The Pakistan Software Houses Association (P@SHA) has formally requested a 10-year extension of the Final Tax Regime (FTR) for the Information Technology (IT) and IT-enabled services (ITeS) sector, which is currently slated to expire on June 30, 2026. This demand comes following extensive consultations with IT companies and exporters, according to P@SHA Chairman Sajjad Mustafa Syed.
P@SHA has submitted its comprehensive budgetary proposals for the upcoming Federal Budget 2025-26, along with other crucial policy recommendations, to relevant government ministries and institutions. The association’s key objectives include attracting Foreign Direct Investment (FDI), fostering IT industry development, boosting export growth, and generating employment opportunities.
The existing FTR allows registered entities under the Pakistan Software Export Board (PSEB) to benefit from a reduced withholding tax rate of 0.25 percent on their export earnings. Mr. Syed emphasized that the continuation of this regime is crucial for maintaining the current momentum of export growth and encouraging further investments within the IT sector.
Predictability and Investor Confidence are Key, Says P@SHA Chief
Mr. Syed elaborated that extending the FTR for another decade, from 2025 to 2035, would provide the much-needed predictability and continuity for the IT industry, thereby bolstering investor confidence. He noted that the sector is currently experiencing significant investment inflows, operational expansions, and diversification into new export markets.
He further stressed that maintaining the FTR would simplify the tax structure for IT firms, enabling them to reinvest more of their earnings into business expansion and technological advancements. Consistent tax policies and incentives are vital for creating a favorable business environment for the burgeoning IT and ITeS industry, he added.
Alignment with Regional Competitors and Global Competitiveness
Chairman P@SHA pointed out that reinstating the FTR for IT and ITeS exports would align Pakistan with its regional competitors, many of whom offer long-term tax incentives to attract FDI. He argued that the IT sector requires stability and consistency in policy to remain globally competitive, expand its export capabilities, and create more jobs. A 10-year tax framework would accelerate digital transformation, enhance investor confidence, and position Pakistan as a leading IT hub, he asserted.
Addressing Talent Migration and Tax Disparities
Mr. Syed also raised concerns about the disparity in taxation between salaried employees in the IT sector (who face income tax rates ranging from 5 to 35 percent) and remote workers (who pay significantly lower rates between 0.25 and 1 percent). He warned that this discrepancy leads to talent migration and brain drain, creating challenges for local companies in retaining skilled IT and tech professionals. He advocated for a substantial reduction in income tax rates for salaried individuals within IT companies to unlock the industry’s full potential.
Proposal to Exempt Withholding Tax on Foreign Exchange Repatriation
Another key recommendation from P@SHA focuses on facilitating foreign exchange repatriation. Under the current Income Tax Ordinance (ITO), 2001, payments made to non-residents for services rendered in Pakistan are subject to withholding tax (WHT), with rates varying based on the nature of the payment and the existence of Double Taxation Agreements (DTAs). For instance, royalties and fees for technical services paid to non-residents without a permanent establishment in Pakistan can attract a 15 percent withholding tax.
To address this, P@SHA has proposed that payments made from Exporters’ Special Foreign Currency Accounts (ESFCA) for services rendered should be exempt from WHT. This exemption would apply to all categories of IT services and is aimed at encouraging the inward repatriation of funds into Pakistan.
