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hussain114
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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

Ok thanks for the details. Did they provided you 1 PRC for multiple remittances? Did the PRC had any remittance details, like amount in USD or PKR, dates, sender etc.? Will it be possible for you to share the format of PRC how it looks? Also I wonder what to do if someone needs PRC for last few years!

 

What code they entered on your PRC and what code you wanted it to have?

 

Also please confirm how do you know it's important to have purpose codes on PRC? I mean to ask aren't codes only for businesses registered with PSEB? Why would individual freelancers have the codes anyways since they're not registered with PSEB?

 

If your bank doesn't ask for Form-R, how do you provide them? I mean when they ask for it, it's when they're holding a remittance & they get a request from headoffice to branch to ask the account holder to provide Form-R. Branch then acquires Form-R from account holder & sends it to headoffice, then they credit the remittance to the account, so that way Form-R remains in the record of the bank & they report this to SBP. But if they're not asking you for it and they're crediting remittances without it, I wonder why you're still giving them? And more importantly, how the branch is keeping it in their record bcoz I don't think they'll be sending it to headoffice, hence it's not being reported to SBP.

 

As for sales tax, agreed. My friend's tax consultant also told me same thing yesterday, but he also asked me to avoid forming sole proprietor & continue as individual to keep things simple. I actually agree with him.  Pakistan is like in top 5 countries with highest number of freelancers & how many freelancers are actually registered as sole proprietor or with PSEB? Maybe 1% or so. Specially when income tax ordinance is clear about it, and have no mention of such thing. I'm almost certain that I'll not take this route to form sole proprietor or PSEB registration. Tax consultants (of course also almost as confused as we are) can just recommend to form a sole proprietor to be on the safe side and so they can make some money and of course they get a permanent customer out of it, but of course forming a sole proprietor comes with some further formalities & protocol.

As you said you have filed the return, then please can you show the treatment of freelancer’s income in tax return?

Bro I hired a tax consultant to file my returns. I didn't do it myself. I paid 3k for it. It's not super complex though, you can learn from a tax consultant how to do it while he files your returns.

Thank you dear. It wasn't a big deal,  you just need to view your return and just have to find out the particular section. Anyhow thanks. Surprised! why are we scared to share information with others.

Sorry brother, I never used IRIS myself to file returns so can't help on this. I've no idea how to use IRIS, it's just too complex for me. But I do plan to learn it from my tax consultant for future so I don't have to use a tax consultant. Let me know your experience with it.

No problem at all. 

 

I requested just to review your return statement and you can definitely easily find out your income there and this is what all about your return that you have to repeat every year with plus minus, simply. 

 

Wealth statement is also a one time activity and later on it is just increase or decrease. Anyhow, no issue i have find the section, it falls foreign income head.

 

 Did they provided you 1 PRC for multiple remittances? Did the PRC had any remittance details, like amount in USD or PKR, dates, sender etc.? Will it be possible for you to share the format of PRC how it looks? Also I wonder what to do if someone needs PRC for last few years!?????

 

Multiple PRC were issued but I returned them back as they were under wrong code. I have attached a sample PRC, some one posted as a sample.

 

sample_PRC.jpeg

What code they entered on your PRC and what code you wanted it to have?

 

Also please confirm how do you know it's important to have purpose codes on PRC? I mean to ask aren't codes only for businesses registered with PSEB? Why would individual freelancers have the codes anyways since they're not registered with PSEB?

 

Only few months back all the question you asked were posted on PSEB and all the stuff I did where recommneded by PSEB itself. In the past few months they have removed all mentions of Free lancer from the websites.

I want codes for software export as thats my primary work. 9184 is the code.

These codes has nothing to do with PSEB. It just a measure of software export by Pakistan. It is maintained at State Bank. All type of remittance has codes which measure what we as nation are doing with remmittance. Having the correct code not only help the Pakistan Export Figures but all also authenticate what we do is a software work. BUT they only provide these codes to business which I found out very recently. Even the bank asked for PSEB registeration to get these codes. I gave them evidence of my work as free lancer. I haven't got any thing back yet.

