The Pakistan Software Houses Association has released its comprehensive policy recommendations for the Federal Budget 2026-27, strongly emphasizing the need to address structural tax distortions in the digital economy.
It is pertinent to note that Pakistan’s IT services exports reached a record USD 3.8 billion in FY25, marking an 18% increase over the previous year. Whereas, freelance and remote work segment, which contributed an additional USD 779 million, surged 90% year-on-year.
Currently, all IT export receipts are eligible for a favorable 0.25% Final Tax Rate under Section 154A of the Income Tax Ordinance. The issue arises when remote workers, who are functionally employed full-time by foreign companies, are registering as “freelancers” to claim the same 0.25% rate.
Therefore, P@SHA warns that this loophole in the tax structure is threatening the expansion of IT industry and its exports by hitting employees of domestic IT companies with a disadvantage – and, registered domestic IT companies suffering due to brain drain and uncompetitive net salary structures as compared to remote workers.
P@SHA Chairman Sajjad Syed explained that this misclassification creates a massive graduated tax arbitrage of 18 to 31 percentage points compared to domestic salaried employees, resulting in 22% to 44% more take-home pay for remote workers. It is a taxation anomaly which is creating discontent among the employees of IT companies in Pakistan.
For example, at a gross monthly salary of PKR 500,000, a remote worker claiming the 0.25% rate takes home PKR 498,750, while a domestic IT employee takes home only PKR 393,250 – a substantial difference of PKR 105,500 per month.
This dynamic creates a systematic drain of senior talent away from Pakistan’s organized IT sector, as no domestic employer can compete with what is essentially an implicit subsidy to foreign companies.
To resolve this crisis, while safeguarding genuine freelancers, P@SHA strongly recommends amending Section 154A to introduce two distinct tax sub-categories. Category A is designed for Independent IT Service Exporters, who will retain the 0.25% tax rate. To qualify, professionals must meet at least three of five criteria: earning income from three or more unrelated clients, avoiding exclusivity agreements, engaging in defined project-based work, operating autonomously, and maintaining a registered business identity.
Category B will cover Remote Employees of Foreign Entities. Indicators of Category B include relying on a single entity for 80% or more of foreign exchange income, receiving fixed monthly compensation, and working under regular supervision. These remote employees would be subject to newly proposed graduated tax rates ranging from 5% to 20% based on their annual income.
To ensure a fair transition, P@SHA advocates for a six-month amnesty window allowing workers to correctly reclassify without facing retroactive penalties or back-taxes. This approach mirrors global best practices, aligning Pakistan with international frameworks like the UK’s IR35 rules, the US W-2 versus 1099 classification, and Germany’s Scheinselbständigkeit rules.
P@SHA stands ready to assist the Federal Board of Revenue in drafting the requisite regulations to eliminate this arbitrage – and, foster a competitive, level-playing and fair domestic IT ecosystem.
