Karachi, May 2, 2026 – The Pakistan Software Houses Association (P@SHA) has called for a clear tax classification of IT freelancers and remote workers in Pakistan’s upcoming federal budget 2026-27, warning that existing rules are creating significant distortions in the labor market.
In its budget proposals submitted to the Tax Policy Office of the Ministry of Finance, P@SHA highlighted that remote workers employed full-time by foreign companies are claiming a concessional 0.25% tax rate under Income Tax Ordinance, 2001 Section 154A, despite earning what is effectively employment income.
The association argued that this practice creates a substantial tax arbitrage when compared to salaried employees taxed under Section 149, resulting in significantly higher take-home pay for remote workers performing identical roles.
READ MORE: PASHA calls for 5-year extension of 0.25% tax regime to boost IT exports
According to P@SHA, the gap ranges between 18 to 31 percentage points in effective taxation, translating into 22% to 44% higher net income for remote workers. This disparity has led to what it described as a “systematic drain” of experienced professionals from Pakistan’s organized IT sector.
Tax arbitrage across salary levels
The following table illustrates the disparity in take-home income under current FY2025–26 tax rates:
| Gross Monthly (PKR) | Income Tax (Section 149) | Take-Home (PKR) | Section 154A Tax (0.25%) | Take-Home (PKR) | Arbitrage |
| 400,000 | 71,750 | 328,250 | 1,000 | 399,000 | +21.5% |
| 500,000 | 106,750 | 393,250 | 1,250 | 498,750 | +26.8% |
| 600,000 | 141,750 | 458,250 | 1,500 | 598,500 | +30.6% |
| 700,000 | 176,750 | 523,250 | 1,750 | 698,250 | +33.4% |
| 800,000 | 211,750 | 588,250 | 2,000 | 798,000 | +35.6% |
| 900,000 | 268,958 | 631,042 | 2,250 | 897,750 | +42.3% |
| 1,000,000 | 307,108 | 692,892 | 2,500 | 997,500 | +44.0% |
At a monthly salary of PKR 500,000, a remote worker pays just PKR 1,250 in tax and takes home PKR 498,750, compared to PKR 393,250 for a domestic employee — a difference of PKR 105,500, or 26.8%.
At PKR 1,000,000 per month, the disparity widens further, with remote workers earning PKR 304,608 more in net income — a 44% advantage.
P@SHA noted that such differences effectively act as an implicit subsidy for foreign employers, making it difficult for local IT firms to retain skilled workers.
Proposed reforms
To address the issue, P@SHA recommended amending Section 154A to introduce two distinct categories. Category A would cover independent IT service exporters, who would continue to benefit from the 0.25% tax rate. Category B would apply to remote employees of foreign entities, subjecting them to graduated tax rates ranging from 5% to 20%.
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.
Global precedents
P@SHA noted that several major economies have already introduced legal frameworks to address similar classification challenges. These include the Netherlands’ DBA Act, the UK’s IR35 rules, the United States’ W-2 versus 1099 classification system based on the ABC Test, and Germany’s rules on “Scheinselbständigkeit” or false self-employment.
The Netherlands, for instance, enforced its DBA Act in January 2025 after a nine-year moratorium, targeting an estimated 13% rate of false self-employment among 1.7 million registered freelancers, with the IT sector among the most affected.
P@SHA emphasized that aligning Pakistan’s tax framework with international standards would help ensure fairness, protect the domestic IT industry, and sustain long-term growth in the sector.