Question Tax Exemption for Pakistani Freelancers

[hussain114]

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

[hussain114]

If you offer services to international clients and receive remittances in your bank that you withdraw in PKR, then yes its exempted, but make sure you get PRCs with the correct purpose code that falls under the exemption.

[mujtaba8000]

We can not be a company as we will be more difficult as other tax will be imposed on us. So just submit returns as individual. And keep safe records of PRC and clients conversion. Tax department on imposes tax on you. And can freez your bank account after tax deduction if you unable to reply them. So do not be so worry.

[engr_mshahid]

Yes, you're right and we shouldn't opt for company solution.

As far as getting PRC is concerned, i think the best solution is to use Payoneer -> Jazz Cash.

Once your payment is transferred to Jazz Cash then call JazzCash helpline and provide them detail. After few days, they will send you the PRC on email.

For this option, Upwork charges 2$ for Payoneer transfer. Then 2% Payoneer to JazzCash but the exchange rate offered by JazzCash is good as compared to direct transfer.

Thanks

[mujtaba8000]

I'm getting PRC from JazzCash for last 1 year. If you have PRC You have no worry about tax.

[hussain114]

If someone is a small freelancer, who is not doing a lot of volume, then I guess its fine to continue as an individual. But forming a company doesn't mean your status changes from individual to a company. If you form a sole proprietor company, it simply adds a business name to your FBR profile, and this still means you're a company owned by an individual. That status doesn't change until you form a bigger company, with more people involved, directors etc.

As a sole proprietor, there will only be service tax applied to you, ONLY when you offer your services to local clients in the country & charge them in PKR. This lcoal income will be taxable because it's not foreign income, and will be treated taxable just like any other local business.

And BTW where did you read that foreign income over 5 million PKR is taxable? It's a misconception. I never read this, can you provide anything supporting this? IT services are exempted from tax, there is no limit mentioned in the income tax ordinance, if I'm wrong, please share the relevant clause in the income tax ordinance.

I just checked Income Tax Ordinance amended upto 2020 on FBR website and on page 509, you can see clause 133 states the following.

"(133) Income from exports of computer software or IT services or IT enabled services upto the period ending on 30th day of June, 2 [ ] 3 [2025:]

4 [“Provided that eighty per cent of the export proceeds is brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels.”]

Explanation.- For the purpose of this clause –

(a) “IT Services” include software development, software maintenance, system integration, web design, web development, web hosting, and network design, and

(b) “IT enabled services” include inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centers, data entry operations 5 [, locally produced television programs] and insurance claims processing.]"

Thanks

[engr_mshahid]

Thanks for very detailed reply.

There are many jobs which are not covered by these categories and does this mean that all other categories are in tax net?

There is a rare chance but what if FBR asks for work done details from Upwork?

Thanks

[mujtaba8000]

You should have transection PRC. If your amount is less than 5 million rupees no questions from fbr.

[engr_mshahid]

This exemption is for those mentioned categories only. Freelancing isn't just about IT.

[mujtaba8000]

Tax exemptions is to all having USD TO PKR with PRC certification. Amount less than 5 million into pkr. I see in FBR policy

[hussain114]

I just shared the latest income tax ordinance 2020 update here. It doesn't say anything about  Rs. 5 million limit. Can you please share the policy you read here?

[mujtaba8000]

See this

[hussain114]

This is not relevant. The Income Ordinance is the ruling authority, and there is no mention of a limit in it.

Also this article doesn't say what time of foreign remittance they're talking about. There are many types of foreign remittances and I believe not all of them can be exempt from tax.

Also I just downloaded Finance Act 2019 but can't seem to find any limit in it. Let me know if you can find in it.

[mujtaba8000]

Brother it is also in FBR if your remittance are less than 5 million rupees
And this instruction are given by state bank of Pakistan remittance department

[hussain114]

Can you please link me with the relevant FBR page? I'd like to get to the bottom of this.

