The policy paper Federal Budget 2026–27: Policy Recommendations for Pakistan’s Digital Economy is the Pakistan Software Houses Association’s principal intervention in the current federal budget cycle. Issued as Version 3.0, marked a Final Approved Manuscript, dated April 2026, and cleared for public release, it is written explicitly for the Federal Board of Revenue, the Ministry of Finance, and the Ministry of Information Technology & Telecommunication. P@SHA presents it as a structured reform blueprint for positioning Pakistan’s IT and IT-enabled services sector as a strategic pillar of foreign exchange generation, employment creation, capital formation, and integration into the global digital economy.
The institutional leadership behind the manuscript carries real weight. The paper is approved by Sajjad Mustafa Syed, the current Chairman of P@SHA and Chairman of Excellence Delivered, which places the report at the intersection of industry representation and operational delivery in enterprise technology and systems integration. It is co-authored by Muhammad Haris Naseer, Treasurer P@SHA and Chief Operating Officer of InfoTech Group and Gulraiz Iqbal, P@SHA’s Policy and Government Affairs Lead, who handles the association’s engagement with tax authorities, ministries, and regulators. The wider review layer is drawn from software, hardware, venture capital, economic research, fintech, and professional services: Bilal Mahmood (Contour Software), Ahsan Jamil (SAi Capital), former P@SHA Secretary General Nadeem Malik, Khushnood Aftab (Viper Group), Salman Dar (P@SHA CEC), Maroof Syed (Center for Economic Research in Pakistan), Shahzad Shahid (TPS Worldwide), and Zeeshan Ijaz (KPMG). The recommendations are shaped not just by tax advocacy but by enterprise delivery realities, venture capital logic, empirical economic thinking, payments execution, and audit and compliance expertise.
P@SHA’s diagnostic frame is built around three structural gaps: policy uncertainty, structural distortions in the tax code, and ecosystem underdevelopment. The six recommendations map onto these gaps.
Pakistan’s IT and IT-enabled services exports reached USD 3.8 billion in FY 2024–25, an 18% increase over the preceding year, while freelance and remote work receipts climbed roughly 90% year-on-year to USD 779 million. The manuscript argues this growth has been helped materially by the 0.25% Final Tax Regime on export receipts under Section 154A of the Income Tax Ordinance, which has given PSEB-registered exporters a low, predictable, and administratively simple tax environment. For a sector that depends on retained earnings and contract visibility, that does more than ease tax bills, it lets firms hire, bid on long-cycle contracts, and build delivery capacity without fearing abrupt fiscal reclassification.
The concern is that this core incentive is running out of road. The 0.25% FTR is authorised only through Tax Year 2026, ending June 2026, and the authors argue that near-annual renewal uncertainty is itself a strategic problem. Investors and global customers do not just ask what the tax rate is. They ask whether it will still be there after they have committed capital, signed a contract, or built a team. The report quotes Chairman Sajjad Syed directly: “every serious investor asks the same two questions: what will my tax exposure be, and will the rules change after I invest?”
P@SHA’s first and most forceful recommendation is a five-year minimum extension of the regime, with a strong preference for a ten-year horizon through Tax Year 2036. The comparative frame is deliberate. Bangladesh has offered a 100% corporate income tax exemption to its IT and ITeS sector, in some form since July 2005, currently extended through June 2027, nearly two decades of uninterrupted sector-wide relief. India’s software rise was built on long-term tax holidays under Sections 10A and 10B that let firms reinvest export margins almost entirely. Vietnam, the Philippines, Thailand, Malaysia, and China have all used extended incentive frameworks for the same purpose. Sri Lanka, which removed its full IT/BPO corporate tax exemption in April 2025 under IMF pressure and replaced it with a 15% concessionary rate, sits as a live counter-example: industry groups there immediately warned of competitiveness erosion in the global services market. P@SHA’s argument is that Pakistan’s IT sector is still too early in its growth curve to be exposed to short-horizon fiscal uncertainty.
