P@SHA Demands Tax Reforms to Close Remote Worker Tax Loophole in FY 2026-27 Budget for a Level-Playing Field

The Pakistan Software Houses Association (P@SHA) has released its comprehensive policy reforms for the Federal Budget 2026-27, strongly emphasizing the need to address structural tax distortions in the digital economy.

It is pertinent to note that Pakistan’s IT services exports reached a record USD 3.8 billion in FY25, marking an 18% increase over the previous year. Whereas the freelance and remote work segment, which contributed an additional USD 779 million, surged 90% year-on-year.

Currently, all IT export receipts are eligible for a favorable 0.25% Final Tax Rate under Section 154A of the Income Tax Ordinance. The issue arises when remote workers, who are functionally employed full-time by foreign companies, are registering as “freelancers” to claim the same 0.25% rate.

P@SHA Demands Tax Reforms to Close Remote Worker Tax Loophole in FY 2026-27 Budget for a Level-Playing Field

Therefore, P@SHA warns that this loophole in the tax structure is threatening the expansion of IT industry and its exports by hitting employees of domestic IT companies with a disadvantage – and, registered domestic IT companies suffering due to brain drain and uncompetitive net salary structures as compared to remote workers.

P@SHA Chairman Sajjad Syed explained that this misclassification creates a massive graduated tax arbitrage of 18 to 31 percentage points compared to domestic salaried employees, resulting in 22% to 44% more take-home pay for remote workers. It is a taxation anomaly which is creating discontent among the employees of IT companies in Pakistan.

For example, at a gross monthly salary of PKR 500,000, a remote worker claiming the 0.25% rate takes home PKR 498,750, while a domestic IT employee takes home only PKR 393,250 – a substantial difference of PKR 105,500 per month.

This dynamic creates a systematic drain of senior talent away from Pakistan’s organized IT sector, as no domestic employer can compete with what is essentially an implicit subsidy to foreign companies.

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To resolve this crisis, while safeguarding genuine freelancers, P@SHA strongly recommends amending Section 154A to introduce two distinct tax sub-categories. Category A is designed for Independent IT Service Exporters, who will retain the 0.25% tax rate. To qualify, professionals must meet at least three of five criteria: earning income from three or more unrelated clients, avoiding exclusivity agreements, engaging in defined project-based work, operating autonomously, and maintaining a registered business identity.

Category B will cover Remote Employees of Foreign Entities. Indicators of Category B include relying on a single entity for 80% or more of foreign exchange income, receiving fixed monthly compensation, and working under regular supervision. These remote employees would be subject to newly proposed graduated tax rates ranging from 5% to 20% based on their annual income.

To ensure a fair transition, P@SHA advocates for a six-month amnesty window allowing workers to correctly reclassify without facing retroactive penalties or back-taxes. This approach mirrors global best practices, aligning Pakistan with international frameworks like the UK’s IR35 rules, the US W-2 versus 1099 classification, and Germany’s Scheinselbständigkeit rules.

P@SHA stands ready to assist the Federal Board of Revenue in drafting the requisite regulations to eliminate this arbitrage – and, foster a competitive, level-playing and fair domestic IT ecosystem.