I'm just curious how can Income Tax Ordinance miss a really important detail if that's really the case.

[abdulm1014]

Explained In a very simple and easy way on how to do it!

https://www.youtube.com/watch?v=oE0avan1_2A&ab_channel=MALIKQAISER

[hussain114]

If you're a freelancer offering IT services and you receive foreign remittances through banking banking channels that you get converted into PKR, which falls under purpose code 9181 to 9186, then its exempted from tax until 2025.

You can download Upwork income certificates as a proof, as well as ask your bank to provide PRCs for all the remittances you receive. If you use Payoneer, then use a bank like Faysal bank, which is their partner (Disclaimer: I've never used Faysal bank, but read somewhere that being a partner, they can issue you PRC much quicker than other banks which receive Payoneer payments through other intermediary banks)

[khan88388]

Freelancer income is tax able says fbr in prime Minister citizen portal 😭

[hussain114]

Not sure who told you that, FBR call center staff is mostly illetrates. Call them 10 times & everyone gives you different information. Call FBR and ask them to connect you with their legal wing. FBR legal team know the laws better & normally give you the correct information. FBR helpline staff is just call center people who hardly know anything useful.

IF IT Online Freelance income f is taxable, there is a LEGAL doc that exists for a reason, to communicate which income is taxable. If anyone tells you otherwise, ask them for a relevant clause in the income tax ordinance.

And BTW since when citizen portal have any authenticity/credibility????

===

Again for your reference here is the relevant clause of Income Tax Ordinance. (Income Tax Ordinance 2020, page 509)

Copied directly from the Income Tax Ordiance:

1
[(133) Income from exports of computer software or IT services or IT enabled
services upto the period ending on 30th day of June, 2
[ ] 3
[2025:]
4
[“Provided that eighty per cent of the export proceeds is brought
into Pakistan in foreign exchange remitted from outside Pakistan through
normal banking channels.”]
Explanation.- For the purpose of this clause –
(a) “IT Services” include software development, software
maintenance, system integration, web design, web
development, web hosting, and network design, and
(b) “IT enabled services” include inbound or outbound call
centres, medical transcription, remote monitoring, graphics
design, accounting services, HR services, telemedicine
centers, data entry operations 5
[, locally produced television
programs] and insurance claims processing.]

[tlha-ashrf]

Can we open a foreign currency account and deposit it there, knowing that it won't convert it from foreign currency to PKR? Is this also allowed? I don't see such information there as well.

[hussain114]

No idea but I've the same question myself. See if you can call FBR and ask them to connect you with their legal team (normally available after 11:00 AM). The can give you best information.

Can you please post here when you're clear about it?

Thanks

[tlha-ashrf]

Could you share your FB? Let's chat there.

[hussain114]

Let's keep the discussion here, so others can also benefit from it

[fba2f7c5]

I live in my father's house so how can I show it as my head office? Do I have to sign an agreement with him?

[mujtaba8000]

Yes you can. We should must pay tax. On audit we will be charged the tax

[hussain114]

I believe you can just show that house's rental or ownership documents, you can cross check with FBR as well

[8cc9fa9a]

@hussain A Just wondering how things are going with you setting up all the stuff.

At my end, I got PRC with correct codes and filed Tax return as a sole proprietorship company. Everything seems settled now.

[hussain114]

I'm getting PRCs regularly now with the correct purpose code. Bank normally sends me PDF PRC in email same day or next day.

However I had filed my tax returns myself for 2020 as an individual in early December 2020. Please let me know if this was a wrong move? If yes, any impact on currently filed returns & what will happen?

I plan to fix this problem from next year's tax return and hopefully will file as a sole proprietor. I just didn't know whether I quality to file as sole proprietor or not since I'm working from home, and there are no business assets, no building/shop, no rent, no bills, no liabilities etc, so don't see how I'll need P&L statement & balance sheet etc.

Also I was in a rush bcoz the new tax expert I found, turned out to be greedy, so I had to get rid of him just a couple of days before the last date. But I found a better tax person for next time.

