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).
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.
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:
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.
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.
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.
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?