 

 

If your bank doesn't ask for Form-R, how do you provide them? I mean when they ask for it, it's when they're holding a remittance & they get a request from headoffice to branch to ask the account holder to provide Form-R. Branch then acquires Form-R from account holder & sends it to headoffice, then they credit the remittance to the account, so that way Form-R remains in the record of the bank & they report this to SBP. But if they're not asking you for it and they're crediting remittances without it, I wonder why you're still giving them? And more importantly, how the branch is keeping it in their record bcoz I don't think they'll be sending it to headoffice, hence it's not being reported to SBP.

 

I just goto bank with r-form and get those stamped and recieved by branch manager. They don't know what to do with it but I said thats not my problem. I am obliged to report my remmittance and I am doing that. Branch don't have any record but I do. When they gave me incorrect code, I showed them R-forms I submitted. Bank is equally confused as we are. 

Whatever I did was wrritten on PSEB website and just got removed. I just followed what was wrritten there. 

Thanks for the follow up. I like the idea of keeping Form-R for personal record.

I actually got a PRC from my branch too but it's different than what you shared bcoz its not sent from headoffice. I needed PRC for past few years of remittances but the branch staff said that will take 'FOREVER'. So my branch manager suggested me something. He asked me to send a list of all remittances to him for which I needed the PRC, so he can cross check all, print, sign & stamp it. That is how I got my PRC but it doesn't have any purpose code mentioned on it. And I wonder if its good enough, since it's not issued by headoffice. But hopefully something is better than nothing?

Do you recommend I should get this updated, this time with a purpose code added to it?
Also which purpose code you think would apply on a virtual assistant/project manager? Would it be 9184 or 9185 or something else?

I have mentioned previously that what bank branches give is not PRC. its a receipt. Ideally that receipt should be enough if it states where payment is actually coming from. But PRC is a reporting of remmittance from your bank to State Bank and it should have purpose code else it's a receipt. 

 

PRC will be helpful in case of Audit. So its better to apply for it now.

 

Just to clarify, I am no expert I am just exploring this stuff for the first time and mentioning the hurdles I am facing. So I am not sure what code fits your work. See second schedule point 133 - the exemption clause and then find out the relevant code from the list codes. There is also code if your work-line is not mentioned in any.

Update:

I called FBR helpline today. The guy who picked the phone in legal wing was in no mood to talk. I explained him the whole thing & in the end all he could say is, "We've information desks in regional offices, you can just go there & get the information you want." So frustrating & disappointing.

By the way, when you get Form-R signed & stamped from your branch manager, do you keep the originally filled copy? I wonder if FBR ever checks it, if they'll ask that it's original & what you submitted to the bank?

I have the stamped photo copy of the R-form

There is no requirement of registering with PSEB in clause 133.

I beleif the requirement to register with PSEB is for getting tax exeption under clause 143 for new start up companies  as defined in clause 62(A) of section 2.

There is no requirement like you said.

 

What I am finding out that it would be way easier if company is registered with PSEB as Bank want PSEB certificate to open company bank account, to add purpose code to your remittance for PRC and even FBR is familair with it. Otherwise I don't know what would be required to prove the income from software work. 

 

note: only companies can get registered with PSEB NOT individuals.

I asked in  a freelance group, a very established freelancer  said, he once got FBR audit and he had to show  an agreement between himself & the company he was working for & that was it. He didn't said if anything else was requested by FBR.

Pakistan is like 4th in top freelancing countries, which means a large number of Pakistani freelancers are receiving remittances, and of course majority of them are individual freelancers and they're most certainly not registered with PSEB, because there is no law that asks anyone working as freelance to get registered anywhere.

I ask myself, how many freelancers in Pakistan are actually registered with PSEB? Maybe 1% or less? Then why should I go through the hassle of forming a company, getting registered with PSEB, making business bank account, then start visiting bank to credit every single payment, filling a bunch of documens of every payment, etc. etc. etc.?

