Tax disparities threaten skilled labour retention, P@SHA warns

ISLAMABAD: The Pakistan Software Houses Association (P@SHA) has called for a more rational taxation framework to support the growth of the information technology sector.

In its budget proposals for the fiscal year 2025-26 released on Thursday, the association stressed the need to eliminate the taxation discrepancies between local salaried employees and remote workers. Currently, local employees face income tax rates of up to 35 percent, while remote workers are taxed at just 1 percent. This disparity has contributed to talent migration, complicating local companies’ efforts to retain skilled professionals, according to P@SHA.

Chairman Sajjad Mustafa Syed presented the proposals, which included a recommendation for the government to streamline operations at the Federal Board of Revenue (FBR).

The association suggested that the FBR appoint commissioners dedicated to addressing issues within the IT industry to prevent unnecessary tax notices and enhance tax officers’ understanding of sector-specific tax matters. This, they believe, would lead to better decision-making and a more efficient tax administration for the industry.

P@SHA also urged the restoration of the Final Tax Regime (FTR) for IT and ITeS exports for the next decade to ensure predictability and encourage investor confidence.

Pakistan’s IT sector leads service exports with 40.68 per cent growth

They said the current policy imposes a 5 percent tax on corporate debit card transactions linked to Exporters’ Special Foreign Currency Accounts (ESFCA) at the time of payment, while IT companies already pay 0.25 percent on their export earnings under the FTR. The association is advocating for an exemption on these corporate debit card transactions from the additional 5 percent tax to eliminate double taxation and promote the use of ESFCAs.

Moreover, P@SHA called for the removal of withholding tax and other excessive fees associated with foreign currency retention accounts to encourage legitimate utilization of foreign currency earnings. They noted that the current tax framework includes WHT and additional charges for using foreign currency debit cards, which disincentives the legitimate use of income that is already exempt under the FTR.

Additionally, the association recommended implementing a tax deduction scheme aimed at incentivizing research and development (R&D) within IT firms. This scheme could offer deductions amounting to a certain percentage, such as 30 percent, of qualifying R&D expenses incurred by these companies. P@SHA highlighted the importance of promoting a robust domestic innovation ecosystem, as the IT sector often relies on adapting existing technologies, which limits its long-term, sustainable growth potential.

Lastly, the association noted that taxpayers are encountering issues of double taxation due to the classification of software as goods by federal authorities and as services by provincial tax authorities. This includes taxes on laptops, computers, and other IT equipment, which are currently subjected to taxation.