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Taxation for IT Companies in Pakistan: Holidays and Exemptions Spell Good News

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3 years ago

Technology

Taxation for IT Companies in Pakistan: While many Pakistani companies and tech forums talk about the latest positive developments in Pakistan’s tech startup industry, one oft-ignored highlight is the current taxation system for IT companies in Pakistan. If you are thinking about starting up a technology firm in Pakistan or you currently run such a firm, you’ll be happy to know that the Pakistan government has granted an income tax exemption for IT companies till 30th June 2016.

Let me repeat:

All software and internet based businesses in Pakistan are exempt from income tax till 2016.

According to the Pakistan Software Export Board (PSEB), the government of Pakistan is interested in attracting foreign IT firms as well as developing local talent. It lists the major initiatives taken in this regard below:Taxation for IT Companies in Pakistan.

  • Provision of low-rent Software Technology Parks (STPs), with fiber-optic connectivity, libraries and conference rooms.
  • 100% ownership of equity allowed to investing foreign IT/ITeS companies.
  • Income Tax exemption for IT companies till 2016.
  • 100% repatriation of profits allowed to IT companies.
  • Seven years’ tax holiday for venture capital funds.
  • Minimum rate of 30% depreciation on computer equipment.
  • The State Bank of Pakistan (SBP) has allowed banks to open Internet Merchant Accounts.
  • Availability of instant, reliable and high-speed connectivity.

While the current deadline for this tax holiday is 30-Jun-2016, there is a strong possibility that this holiday will get extended.

Reason for Tax Exemption

In a country where it seems the tax ratio is increasing everyday on almost everything this exemption does raises an obvious question: Why?

There is no well documented reason from the government. One reason may be that the government is really interested in growing the industry. Many businesses are declining and foreign investment is slowing down. Keeping this in mind and also because online businesses are bringing a lot of money to the country, the exemption makes sense.

If taxes are imposed on online businesses the financial burden on the owner my eventually cause the government to lose easy money. Also, consider that the exemption also holds true for overseas Pakistanis who transfer money to their families via wire transfer. This makes the second point very valid that the government is interested in protecting sources of incoming cash – whichever ones are left.

What Does a Tax Holiday Mean for IT Business Owners?

Simply put, it presents a wonderful opportunity for you as an IT business owner. Even if you are not from Pakistan, you can come and do business from Pakistan and enjoy the exemption. You can also retain 100% equity of the business though you’ll obviously be expected to pay income tax.

Even though as an IT business owner you don’t have to pay any specific tax for software development-based income or an online business, income tax is one way to give something back to the society where you are earning your livelihood. It may not go to the welfare of the society but you can take pleasure in the fact that you did your part.Taxation for IT Companies in Pakistan

Sales Tax for IT Businesses

According to the Federal Board of Revenue (FBR), there are categories of transactions that qualify for sales tax. Sales tax is not levied on some software industry transactions such as:

–       Downloading material from the internet

–       Subscribing to internet-based services

–       Upgradation charges

–       Maintenance fee

–       Training fee

and more

An inexhaustive list of activities that incur a 16% sales tax are listed below:

–       Sale of CDs/DVDs with or without software

–       Sales of any other hardware medium with or without software

–       Sale of System software, which are usually essential to operate computers

–       Download which is accompanied backup copy of the software on any hardware medium and

–       Sale of customized software with transfer of all rights to make amendment/charges in the software

The PSEB claims that its tax incentives “have been instrumental in the IT industry’s development.” Do you agree? What is your take on the current taxation system in Pakistan for online businesses, software houses and IT companies?

  • Hassan Abbas

    Two questions:

    1. When did this exemption come into execution? I mean from which date onwards the income tax is exempted?

    2. Can you share some official link/article from either FBR or PSEB which confirms what you have mentioned in your article?

    Thanks for the great work.

  • Mr. Hassan Abbas has already asked key questions, I’m also looking forward for latest updates.

