Karachi: The Pakistan Software Houses Association (P@SHA) has called on policymakers to introduce a clear tax classification for IT freelancers and remote workers in the upcoming federal budget 2026–27, warning that existing provisions are distorting Pakistan’s labor market.
In its proposals submitted to the Tax Policy Office under the Ministry of Finance, P@SHA highlighted that remote workers employed full-time by foreign companies are availing a concessional 0.25% tax rate under Section 154A of the Income Tax Ordinance, 2001. However, the association argued that such income effectively constitutes employment income rather than export of services.
This practice, P@SHA noted, creates significant tax arbitrage when compared to salaried individuals taxed under Section 149, leading to substantially higher take-home pay for remote workers performing similar roles.
According to the association, the effective tax gap ranges between 18% and 31%, translating into 22% to 44% higher net income for remote workers. This imbalance has triggered what P@SHA termed a “systematic drain” of experienced professionals from Pakistan’s formal IT sector, as skilled workers shift toward foreign remote employment.
For example, at a monthly income of PKR 500,000, a remote worker pays just PKR 1,250 in tax and takes home PKR 498,750, compared to PKR 393,250 for a locally employed professional — a difference of PKR 105,500 (26.8%). At PKR 1,000,000 per month, the disparity widens to over PKR 300,000 in additional net income, giving remote workers a 44% advantage.
P@SHA warned that such disparities act as an implicit subsidy for foreign employers, undermining the competitiveness of local IT firms and complicating talent retention.
To address the issue, P@SHA has proposed amending Section 154A by introducing two categories. Category A would apply to independent IT service exporters, who would continue to benefit from the 0.25% tax regime. Category B would cover remote employees of foreign entities, subjecting them to progressive tax rates ranging from 5% to 20%.
The association also recommended a five-factor classification test to distinguish between independent contractors and employees, backed by self-declaration mechanisms, risk-based audits, and integration with banking data.
P@SHA pointed out that several countries have already implemented frameworks to address similar classification issues, including the Netherlands’ DBA Act, the UK’s IR35 rules, the United States’ worker classification system (W-2 vs 1099), and Germany’s regulations on false self-employment.
It cited the Netherlands as an example, where enforcement of the DBA Act resumed in January 2025 after a prolonged moratorium, targeting widespread misclassification across sectors, particularly in IT.
P@SHA emphasized that aligning Pakistan’s tax structure with international best practices would promote fairness, safeguard the domestic IT ecosystem, and support sustainable growth in the country’s digital economy.
