P@SHA has submitted comprehensive policy recommendations for the Federal Budget 2026 urging immediate action to correct tax distortions in Pakistan’s digital economy and address the growing issue of remote worker tax arbitrage.
Pakistan’s IT services exports reached a record $3.8 billion in fiscal year 2025, up 18 percent year on year, while the freelance and remote work segment contributed an additional $779 million with a striking 90 percent annual increase. At the same time, the current tax setting under Section 154A allows all IT export receipts to qualify for a 0.25 percent final tax rate, a provision that is being claimed by many remote workers who register as freelancers to access this concessional treatment.
P@SHA warns that this loophole is undermining local IT companies by creating a significant tax gap between formally employed staff and remote workers. The association’s chairman, Sajjad Syed, explained that the misclassification yields an 18 to 31 percentage point tax difference, translating into remote workers taking home 22 to 44 percent higher net pay compared with locally employed counterparts.
To illustrate the disparity, on a gross monthly salary of Rs 500,000 a remote worker claiming the 0.25 percent rate would net Rs 498,750, while a local IT employee would take home Rs 393,250 — a monthly gap of Rs 105,500. This remote worker tax advantage is contributing to talent outflow and placing organised IT firms at a competitive disadvantage they cannot absorb.
To resolve the crisis while protecting genuine freelancers, P@SHA proposes amending Section 154A to create two distinct categories. Category A would preserve the 0.25 percent rate for independent IT service exporters who meet at least three of five criteria: income from three or more unrelated clients, absence of exclusivity agreements, project-based work, operational autonomy, and a registered business identity. Category B would cover remote employees of foreign firms and is characterized by dependence on a single payer for 80 percent or more of foreign income, fixed monthly compensation, and work under regular supervision; these workers would be subject to a graduated tax rate ranging from 5 percent to 20 percent based on annual income.
P@SHA also recommends a six-month amnesty window to allow workers to reclassify without retrospective penalties, aligning Pakistan’s approach with international frameworks such as the UK IR35 rules, US W-2 versus 1099 distinctions, and Germany’s rules on disguised employment. The association has offered to assist the Federal Board of Revenue in drafting regulations to close the remote worker tax loophole and restore a level playing field for Pakistan’s IT ecosystem.
With Budget 2026 approaching, P@SHA stresses that timely tax reform is essential to safeguard export growth, retain senior talent within organised companies, and ensure fair competition between local employees and remote workers.