You are absolutely correct about everything. I hope that is the WAY, FBR conduct there business. The only issue is the inconsistent reply people got from help line of FBR.
In my case bank told me to not receive payment in my account or call them family remittance or salary. The bank don't ask for purpose code by default but when you tell them to write software export code they required PSEB, contract etc etc.. Basically tob tell the purpose code is the responsibility of account holder hence if you follow the bank, it would fall into hiding the income, if wrongly declared as remittance from family.
So hopefully some one from government take interest in free lancing and stream line the process.
Free lancing is basically giving services and hence fall into business category. From my personal experience, you have form the sole proprietary business in Netherlands and, turkey. I have personal experience hence I can only comment on these countries.

Yes, FBR staff is extremely frustrating.

 

I've spoken with my bank several times & the staff at branch said it's fine to receive your remittances in it's current state. They said no need to do anything extra as long as your remittances come in your account without any query. But this maybe different for different banks. I opened an account in Askari bank & after opening the account, the staff member said you can't receive remittances in this account, bcoz the headoffice will hold it each time & will just cause you more delays.

 

If a freelancer is a filer, then he has already provided his/her bank details to FBR & since remittances come in the bank, so such freelancers are not hiding anything at all.

 

Freelancing may fall under business category, but it has to be on paper, there has to be some written legislation on freelancing by the government, which is not in place right now. Govt officials really need to sit & make some rules for freelancing, so we freelancers can be at ease that we're doing things right. But it doesn't look like they've any interest here at all.

Hopefully this thing will get clearer. So in short there is no right and wrong way. 

 

I have now form the sole propriety business. And receiving payment to bank account with correct purpose code. Payment has not been stopped OR/AND I didn't need to submit r-form, probably because the NTN is with the bank and also bank call for purpose code which kind a is a R-form. 

 

I personally don't recommend to go through all the hassle if some one is earning 1 million pkr in a year But if someone is earning a bit more chances of Audit increases and hence this MAY OR MAY NOT help in long run. only Allah Knows.

Did you got registered with PSEB as well?

Did you opened a new business bank account after registering sole proprietor?

PSEB not yet... 

All the other stuff yes.

Ok so PSEB is not necessary then if business bank account & purpose codes are in place?

When you said you got correct purpose code, please explain this a bit?
How is purpose code tagged with all your remittances to proof all your remittances are freelances related?

Ever since you've this setup in place, did you acquired PRC yet? Also which bank is this?

> "Receiving payment to bank account with correct purpose code."

Is the purpose code mentioned somewhere in statement for each payment?

Thanks

Ok so PSEB is not necessary then if business bank account & purpose codes are in place?

I am not saying PSEB is NOT necessary or VERY necessary. I haven't got upto point to register for it. Thinking out few personal reasons. 

Yes a business bank account.

 

When you said you got correct purpose code, please explain this a bit?

4 Export of Computer Software
- Receipts on account of export of computer software including design,
development, and programming of customized system.
Purpose code: 9184

I am doing software work. So my remittance should also show the purpose of payments. The bank needs to report SBP about the reason of foreign funds, hence the correct purpose code.

 

How is purpose code tagged with all your remittances to proof all your remittances are freelances related?

I tell them the purpose code which should be printed on all my PRCs and reported to SBP. So since I have sole business, the PRC generation won't be an issue hopefully.

 

Ever since you've this setup in place, did you acquired PRC yet? Also which bank is this?

NO I haven't. I got bit lazy after getting things setup. it took more than a month for Bank to open a bussinees account. Hence I haven't got many payments so I will apply soon.

SCB and UBL.

 

Is the purpose code mentioned somewhere in statement for each payment?

NO. I am hoping it will be on PRC. I am positive because I got call from bank and they ask for reason of payment and purpose code. (very first time) 

https://tribune.com.pk/story/2106450/2/?amp=1.

