When P@SHA submitted its budget proposals recommending that remote workers be brought within the ambit of income tax law, the reaction was swift and predictable. PAFLA — the Pakistan Freelancers Association — led the charge against it, mobilising public sentiment with considerable noise. What was conspicuously absent from the debate, however, was context. PAFLA is led by individuals who are not themselves freelancers, operates without legal authorization to use the word “Association,”¹ and cannot, by any reasonable measure, claim to represent Pakistan’s freelancing community. That it became the loudest voice in this conversation tells you everything about the quality of discourse surrounding this issue.
Context: A Tax Loophole Was Born
The story begins in December 2018, when the State Bank of Pakistan formally introduced purpose code 9186 for inward remittances classified as “Freelance of computer and information services.” The introduction of this code, intended to track and support genuine freelancers, inadvertently extended to them the same income tax exemption previously reserved for registered IT companies.
The policy was well-intentioned. Its consequences were not.
When COVID-19 forced companies worldwide to adopt remote work, Pakistan’s labour market was permanently altered. International firms from Europe, GCC and North America began actively recruiting Pakistani professionals, often in direct violation of the legal requirement to establish a local representative office for purposes of payroll tax withholding, EOBI, and Social Security obligations. The Federal Board of Revenue, characteristically, did not enforce the law.
The arbitrage this created was staggering. I spoke with a CEO of a major Lahore-based company who described being systematically targeted by a German firm poaching his senior employees. The pitch was simple: Join the German company, register as a freelancer with PSEB, reclassify your salary as freelance income, and your effective tax rate drops from 35% to 0.25%, a 35% increase in take-home pay, overnight, for doing the same job. That CEO of faced an impossible choice: absorb the 35% tax cost on salary of Rs. 12-15 lacs per month, or watch his senior talent walk out the door. Having very limited supply of senior technical talent, that was not really an option.
He was not alone.
The Scale of Misclassification
As the remote work phenomenon accelerated through 2020 and 2021, what began as individual tax arbitrage became industry-wide practice. IT companies, unable to compete on net salaries with international remote-work offers, began routing high-earning employees through their international entities, effectively placing them off their local books. The IT Ministry declined to close the tax loophole. The market adapted accordingly.
Today, an estimated 10% of Pakistan’s IT industry workforce has reclassified itself as “freelancers.” In FY 2022, freelance exports represented 10% of total IT exports. By 2026, that figure had risen to 22%. Even though marketplaces data suggests that freelance jobs are shrinking but Freelancing export receipts under code 9186 grew from $265 million in 2022 to $950 million in 2026 — a number the IT Ministry has proudly cited as evidence of its freelancing policy’s success.
It is not success. It is accounting. Ministry finds it more convenient to reclassify industry contraction as freelancing growth than to confront the structural deterioration directly
A conservative estimate suggests that more than half of that $900 million represents revenue earned by structured IT companies that is being misreported as freelance income — revenue that is earned by copmanies but does not appear on their corporate balance sheets, is not subject to audit, and cannot be used to demonstrate institutional credibility to investors. The Ministry has chosen to spin the hollowing out of a formal industry as a triumph of the gig economy. That spin should be called out for what it is.
The Real Cost to Pakistan
This is not merely a tax compliance issue. The consequences compound at every layer of the economy:
For corporate growth and investment: Pakistani IT companies were on a trajectory toward IPOs and formal M&A activity. That trajectory has been severely disrupted. When a significant share of payroll moves off local books, it disappears from audited accounts, distorts revenue figures, and makes the company structurally illegible to institutional investors. Companies that were preparing for funding rounds or listings have been pushed — often involuntarily — into the informal economy. There is no easy path back.
For multinational presence: Pakistan hosts only 18 multinational companies with back-office operations. India hosts hundreds. Multinationals operating in Pakistan — companies like S&P Global, Teradata, and Contour — cannot legally adopt the grey practices that local firms have normalized. Their workforces, aware of the tax-free alternative available to peers, have grown increasingly frustrated to standard payroll deductions. Country heads have privately disclosed that their global principals are considering relocating hiring to other markets rather than manage the instability. If Pakistan loses its multinational anchor clients, it loses the reputational credibility that enables smaller firms to win enterprise contracts. That loss cannot be easily reversed.
For state revenue: The fiscal cost is not limited to income tax forgone. EOBI contributions, Social Security payments, and the full apparatus of employment-related revenue have been quietly eroded.
For contract scale and competitiveness: Winning large global contracts requires demonstrable institutional capacity: audited financials, permanent headcount of credentialed employees, and the ability to provide formal guarantees. An industry increasingly composed of informal freelancers cannot meet these thresholds. Average contract sizes will shrink. The industry will be confined to the lower tiers of the global value chain.
A Comparison That Should Give Policymakers Pause
India’s IT exports are projected at $315 billion in 2026 — approximately 75 times Pakistan’s figure. And yet, on most major freelancing platforms, India ranks below Pakistan. This is not because Indian developers are less skilled or less entrepreneurial. It is because India’s policy environment systematically converts freelancers into agencies, agencies into registered firms, and registered firms into scalable institutions. Pakistan’s policy environment, as currently structured, does the reverse: it converts corporate employees into freelancers, and structured companies into informal entities. That is not a nuance, but a policy failure of the past five years.
The pattern of abuse is, unfortunately, not new. PSEB startup incentives and Special Technology Zone benefits have been gamed in similar way. Each time a well-intentioned instrument is deployed without enforcement architecture, it is captured by the most opportunistic actors and distorted beyond recognition. The freelance code is the latest, and most consequential, instance of this pattern.
The Policy Pakistan Actually Needs
The solution is not to impose European-level income tax on a workforce that can, with minimal friction, open international bank accounts, incorporate offshore, or relocate entirely. That is not a threat; it is a description of the sector’s structural reality. A virtual industry has virtual borders. Policymakers who treat IT professionals as a captive tax base will be surprised by how quickly that base evaporates.
Equally, a blanket continuation of the status quo destroys the formal economy from within. The correct response is a credible, enforceable framework that rewards compliance without punishing the sector’s global competitiveness. The following proposals represent a serious starting point:
- Reduce the maximum payroll tax rate to 15% and the effective average to 8%, increasing the tax base through broader participation rather than higher rates on a shrinking compliant population.
- Adopt the globally accepted definition of a freelancer: an individual earning income from more than one source, with a maximum monthly income threshold of $3,000.
- Give 100% tax exemption to genuine freelancers who fit the above criteria.
- Apply a uniform payroll tax rate of 15% to both remote workers and regular employees. Remote workers are employees in all but name; the tax treatment should reflect that reality.
- Enforce the law for international companies to either register locally, or engage Pakistani talent through locally registered HR agencies subject to the same compliance obligations as multinational and national employers.
A Word on P@SHA’s Failure of Nerve
P@SHA has made a strategic error in this episode by failing to campaign against the predatory payroll tax rates that created the loophole’s appeal in the first place. An association that accepts 35% income tax on its workforce as a fixed condition, and then proposes to extend that rate to remote workers, is not solving a problem. It is guaranteeing resistance, fuelling the very narrative that PAFLA is now exploiting, and ensuring that any reform effort dies on arrival.
The ask must be simultaneous: close the misclassification loophole, and reduce the tax burden that made misclassification rational. One without the other is neither fair nor politically viable.
Pakistan has a genuine opportunity to build a structured, globally competitive technology export sector. That opportunity is being squandered. The correction requires courage from policymakers, honesty from industry association, and a shared commitment by industry to the long-term success of this sector rather than the immediate preservation of self interests.
The clock is running. The talent is already looking at the exit.
