Why did the bank deduct 1% instead of 0.25% from our IT export remittance, and can we get it back?

Software houses often see two different figures on their inward remittance advices: 0.25% on some and 1% on others. The difference comes from a single line in the First Schedule to the Income Tax Ordinance, 2001, and whether the difference can be recovered depends on how final taxation and the refund sections interact.

What does the law say about the rate?

Section 154A(1) requires every authorized dealer in foreign exchange, at the time of realization of foreign exchange proceeds, to deduct tax at the rates in Division IVA of Part III of the First Schedule. Clause (a) covers exports of computer software or IT services or IT enabled services “where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB)”. Clause (b) covers services or technical services rendered outside Pakistan or exported from Pakistan.

Division IVA then sets:

S. No.	Type of receipt	Rate
1	Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board	0.25% of proceeds, for tax years 2024 up to tax year 2029
2	Any other case	1% of proceeds

The end year was changed from 2026 to 2029 by the Finance Act, 2026, so 0.25% is available for tax year 2027.

Why would a bank apply 1%?

On the wording of the law, 1% applies whenever the receipt is not within entry 1. That covers:

• an exporter that is not registered with PSEB, or is registered but not “duly certified” as clause (a) requires;
• proceeds that are not for software, IT services or IT enabled services, such as other services falling under clause (b).

How the bank verifies PSEB status is not in the Ordinance. Section 154A(5) says the Board, in consultation with the State Bank of Pakistan, prescribes the mode, manner and procedure of payment of tax under the section. Those instructions are not in this corpus.

Can the difference be recovered?

If the 1% was the correct rate because the company was not registered and certified, there is no excess to recover. The 1% is the rate the law sets.

If the company qualified for 0.25% and the tax is final under section 154A(2), section 169(2)(e) says there is no refund “unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance”. The Ordinance does not deal specifically with a bank applying the wrong entry, so whether the extra deduction is an excess under that clause is a question for the Commissioner on the facts.

The refund process. Section 170(1) lets a taxpayer that has paid tax above the amount it is properly chargeable apply to the Commissioner. Under section 170(2) the application is in the prescribed form, verified, and made within three years of the later of the assessment order for the year and the date the tax was paid. Section 170(4) requires a written order within sixty days, after a hearing, and section 170(5) allows an appeal. Section 170(3) first applies any excess against other tax the company owes. Section 170A also lets the Board issue refunds verified by its computerised system without an application, from tax year 2021.

If the company opts out of final taxation. Section 154A(3) lets a person opt out each year when filing its return. The deduction is then a credit under section 168(2) against tax on taxable income for the year it was deducted, and any overall excess is dealt with under section 170.

Worked example (illustrative figures)

Sialkot Softworks (Pvt) Ltd, registered and certified with PSEB, realizes Rs. 20,000,000 of software export proceeds in tax year 2027. Its bank applies the 1% rate.

1. Deducted by the bank: Rs. 20,000,000 x 1% = Rs. 200,000.
2. Rate under Division IVA entry 1: Rs. 20,000,000 x 0.25% = Rs. 50,000.
3. Difference: Rs. 200,000 - Rs. 50,000 = Rs. 150,000.

The Rs. 150,000 is the amount that would be put forward as an excess under section 169(2)(e) and claimed under section 170. Had the company not been registered and certified, the Rs. 200,000 would be the correct tax and there would be nothing to claim.

Common mistakes

• Treating registration alone as enough. Clause (a) of section 154A(1) says “registered with and duly certified by” PSEB.
• Assuming the reduced rate runs forever. Division IVA limits 0.25% to tax years 2024 to 2029.
• Missing the three-year window. Section 170(2)(c) sets the time limit for a refund application.
• Expecting a platform name in the law. Section 154A does not mention Payoneer or any other service. It turns on realization of foreign exchange proceeds by an authorized dealer.

What to check in the official text

Read section 154A(1) to (5), section 169(2), section 170 and section 170A, and section 168(2) if the company opts out. Check Division IVA of Part III of the First Schedule in the official PDF. PSEB registration rules, State Bank instructions to banks and any FBR procedure for correcting a bank’s deduction are outside this corpus.