The second policy area takes up a distortion that the authors believe now threatens the structure of the labour market itself. Under the current framework, many individuals working full-time for foreign companies register as freelancers with the Pakistan Software Export Board and channel their income through Section 154A, paying 0.25% final tax on earnings that are, in practice, employment income. Domestic salaried employees performing similar work are taxed under the progressive slabs in Section 149.
The arithmetic is brutal. At a gross monthly income of PKR 500,000, a remote worker claiming the 0.25% rate takes home PKR 498,750 versus PKR 393,250 for a domestic IT company employee on the same gross a gap of PKR 105,500 a month, or 26.8% more take-home pay. At PKR 1 million a month, the gap widens to PKR 304,608, a 44% arbitrage. Across the salary range, the tax differential runs between 18 and 31 percentage points, translating to 22–44% more take-home for identical work. No domestic employer can compete with that. It is, in effect, a subsidy paid by the Pakistani tax code to offshore employers, at the expense of tax-compliant Pakistani firms trying to retain senior talent and build long-term institutional capacity at home.
The report does not argue against remote work. It acknowledges it as a real source of foreign exchange and skill accumulation. What it challenges is the tax system’s inability to distinguish between a genuine independent exporter and a de facto employee of a foreign company. The proposal is to amend Section 154A to introduce two sub-categories: Category A, retaining the 0.25% final tax for legitimate independent IT service exporters who can demonstrate multiple clients, project-based work, and a business identity independent of any one principal; and Category B, applying graduated rates of 5–20% to remote employees of foreign entities depending on annual income. A five-factor classification test, self-declaration mechanisms, banking channel integration, and a phased transition with a six-month amnesty window are proposed to make the shift workable. The framework draws on the UK’s IR35 rules, the Netherlands’ DBA Act, the US W-2/1099 ABC test, and Germany’s Scheinselbständigkeit regime, all jurisdictions that have grappled with the same false self-employment problem.
This is the recommendation most likely to be politically contentious. P@SHA is asking the state to narrow a benefit currently enjoyed by tens of thousands of individual earners whose remittances have been celebrated as a foreign exchange success story. The report’s wager is that the long-term cost of letting the arbitrage continue, a hollowed-out domestic employer base, outweighs the short-term political friction of correcting it.
The third pillar concerns public sector technology procurement. Pakistan’s federal and provincial governments spend billions annually on enterprise software, IT infrastructure, devices, cloud services, and digital transformation projects, but the overwhelming share flows to multinational vendors, even in categories where credible local alternatives exist. The state, in P@SHA’s view, is using one of its largest economic levers without any strategic logic tied to domestic capacity formation.
The proposed Made in Pakistan procurement framework is phased. In the first two years, all foreign software and hardware purchases would be routed through PSEB- or P@SHA-registered local channel partners, capturing margin and building local service capability. Locally produced software (ERPs, banking systems, fintech, e-government platforms) would receive a phased mandate of 20% in Year 1 and 40% in Year 2, with mandatory evaluation of Pakistani alternatives before any foreign procurement and formal justification required for rejection. By Years 3–5, 60% of end-user devices in public procurement would have to be locally assembled, and all government cloud and hosting workloads would have to sit on local infrastructure regardless of data sovereignty classification. A Pakistan ICT Products Registry under PSEB would certify locally developed software and locally manufactured hardware against defined quality, security, and interoperability standards.
The argument is that procurement should not be treated as a passive administrative function. It is a strategic demand instrument, one that India (through GeM and Make in India), Brazil (Marco Civil), China (MLPS 2.0), and the EU (GAIA-X, the Chips Act) have all used to build domestic technology capability.
The fourth dimension is venture capital, and the numbers are stark. Disclosed equity VC investment in Pakistani startups went from USD 366 million across 73 deals in 2021, to USD 347–355 million in 2022, to USD 75.8 million in 2023, to just USD 22.5 million in 2024, a 70% year-on-year decline and the lowest level since 2018. Q1 2024 recorded zero disclosed deals, the first blank quarter since tracking began in 2015.