  • Hassan Abbas

    So there is no one to reply to my queries?

  • Nida Rasheed

    Hi,

    Sorry for the delay in the reply. We had to confirm the information with the PSEB and FBR.

    1. When did this exemption come into execution? I mean from which date onwards the income tax is exempted?

    The amendments in the Customs Act 1969 (IV of 1969) allow for this tax break.The relevant CBR notification is: Notification No. SRO 358 (i)/2002. This was effective from 2002.

    2. Can you share some official link/article from either FBR or PSEB which confirms what you have mentioned in your article?

    Link to the Income Tax Ordinance: http://download1.fbr.gov.pk/Docs/201191210938447ITOrdinanceUpdated2011.pdf

    As per the 2nd schedule – exemptions and tax concessions of the Income Tax Ordinance
    Clause 133:

    “Income from export of computer software and its related services developed in Pakistan: provided that the exemption under this clause shall not be available after the 30th day of June, 2016.”

    Also, a software house/company must be registered with PSEB and the State Bank of Pakistan, in order to realize its earnings and to avail Export Finance/Refinance Scheme.

    Have a great day!

  • Hassan Abbas

    Thank you for the reply, this is truly of great help.

  • Rehman

    Can you share some official link FBR which confirms, Sales tax is not levied on some software industry transactions such as:

    – Downloading material from the internet

    Kindly provide the FBR link which confirm the exemption of the sales tax on downloading software’s

  • Umair

    I am new to business in pakistan. Trying to setup a software house who will provided software development services to foreign clients. I understand that till June 16 I don’t have to pay any income tax on my income but I don’t understand the concept of sales tax. How and when is it applicable. Realistically do I have to register for sales tax or only income tax with FBR/NTN?

    • Nida Rasheed

      We’re not able to provide advice on taxation law in Pakistan, so please refer to a tax attorney. Thanks.

    • Hassan

      If you are planning to provide services only then you only have to register for income tax. If you are planning to develop and sell products then you have to register for sales tax as well.

    • Asma Naz

      Hi Umair.. I have the same concern as you had.. can you share with me what you did for sales tax?

  • Hi,
    Thanks for the informative article, The title says “Taxation for IT companies” I just want to clarify would it make any difference if we are operating as sole proprietor or does it have to be a private limited company.
    Waiting eagerly for your reply.
    Thanks,
    Ahmed

    • Nida Rasheed

      Hi Ahmed,

      Since we’re not experts in the field of taxation, I’d strongly recommend going to the links we included and checking the source itself. :)

      • Thanks, I took a look at FBR ordinace and the exemption as it appears to me does not specifically applies to limited companies rather it covers person, groups of persons as well, So my understanding is it covers all forms of formations. However I will speak to reps of FBR for confirmation.

        Thank you once again :)

        • Nida Rasheed

          You’re welcome Ahmed! :)

  • Moiz Omar

    Good policies by the Government.

  • Zishan Danish

    Can anyone shed some light on the sales tax situation as this seems to be bit of a grey area. When we source services of a company based in Europe, we do not pay VAT (I understand that its different from sales tax). Can someone confirm if sales tax is exempt when providing services outside the state?

    • Hi Zishan,

      Since we’re not tax experts, I’d strongly recommend you use the links provided to research this. :)

      • Zishan Danish

        Thanks, Nida :) I understand that and have also visited the links in this article but as you know it, it’s painful to try and parse the legal mumble-jumble within FBR and PRA websites. Hence, just a suggestion for some knowledgeable author to post an easy-to-understand article on this topic. I’m sure many others like me are searching for this information or might not be aware of sales tax on IT services at all.

        • That’s a good suggestion! We’ll figure out the various how-to guides we can create to help out entrepreneurs. :)

          • Zishan Danish

            That would be much appreciated. Thanks again!

  • Mehmood

    If you could please tell whether Sales Tax is applicable on Web Site Development of a private limited company, if yes, then at what rate? Thanks

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