One of the reason to form a company. Good that free Lancer limit has been increased

Hmmm I'm confused. I mean I never heard there was a limit on remittances.

Article says earlier it was $1500 per individual per month, but I never had any issue before above $1500.

Any idea what has changed yesterday?

No idea.. other than the article itsefl.

 

Article says earlier it was $1500 per individual per month, but I never had any issue before above $1500

I can only guess that this is because no one is submitting the R-forms and hence inward remittance is considered family remittance. But on ther other hand bank don't know what to do with non-family remittance.

I was aware of the $1500 limit but never saw anyone get bothered by the banks also in my case, this has never been an issue. 

Yeah you see the problem here.

1. What's the point of putting a limit on remittances in the first place? They can put checks in place, but makes no sense on putting a limit tbh.

2. In many cases remittances get credited as encashed PKR, routing through a different bank & the receiving bank have no immediate way to find/hold a remittance right away to identify if its family remittance or freelance remittance. So basically they've no idea what they're doing & unfortunately there is no one to answer any queries.

 

We need way better legislation here.

Hey bro, I think you missed my other long message with lots of questions. Please reply when you've a moment. Thanks

1. Who formed the sole proprietor for you?

2. How much you paid for it?

3. How long it took until the sole proprietor was formed? I mean what is the process time. And if you had to visit them & it was done in one sitting, or if it took few days etc.

 

4. After sole proprietor was formed, what documents did you took to the bank to get the business account opened? Why it took a month for it to open? Doesn't it normally take a week or so?

 

5. >> You mentioned, "I am doing software work. So my remittance should also show the purpose of payments. The bank needs to report SBP about the reason of foreign funds, hence the correct purpose code."

Please confirm how is this reporting done & how often? Is it submitting R-Form, invoice & bunch of documents for every single remittance? And will it happen for every single remittance?

 

6. At what point you told the purpose code to the bank? I mean is this at the time of opening the account or when you receive remittances each time?

 

7. Now that you've formed a sole proprietor, please also confirm how will you deal with service tax, & how to claim service tax exemption for remittances?

 

I visited SCB couple of times in past few years to open a bank account & every time they told me they don't open a bank account for freelancers, it's against their policy.  I had a similar experience with UBL as well. So how did you managed to open an account in these banks.

 

Lots of queestions, but hopefully this will help a lot of other people as well.

 

I'll wait a bit more to hear from you on this new setup & see how it works out.

Please keep us posted on this new setup. 

 

Thanks a lot.

1. Who formed the sole proprietor for you?

 

A tax consultant.

 

2. How much you paid for it?

 

around 2000 rs

 

3. How long it took until the sole proprietor was formed? I mean what is the process time. And if you had to visit them & it was done in one sitting, or if it took few days etc.

I whatsapp my id card number and iris password. It took only a day with no visit 

 

4. After sole proprietor was formed, what documents did you took to the bank to get the business account opened? Why it took a month for it to open? Doesn't it normally take a week or so?

I took the printed copy of submitted iris form which states the company name, 02 letter head (which is a requirement), stamps (with "sole proprietor" written in it ). Bank was generally not interested in openning a business account. I had a better experience with UBL bank compared to SCB. but both took more than 30 days with home visit to verify. Its better if you have a dedicated room for your work. UBL also took pics.

 

5. >> You mentioned, "I am doing software work. So my remittance should also show the purpose of payments. The bank needs to report SBP about the reason of foreign funds, hence the correct purpose code."

Please confirm how is this reporting done & how often? Is it submitting R-Form, invoice & bunch of documents for every single remittance? And will it happen for every single remittance?

6. At what point you told the purpose code to the bank? I mean is this at the time of opening the account or when you receive remittances each time?

 

Uptill now I get a call that "your remittance is received at xyz rate . do you want to confirm?" and then I tell them the purpose code. Previously, this was the same but they didn't ask for purpose code. Nothing other than this required, 

 

7. Now that you've formed a sole proprietor, please also confirm how will you deal with service tax, & how to claim service tax exemption for remittances?

no clue. One step at a time.

