Pakistan Software Houses Association has submitted formal budget proposals to the Tax Policy Office of the Ministry of Finance calling for a clear legal distinction between information technology freelancers and remote workers in the upcoming federal budget for fiscal year 2026-27, warning that the absence of such a distinction is creating severe labour market distortions and systematically draining experienced talent from Pakistan’s organised information technology sector. PASHA highlighted that remote workers employed full-time by foreign companies are claiming a concessional 0.25 percent tax rate under Section 154A of the Income Tax Ordinance 2001, despite earning what is effectively employment income, creating a substantial tax arbitrage when compared to salaried employees taxed under Section 149 and resulting in significantly higher take-home pay for remote workers performing identical roles.
According to PASHA, the gap in effective taxation ranges between 18 to 31 percentage points, translating into 22 to 44 percent higher net income for remote workers compared to their counterparts on formal payroll at domestic information technology companies. At a monthly salary of Rs500,000, a remote worker pays just Rs1,250 in tax and takes home Rs498,750, compared to Rs393,250 for a domestic salaried employee, a difference of Rs105,500 or 26.8 percent. At Rs1,000,000 per month, the disparity widens to Rs304,608 in additional net income for the remote worker, representing a 44 percent advantage. PASHA described this as an implicit subsidy for foreign employers that makes it structurally impossible for domestic information technology companies to retain senior skilled workers who can access the same or comparable roles under a remote work arrangement at a dramatically lower tax cost.
To address the issue, PASHA recommended amending Section 154A to introduce two distinct categories: Category A, covering independent information technology service exporters who would continue to benefit from the 0.25 percent tax rate, and Category B, covering remote employees of foreign entities, who would be subject to graduated tax rates ranging from 5 to 20 percent. The association also proposed implementing a five-factor classification test to distinguish between independent contractors and employees, supported by a system of self-declaration, risk-based audits, and integration with banking channels. PASHA further noted that several major economies have already enacted legal frameworks to address similar misclassification challenges, including the Netherlands’ Deregulation of Assessment of Employment Relationships Act, the United Kingdom’s IR35 rules, the United States’ worker classification system distinguishing between W-2 employees and 1099 independent contractors, and Germany’s rules on false self-employment, with the Netherlands having enforced its framework in January 2025 after a nine-year moratorium targeting an estimated 13 percent rate of false self-employment among 1.7 million registered freelancers, with the information technology sector among the most heavily affected.
The urgency of PASHA’s proposals is compounded by the imminent expiry of the Final Tax Regime for information technology and information technology-enabled services exports, which is set to lapse on June 30, 2026. The regime allows for a reduced withholding tax rate of 0.25 percent on export proceeds for entities registered with the Pakistan Software Export Board, and PASHA has called for the government to restore a ten-year tax exemption under the Final Tax Regime from 2025 to 2035, arguing that the sector requires policy stability and predictability to maintain global competitiveness, sustain export growth, and create employment at scale. With Pakistan’s information technology exports projected to exceed $4.5 billion this fiscal year and the government targeting $15 billion by 2030, the tax framework the budget establishes for the sector over the coming decade will be among the most consequential policy decisions the government makes in the upcoming budget.
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