Section 154A of the Income Tax Ordinance 2001 outlines tax deduction requirements for IT services and other exported services, with final tax treatment subject to specified compliance conditions.
ISLAMABAD: The Federal Board of Revenue (FBR) has clarified the income tax framework applicable to the export of Information Technology (IT) services during Tax Year 2027, under Section 154A of the Income Tax Ordinance, 2001.
The FBR issued the updated Income Tax Ordinance, 2001, incorporating amendments up to June 30, 2026, for Tax Year 2027, covering the period from July 1, 2026, to June 30, 2027.
Under Section 154A, every authorised foreign exchange dealer is required to deduct tax from foreign exchange proceeds realised against specified exports and services at the rates prescribed in Division IVA of Part III of the First Schedule.
These provisions cover exports of computer software, IT services and IT-enabled services by exporters registered with and duly certified by the Pakistan Software Export Board (PSEB).
The section also applies to services and technical services rendered outside Pakistan or exported from the country. Other covered transactions include royalties, commissions and fees earned by resident companies from foreign enterprises for the use of specified intellectual property or the provision of industrial, commercial or scientific knowledge and expertise outside Pakistan.
Construction contracts executed abroad, foreign commissions payable to indenting commission agents and other services notified by the FBR are also included within the scope of Section 154A.
Conditions for final tax treatment
Section 154A provides that tax deducted on the covered transactions may constitute a final tax on the income arising from those transactions, provided the taxpayer fulfils the prescribed conditions.
These include filing an income tax return, submitting withholding tax statements for the relevant tax year where required, and filing federal or provincial sales tax returns where applicable.
However, the sales tax return condition does not apply to exporters of computer software, IT services and IT-enabled services covered under clause (a) of sub-section (1) of Section 154A.
The law also stipulates that taxpayers covered by the final tax regime cannot claim credit for foreign taxes paid against the income subject to this provision.
Option to opt out of final taxation
The final tax treatment is not automatic for taxpayers who fail to meet the specified compliance requirements or choose not to be taxed under the final tax regime.
Under sub-section (3), the provisions governing final taxation do not apply to a person who fails to fulfil the prescribed conditions or opts out of the regime. The taxpayer must exercise this option annually when filing the income tax return under Section 114.
The provision also authorises the FBR, in consultation with the State Bank of Pakistan (SBP), to prescribe the mode, manner and procedure for payment of tax under Section 154A.
Furthermore, the FBR has the authority to include or exclude particular services from the scope of the section.
The applicable tax rates are specified in Division IVA of Part III of the First Schedule to the Income Tax Ordinance, 2001. Accordingly, exporters should consult the relevant schedule and ensure compliance with the filing and other statutory requirements applicable to their transactions during Tax Year 2027.