 

8. I visited SCB couple of times in past few years to open a bank account & every time they told me they don't open a bank account for freelancers, it's against their policy.  I had a similar experience with UBL as well. So how did you managed to open an account in these banks.

 

I had my previous salary account that I used for free lance stuff. I opened a current business sole proprieter account with the documents mentioned above. 

Ok thanks a lot. This is very helpful.

 

And wow, those banks visited your home to verify before opening a business bank account?

That's really interesting. I wonder where else  that happens in the civilized world?

So much for government's motto, "Ease of doing business".

I have same kind of question. I am a freelancer as well as govt employee. The same tax deduction applies to me as an individual that only working as a freelancer. 

Hi Hussain,

Thanks for the information brother. There are lot of hurdles for freelancers in Pakistan when it comes to bring money in Pakistan. I need a bit of help in my case where I am currently struggling

 

Previously, I used to work on upwork and freelancer.com and was usually withdrawing funds through that channel to my bank account. For my permanent clients, I use them directly and ask them to pay me through payoneer (I generate an online invoice for them) and they pay me through that and funds comes in my USD account on Payoneer which I later withdraw to my local bank account. 

The problem comes when I went to my file my tax returns, My tax consultant told me that these payment is not coming from a proper banking channel (as Mobilink does a local bank - bank transfer) and shows a "Home Remittance". I wanted to know with services like payoneer, xoom, transferwise how do I show the proof of payment as IT services because if God forbid anyone audits then they won't be consider this income which falls under "IT services"

Please if anyone can share their experience regarding bringing foriegn payments through these channels and can proof that these are for IT consultancy.

Thanks,

The PRC certificate. I am struggling to get PRC from bank as well but PRC should contain the trail of these remittances.

 

Regarding your specific case, I don't have exact details about your case but the deposit should directly in your account. i.e. Customer ----> to your account. 

where customer can be your client, upwork client etc...

 

So I had a foreign bank account and payment were coming to that foreign account and from there I was transferring to my PAK account. Turns out that doesn't qualify for exemption. I didn't claim the exemption either. Other can also add to this info. 

Hi,

 

Ok so basically exemption have 2 conditions.

1. Money must come in your bank account

2. 80% of the money must be encashed in PKR, so that govt can keep the USD & get the benefit of foreign currency .

 

IT services are for sure exempted, but I'm not sure how the exemption can be provien in your case since you're transferring from USD to PKR account.But I'd assume it shouldn't be so hard to proof that your income is from IT services.

 

One thing you can try and get a written contract/agreement with your permanent clients to show in case ever an audit comes.

 

But also try to consult couple of more lawyers. As far as I've seen, most of the lawyers have not much exposure to freelance work & hence they're not very helpful.

 

You can also call FBR helpline and ask them to connect you with their legal wing (9am to 4pm), maybe a reasonable person will be willing to hear your case &  guide you properly, but this also depends on luck who picks up the phone lol.

 

Keep us posted on your case.

 

Thanks

ASA, So if we get wire transfer ($) to any $ account in Pakistan. Will it still be Tax exempted ? Thanks

WS, not if you withdraw USD from your USD account, but as far as  I know, now they changed policy and USD account holders can only withdraw in PKR, so technically it should be exempted but please call FBR to be sure.

Good healthy discussion going on.

I just want to take opinion of you guys about my scenario.

I am working as a full time freelancer on Upwork and I withdraw all of my earnings first from Upwork to Payoneer and then from Payoneer to my local PKR bank account.

Do i qualify for the tax exemption by fulfuling the two requirements of all transaction through proper banking channel and that 80% foreign exchange thingy?

Would really appreciate your response.

Thanks.

Yes, you do.

For a Freelancer , I am not sure but as a company as per 133 IT service income is exempted , But under section 113 Minimum Tax , Exempted income is entitled to minimum tax rate on gross turnover.

 

Correct me if i am wrong. 

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