P@SHA Urges Govt to End 0.25% Tax Loophole Used by Remote Workers

The Pakistan Software Houses Association (P@SHA) has released its policy recommendations for the Federal Budget 2026-27, calling for reforms to address structural tax distortions in Pakistan’s digital economy.

P@SHA highlighted that Pakistan’s IT services exports reached a record $3.8 billion in FY25, showing an 18% increase compared to the previous year. The freelance and remote work segment contributed an additional $779 million and recorded a 90% year-on-year increase.

At present, all IT export receipts qualify for a favorable 0.25% Final Tax Rate under Section 154A of the Income Tax Ordinance.

According to P@SHA, the issue arises when remote workers, who are effectively employed full-time by foreign companies, register themselves as freelancers to claim the same 0.25% tax rate.

The association warned that this loophole is hurting the expansion of Pakistan’s IT industry and exports by placing employees of domestic IT companies at a disadvantage. P@SHA said registered local IT companies are facing brain drain and struggling with uncompetitive net salary structures compared to remote workers.

P@SHA Chairman Sajjad Syed said the misclassification has created a graduated tax arbitrage of 18 to 31 percentage points compared to domestic salaried employees. According to him, this results in remote workers receiving 22% to 44% more take-home pay than employees working for local IT companies.

He described the situation as a taxation anomaly that is creating discontent among employees in Pakistan’s IT sector.

P@SHA provided an example stating that at a gross monthly salary of Rs. 500,000, a remote worker claiming the 0.25% tax rate takes home Rs. 498,750, while a domestic IT employee receives Rs. 393,250. This creates a monthly difference of Rs. 105,500.

The association said this situation is causing a systematic drain of senior talent away from Pakistan’s organized IT sector, as domestic employers cannot compete with what it described as an implicit subsidy benefiting foreign companies.

To address the issue while protecting genuine freelancers, P@SHA proposed amendments to Section 154A to create two separate tax sub-categories.

Under the proposal, Category A would apply to Independent IT Service Exporters, who would continue receiving the 0.25% tax rate. To qualify, professionals would need to meet at least three out of five conditions, including earning income from three or more unrelated clients, avoiding exclusivity agreements, working on defined project-based assignments, operating independently, and maintaining a registered business identity.

Category B would apply to Remote Employees of Foreign Entities. Indicators for this category would include receiving 80% or more of foreign exchange income from a single entity, earning fixed monthly compensation, and working under regular supervision.

P@SHA proposed that remote employees in Category B should be subject to graduated tax rates ranging from 5% to 20%, depending on annual income.

The association also recommended a six-month amnesty window to allow workers to reclassify themselves correctly without facing retroactive penalties or back taxes.

According to P@SHA, the proposal follows international practices similar to the United Kingdom’s IR35 rules, the United States’ W-2 and 1099 classification system, and Germany’s Scheinselbständigkeit regulations.

P@SHA said it is ready to assist the Federal Board of Revenue in drafting regulations aimed at removing the tax arbitrage and creating a competitive and fair domestic IT ecosystem.

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