P@SHA does not deny the role of the global venture market correction, but insists domestic policy choices have made things significantly worse. Investors looking at Pakistan have to weigh how capital gains are taxed, whether fund structures are treated transparently, how easily money can be brought in and taken out, and whether regulatory approvals are predictable. Without clarity on these, Pakistan is a harder sell regardless of founder quality.
The report proposes that licensed VC and PE funds investing in PSEB-registered IT and ITeS companies be treated as pass-through entities for tax purposes, consistent with the 80/20 distribution norm used in the US, UK, Singapore, and India. Capital gains on equity held three years or more in PSEB-registered companies would be fully exempt; 1–3 year holds would get 50% exemption. The State Bank would authorise specialised foreign currency accounts for VC-backed tech companies to hold equity investments in their original denomination, with defined repatriation rights for international growth and expansion. SECP would create a fast-track registration pathway for funds with more than 60% of their capital concentrated in IT and ITeS.
Pakistan produces roughly 25,000 IT graduates a year and trained more than 350,000 professionals across government and industry programmes in FY 2024–25 through schemes like DigiSkills and e-Rozgaar. But, the report argues, breadth has not translated into depth. Employers continue to report shortages in AI and machine learning, cloud engineering, cybersecurity, advanced software development, and product architecture, the higher-value segments of the global digital economy.
The proposal is a dedicated PKR 5 billion annual federal budget for National Skills Programs, jointly governed by the Ministry of IT, PSEB, and P@SHA. Disbursement would be tied to verified placement outcomes, with training providers compensated based on a minimum 60% placement rate within six months, not raw enrolment. Eight priority programmes are outlined in detail, with the largest being a 10,000-seat-per-year Full-Stack Development Bootcamp (PKR 1.5 billion) and a 5,000-seat Cloud-Native Development track (PKR 1 billion) covering AWS, Azure, and GCP certifications.
The underlying view is that a digital export strategy cannot rest on tax incentives and capital access alone. It also needs a workforce capable of moving the country up the value chain.
The sixth pillar addresses the fragmented provincial sales tax environment for domestic IT services. (IT exports are already zero-rated under existing federal and provincial frameworks, so this recommendation does not affect them.) Since the 18th Constitutional Amendment, provinces have operated separate sales tax on services regimes with rates ranging from 3% to 16%, different exemption criteria, separate registration portals, and divergent interpretations of what counts as a taxable IT service. For companies serving domestic clients across multiple provinces, the compliance burden often exceeds the tax liability itself, and inter-provincial transactions sit in a jurisdictional grey zone where both the provider’s and the client’s province may claim taxing rights.
P@SHA proposes that domestic IT services serve as a pilot for broader sales tax harmonisation through the Council of Common Interests or the National Tax Council. The framework is straightforward in principle: a unified reduced rate of 5% across all provinces and ICT, single federal-level registration with reciprocal recognition, a unified electronic filing portal with backend revenue sharing to provinces on an agreed formula, and clear destination-based rules for inter-provincial supply. The argument is that IT services are particularly well suited to such an experiment because they are strategically important, easy to trace digitally, and still modest enough in revenue terms to make reform politically manageable. Implementation in 12 to 18 months is judged feasible.
The six pillars are mutually reinforcing rather than additive. The FTR extension is the core incentive; the freelancer–remote worker classification protects it from misuse; procurement mandates create demand; the VC reforms rebuild the capital pipeline; the skills budget strengthens supply; and sales tax harmonisation lowers domestic friction.
The two recommendations that will define whether the rest of the package succeeds are the FTR extension and the freelancer reclassification. Without the first, the entire export tax architecture lapses in June 2026 and nothing else in the manuscript matters very much. Without the second, the regime that survives will be the one that actively rewards offshore employment over building Pakistani companies. The broader message is that Pakistan has reached a point where incremental, uncoordinated changes will no longer suffice. If the digital economy is to mature into a serious export platform, the state has to provide certainty, correct embedded distortions, and use its fiscal, regulatory, and procurement tools with more strategic discipline than it has in the past.
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