Are you engaged in exporting services from Pakistan, including IT and IT-enabled services? Understanding tax obligations on payments received from abroad is crucial for compliance and financial planning. For tax year 2026, the Federal Board of Revenue (FBR) has updated the Income Tax Ordinance, 2001, introducing Section 154A to govern tax deduction on export of services.
Section 154A: Who Should Deduct Tax
1. Authorized Dealers in Foreign Exchange
Every authorized dealer (e.g., banks handling foreign remittances) must deduct tax at the time of realization of foreign exchange proceeds from exporters of services. The tax rates are specified in Division IVA of Part III of the First Schedule.
2. Types of Exported Services Covered
Section 154A applies to the following categories of exported services:
• IT Services and IT-enabled Services
Exporters registered and certified by the Pakistan Software Export Board (PSEB) are included.
• Technical or Professional Services
Services rendered outside Pakistan or exported from Pakistan.
• Royalty, Commission, or Fees
Payments received for patents, inventions, designs, secret processes, or industrial, commercial, or scientific knowledge provided to foreign enterprises.
• Construction Contracts Executed Abroad
Includes international construction projects undertaken by Pakistani contractors.
• Foreign Commission for Indenting Agents
Commission due to foreign indenting agents is also taxable under this section.
• Other Services as Notified by FBR
The FBR may periodically include or exclude specific services.
Key Features of Tax Deduction
1. Final Tax Status
• Tax deducted under Section 154A is considered final tax on the income arising from the transaction.
• To qualify for final taxation, the following conditions must be met:
o Tax return has been filed;
o Withholding tax statements for the tax year are submitted if required;
o Sales tax returns under federal or provincial law are filed, if applicable.
• Note: PSEB-certified IT exporters are exempt from these conditions.
2. Option to Opt-Out
• Exporters who do not meet the conditions or choose not to be subject to final taxation can opt-out annually at the time of filing their tax return under Section 114.
3. Procedure and Compliance
• The FBR, in consultation with the State Bank of Pakistan, prescribes the mode, manner, and procedure for tax payment under this section.
• The Board retains the power to include or exclude certain services, providing flexibility in its application.
Tip for Exporters
💡 Check your tax obligations:
1. Confirm if your service is covered under Section 154A.
2. Ensure registration with PSEB if exporting IT services.
3. File your income and sales tax returns timely to benefit from final tax status.
4. Use FBR online portals or your authorized dealer’s system to track tax deducted at source.
Disclaimer: This article is for general information and educational purposes only. It does not constitute legal, tax, or financial advice. Consult a tax professional or FBR for official guidance.