PSEB

 

BUT when I contacted the local FBR office to find out about exemption and how to prove it, they said PSEB registration. Although the legal wing of FBR advice is quite clear but I doubt the local offices have any knowledge about it. If the case comes under Audit, I am not sure how the case will be dealt with. There is a youtube channel  TAx dosti

https://www.youtube.com/watch?v=FxSleLSB8pk 

 

This is 03 part series. I contatced this guy and asked him to give me info about my case. I paid him 5000 for advice, he said what I am doing is fine But he recommended to form a company to be more legit. I asked him whats the difference but I didn't get the clear answer. I am now having an idea that every thing is build up for business. Like PSEB registeration, PRC codes.  Everything would be very simple to prove if we have the PSEB and PRC. This all exercise is to deal with future audit. I also know there will be certain catch with forming a comapny. Sale tax etc.. No idea how we will deal with all that crap.

 

I have an account in Standard Chareterd Bank. 

Tax dosti guy charged 5,000 only for advice on the phone?? That's a lot for an unclear answer.

Please also let me know what exactly are you doing that he said is fine? I want to see if I'm doing the same & want to decide what route to take from there.

 

PSEB is mainly formed for people doing software 'EXPORT'. There is a HUGE difference in 'Export' and offering services online as a freelancer. But FBR treats PSEB like it's a BIG IT Organization that you can't work without, which makes no sense. It only proves illiteracy of FBR staff.

 

When a sole proprietor is formed, I think for every single remittance you've to provide Form-R to the bank, and if that's not done, then remittance won't be credited to your account. And then there are remittances that appear as normal atm funds transfer. I wonder how to provide Form-R for them & how to get PRC for them.

 

And acquiring PRCs is another pain. Did you ever acquired a PRC from your bank? if so, what was a process, did the branch manager provided it and how much time it took?

 

BTW, why would there be sales tax or any other tax after someone registers a sole-proprietor? Plus sales tax should be for small business like grocery stores etc. And I mean sole proprietor, PSEB, to get all these pieces in place eventually mean to get tax exemption, not to pay any taxes.

Hi,
Is there anyone who filed the return and mentioned his freelancer income in
the return and FBR get him audited?
I believe there wouldn’t be anyone, so i advise please don’t get confuse
yourself,if anyone is audited then he should simply provide Upwork income
proof n it will be enough. They will definitely be agreed with your
statement and proof. So again, please don’t go for registration if you
don’t have a proper company otherwise there must be alot of other issues
regarding your current employer, if employed.

I file my returns as Upwork freelancer. Well FBR don't audit everyone, they pick random people for audit, I believe through a computerized audit.

 

I agree & I really want to avoid Sole Proprietor & registration with PSEB. Proof can be provided but I wonder if FBR lower staff asks you to provide PRCs & other stuff.

 

I'll check one more time with FBR next week to be sure.

Yes you are right and we also know that not everyone is audited, that was reason i said no need to go for registration.
If they audit, then we will be in a better position to argument with them and no need to worry because they listened you properly and also advise if require some additional. Earlier, i have been passed from this process and remained successful to proof my claimed with FBR.

But it is appreciated if you are taking clarity over it. Please keep us posted if you talk to them.

Further can you inform in which section of IRIS you have mentioned your Upwork income because this is my first year with Upwork income. Please guide.

5000 for advice and forming a company which I didn't go for at that time because I thought what I am doing is correct than why should I. Also I guess that no one knows what to do for sure, hence everything is unclear. Somebody told me to get PASHA membership also.

 

I acquired PRC from bank but with irrrelevant code and yes I provided R-form for all my incoming remmittances without the bank asking for it. I asked bank to issue the correct code for my remittances and hence all the drama that these codes are strictly for business not for individual becuase my account is salaried account and remittances are business or something like it. Just to make it clear the PRC is generated on behalf of state bank. So often bankers give you reciept of transaction and call that PRC. Always remeber PRC has the purpose code on it. The application to Bank manager was required and it took 1 week to get it with wrong codes and its now over one month and I didn't get anything back after correction.

 

There is no sales tax if services are provided to overseas customer, but sales tax is on everything not only groceries. By law, everyone who is providing any type of services need to register for sales tax. This is another very vast topic that I don't have much knowledge about. So to answer your question, There is exemption on Income tax for free lancer BUT still we file our returns, similarly, so there is no sales tax if services are provided to overseas customers BUT still we need to file sales tax returns. 

 

 

 

 

 

Just for update!
I have called today in the afternoon to FBR income tax legal department and lucky was attended and connected with legal team. Frankly they don’t know about the treatment of individuals’ freelancers income and giving only one reply that to get register for exemption and when it is asked to them that we are individuals and individual registration is not available then they reply, ok don’t register and if you are audited then put your proof of income. When i asked again that it is still not cleared then they said we are putting it in our website in Q&A.
Further they said no need to worry if you have a valid proof with you.
Any other called today?
Please keep posted.

Ok so we're 'Back to square one'. Looks like FBR is really unsure about things, just like the rest of us.

 

BTW to answer your question, all foreign income, including Upwork income goes in same category while submitting tax returns. Your tax consultant will know how to file it.

Well I haven’t consulted anyone for filling my return and this is first time with freelancer income, so i just want to confirm where (tax section) have you mentioned this income?
Latest Articles
Featured Topics
Learning Paths