Disclaimer: This article is not intended to provide definitive tax advice but just as a guide on the resources available on the subject. Please consult a tax advisor or qualified professional to determine your tax liability.
Pakistani freelancers do business worth millions of dollars with local and international clients, providing a wide range of services ranging from software development to graphic design to content writing and SEO-related tasks. Income earned by individuals or firms in the freelance business is taxable income that should be reported to the relevant authorities. You should start with getting your National Tax Number (NTN) set up and then filing your returns accordingly. Income tax filings deadline is 30th September for every year.
Getting an NTN and Filing
Getting tax-related work done sounds like it would involve a lot of paperwork, standing in lines at banks to pay your dues and filling out long complex forms. All of that is not true in this day and age where technology is making life easier in almost all arenas.
The Federal Board of Revenue has made registration for a new NTN or filing taxes available online. The service is completely free and does not require any paperwork at all. However, it is advised though that you keep your paperwork handy in case it is needed to verification. If you are not sure about whether you already have an NTN from a past job, put your CNIC and name into the registration tool and it will return your NTN if it already exists in the system.
You can also use the e-Payments service to pay the tax online – the process from A to Z can be completed without leaving your desk/home/office. It is advisable, however, to keep a record of your transactions and print out your forms and receipts to back up the work you do online.
Tax Exemption
The often quoted clause 133 of the Income Tax Ordinance can be seen below. It appears that if your freelance work as an individual falls into any of the categories listed in the clause, your services would be exempt from taxation on total income till June 2016. The argument against the validity of this claim is that this exemption only applies to registered IT firms providing these services and a freelancer doing business on his/her own does not fall into this category.
What should be noted though is that being exempt does not mean that you do not need to get an NTN or file your tax returns, it just means that you might be eligible for a tax exemption. Tax forms have rows where you report your tax-exempt income, but you report it nevertheless.
The text from clause 133 of the 2001 Income Tax Ordinance that is quoted in favor of the exemption can be seen below:
“Income from exports of computer software or IT services or IT enabled services upto the period ending on 30th day of June, 2016.
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, locally produced television programs and insurance claims processing.”
Tax Brackets
A guide to how much tax you might have to pay starting 2016 or currently are the latest income tax brackets (on annual income). The tax rate for self-employed individuals is 0% for the first PKR 400,000 of income – which translates to about PKR 33,000 per month. The way these brackets work is that the first PKR 400,000 is not taxed even if you make more. You pay the tax rate on each bracket on the amount that exceeds the limit of the previous bracket, not your entire income. The maximum tax rate of 25% applied to any income greater than PKR 2,500,000, which is about PKR 200,000 a month. In case you make that much in a year, you would pay PKR 347,500 plus 25% on the amount that you make in excess of PKR 2,500,000
This website provides a convenient summary of the brackets to calculate the tax on your income if your freelance income comes in the form of a salary or as self-employment income. Please note that the brackets are different for both classes.
