The Federal Board of Revenue (FBR) has revealed plans to introduce a 4% withholding tax on IT services starting from the fiscal year 2025-26 (FY26). This move is part of the government’s larger strategy to boost tax collection, widen the tax base, and ensure compliance within Pakistan’s rapidly expanding information technology sector.
As per the FBR, this withholding tax will affect both local and foreign companies offering IT-related services, such as software development, IT consultancy, web and app development, cybersecurity solutions, and various other digital services. The tax will be deducted at the source, meaning that any payments made to IT service providers will automatically have the 4% tax withheld before the funds are transferred.
Reactions from industry experts have been mixed. Some believe this will help formalize the IT sector and enhance transparency in transactions, while others worry that the new tax could add financial strain on freelancers, startups, and small IT firms that are already finding it tough to compete globally.
The Pakistan Software Houses Association for IT & ITeS (P@SHA) and other industry groups have called on the government to reconsider or offer exemptions for smaller businesses. They emphasize that Pakistan’s IT exports are a vital source of foreign exchange, and excessive taxation could stifle the sector’s growth potential.
FBR officials argue that this measure is essential to align Pakistan’s tax policies with international standards, where withholding taxes on service sectors are quite common. They also believe this tax could help identify businesses that aren’t compliant and encourage more IT professionals to register with the tax authorities.
The IT sector stands as one of Pakistan’s fastest-growing industries, making a significant contribution to GDP and generating thousands of jobs for skilled professionals. Supporters of the new policy contend that formalizing tax compliance could enhance government revenues, which could then be reinvested into digital infrastructure and other critical areas.
Also read: Pakistan eCommerce Association Calls for Reduced Taxes to Support Local Digital Marketplaces