Btw how much you paid to file your tax returns as a sole proprietor?

[khan88388]

Individual is best. My lawyer take no fee from me because he is my cousin and working for 10 years in tax field. He askes me to get only PRC and declare income as foreign remittance

[hussain114]

Ok, under which category you enter your income? Under 'Foreign Income' and then enter same amount next to it as 'non-taxable'?

I also do the same way but I was watching a YouTube some time ago and the guy said this is the wrong way of doing it, so now I'm confused.

[8cc9fa9a]

income/(loss) from bussiness   code:3000  was used to enter income and on the next column all was exempted from tax.

You are correct, software export is not counted as foreign income.

Disclaimer: I didn't do tax my self. So I don't know much about it. 

[8cc9fa9a]

This was also the first time I was filing tax return as sole proprietor. I prepared the things like the individual but my Tax company asked me to do it like bussiness do i.e. to prepare profit loss excel sheet. I also work from home (rented home) so I did get some pointers like add 30% of home rent, 30% of electricity, 80% of internet charges, buying office desk, printer/cartridges etc ..Assests can be the computers acessories. Initial investment can be the amount used to open bank account. These are just pointers to get us thinking how to get P/L sheet done.

I hired **Edited for Community Guidelines** for my tax related stuff. You can guess they are not cheap but I wanted peace of mind. I rather not mention the cost here. I could have got it done under/around Rs 8000 for any other lesser known firm.

I cannot comment on your situation but my recommendation would be to hire someone who knows what he is doing. I had a really good experince just talking with **Edited for Community Guidelines**. In the initial days he guided me alot without any charges. I don't live in lahore else he would have been my first choice. 

[khan88388]

But brother individual is best... As sole proprietary you make a company which may involve other taxes like service tax etc..

[hussain114]

Service tax applies only if you sell your services to local clients within the countries. There is no service tax if you receive remittances against your services

[hussain114]

But your point about keeping it personal vs making a sole proprietor, well its still debatable. I don't think there are any rules laid out by the govt yet but I guess its a personal choice, so you can keep things more streamlined & organized. If a small grocery store at the end of the street is a registered sole proprietor, then why shouldn't a home based freelancer should be, specially when there is no harm in doing so, bcoz the taxes are exempted until 2025 anyways on the foreign IT income.

[hussain114]

Right ok, I'll ask my tax guy to file as a business next time. BTW 1 thing for me is, I registered my sole proprietor after July 2020, so I guess there was no need to file returns of tax year 2020 as a sole proprietor anyways. Did you mention a name of your tax expert bcoz I don't see it.

[khan88388]

What after 2025......they will take service tax? My big mistake was to register with FBR non filer are more happy Than us.

[hussain114]

Normally the govt extends the exemption each year in order to encourage online IT freelancers to bring in foreign exchange into the country. So I think they will continue extending it until Pakistan's economy is really stable. But even if they don't extend it after 2025, I think they will only apply a small % of tax on IT freelancer's foreign income, bcoz they can't afford to discourage IT freelancers.

It is best to be a filer & declare everything to FBR. Everything must be properly documented.

[8cc9fa9a]

Yes I did used my tax firm name. It was removed by community guidlines. **Edited for Community Guidelines**

and the second one I recommended was the **Edited for Community Guidelines**

[khan88388]

In my view we should simply get prc and return submission no need to make a company....

[8cc9fa9a]

We were doing individual filing for 2-3 years but because there weren't any guidelines for free-lancers, it was recommended to go to sole proprietorship.

No one is wrong or right here, its just to keep our financial records staright.

1. Have look at Pakistan Software Export Board, they don't even have a registeration for free lancers. 

2. Also goto a bank and try to open an account for free lancer 

3. Try to get a PRC with correct code as Free lancer

4. Try to get information From FBR as a free lancer.

Things might have gotten better but it was way easier to get yourself sole proprietorship company and get aligned with FBR system. 

Its personal choice though.