In the fast-emerging IT industry of Pakistan, exporters influence the economy to a large extent by developing software. They are offering digital solutions and exporting IT enabled services. But the tax world can be difficult to get your head around. It is important for exporters to know about IT and sales tax in order to be compliant, minimize costs and penalties. In this blog, we cover basics such as sales tax on IT in Pakistan, exemptions available for exporters and some practical advice around your calculations. Whether you’re exporting software or offering IT support services online, being informed can help you maximize the benefits of these tax measures.
Overview of Sales Tax on IT
Sales tax in Pakistan is imposed under the Sales Tax Act, 1990 and on services it is controlled by Provincial Ordinances. The Federal side is controlled by the Federal Board of Revenue (FBR), and provinces operate service-related taxes. The IT and IT enabled service sectors includes software development, data processing and call center operations. The taxation will depend on location of the supply and nature of service.
In the case of ICT, IT services tax was available at 16% from July 2015 but later it had to be brought down to 5% by making another notification. Provincial rates for services typically fall between 15% and 16%, and the combined standard federal sales tax rate on goods is 18%. Crucially, provision within the domestic market of IT services evidently comes under taxable services.
But the point of interest for exporters is how these provisions are to be interpreted in the event of an international transaction. Exports are dealt with differently to promote foreign exchange earnings and are often eligible for zero-rating or exemptions.
Sales Tax on IT Services
IT services sales tax-effect in Pakistan is mainly for domestics supplies and on lower side for exports. ICT (Tax on Services) Ordinance 2001 also has given a broad definition of IT/IT enabled services, which is made consistent with the Income Tax Ordinance. The seller in the locality of a buyer that is client must charge sales tax for the province at which his business’s location. You can take an example of 16% in case Punjab represents services associated with IT.
Exporters have at least some good news that exports of IT services and IT enabled services are zero rated. This is the situation countrywide, except for certain exceptions in provinces like Sindh. Would the exporters on PSEB have an added advantage as most exporters don’t need to get FBR sales tax registration for exports? There are also possibilities that related services such as telecom for software exporters may be spared.
It may be mentioned here that although exports are zero-rated for sales tax purposes, PSEB-registered companies still are subject to withholding tax at a reduced rate OF 0.25% until the year 2026 on export proceeds which is also a final tax under the Final Tax Regime (FTR).
Sales Tax on IT Equipment
In terms of hardware sales, Pakistan’s IT equipment is sold by importers and suppliers are charged with the sales tax. The general rate for imported goods is 18%. But certain items like computers and laptops are subject to a separate rate. The FBR has raised sales tax on imported computers and laptops to 10% from 5% with effect from the ongoing fiscal as part of revenue generation measures. That’s true at the import level and for companies like IT firms, that cost can rise.
Exporters have some potential relief. Inputs that are used to carry out export-oriented activities may be eligible for the suspension or refund of sales taxes. In case of the importation of equipment for generation of exportable IT services, exporters are allowed input tax credits or exemptions.
Exemptions and Benefits for IT Exporters
There are several incentives for exporters in the IT industry to grow. Key exemptions include:
- Zero Rating on Exports: No sales tax on IT and IT enabled service exports under SRO 590(I)/2017 of ICT and provincial equivalent.
- Relief for Income Taxes: Income from exports is not taxed if 80% repatriated but is subject to the minimum tax on turnover. A possible transition to a 100% tax credit system could improve the situation.
- No Registration Necessary: Pure exporters of software or IT services sometimes avoid sales tax registration requirements.
- Reduction of withholding tax: 0.25% (for ATL listed IT exporters).
These are part of Pakistan’s effort to encourage digital exports but keep the rules in mind. Keep records of remittances and transact only through authorized dealers.
Compliance Requirements for IT Exporters
For Sales Tax on IT, exporters must keep in check:
- Appropriate sales tax registration (federal, provincial as applicable)
- Proper invoicing indicating zero-rated export of services
- Retention of contracts with foreign customers
- Evidence of foreign currency remittance
- Filing sales tax returns on time
Non-compliance could lead to the denial of your zero-rating exemptions and penalties, including an audit.
Conclusion
For Pakistan IT exporters, the correct application and understanding of sales tax on IT. Potential statues can convert possible liabilities into assets. The system ensures global competitiveness through zero-rated exports and specified exemptions. Keep an eye out for FBR notifications as policies will likely continue to develop recent change. The laptop tax increase are good examples of why vigilance is necessary. By complying and benefiting from advantages, exporters can concentrate on innovation and expansion. If you are an IT exporter, check your current operations to make sure they’re not overpaying.