Must a software house in Islamabad charge ICT sales tax on IT services it provides to local clients?

A software house rendering IT services in Islamabad is within the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. Section 3 charges sales tax on the value of taxable services rendered or provided in the Territory, and serial 11 of Table-1 of the Schedule puts IT services and IT-enabled services at fifteen percent. This page uses the Ordinance as amended to 30 June 2025, the latest edition held here.

What does the law say?

Section 3(1) says there shall be charged, levied and paid a tax known as sales tax, at the rates in column (4) of Table-1 of the Schedule, “of the value of the taxable services rendered or provided in the Islamabad Capital Territory”. Its first proviso says services in Table-2 are charged at the rates, and under the conditions, set out in Table-2.

Serial 11 of Table-1 reads “IT services and IT-enabled services”, with the rate “Fifteen percent”. Its explanation says:

• “IT services” include but are not limited to software development, software maintenance, system integration, web design, web development, web hosting and network design; and
• “IT enabled services” include but are not limited to inbound or outbound call centres, medical transcription, remote monitoring, graphics design, accounting services, human resources (HR) services, telemedicine centres, data entry operations, cloud computing services, data storage services, locally produced television programs and insurance claims processing.

The entry was substituted by the Finance Act, 2023, according to the footnote.

How is the tax administered?

The Ordinance borrows the machinery of the Sales Tax Act, 1990. Section 2 gives undefined words the meaning they have in that Act. Section 3(2) says the tax is charged and levied as if it were a sales tax under that Act. Section 3(3) applies the Act’s provisions, rules and notifications, mutatis mutandis, to:

• manner, time and mode of payment;
• registration and de-registration;
• keeping of records and audit;
• enforcement and adjudication; and
• penalties and prosecution, and allied matters.

A second proviso to section 3(1), added by the Finance Act, 2025, says a service provider in Table-1 or Table-2 shall integrate its business with the Board’s computerized system for real-time reporting, from a date and in a manner the Board prescribes by general order. No such general order is held in this corpus.

Is there a lower rate for some software work?

Table-2 serial 11 covers “Services provided by software or IT-based system development consultants” at five percent, “subject to the conditions that no input tax adjustment or refund shall be admissible”. The Ordinance does not say how to choose between Table-1 serial 11 and Table-2 serial 11 for a particular engagement. The related page on the reduced five percent rate looks at that entry.

Worked example (illustrative figures)

Margalla Code (Pvt) Ltd, in Islamabad’s I-9 sector, builds a website for a Blue Area law firm for a fee of Rs. 800,000, and applies Table-1 serial 11.

1. ICT sales tax: Rs. 800,000 x 15% = Rs. 120,000.
2. Invoice total: Rs. 800,000 + Rs. 120,000 = Rs. 920,000.

If the law firm is a prescribed person under section 153 of the Income Tax Ordinance, it also deducts income tax from the gross amount payable, “including sales tax, if any”. At the 4% rate for IT services in tax year 2027:

3. Income tax deducted: Rs. 920,000 x 4% = Rs. 36,800.
4. Amount paid to Margalla Code: Rs. 920,000 - Rs. 36,800 = Rs. 883,200.

The sales tax of Rs. 120,000 is then paid over under the Sales Tax Act machinery applied by section 3(3). Whether any part of it is withheld by the client under the Sales Tax Act’s withholding provisions is not covered on this page.

What if the client is outside Islamabad?

Section 3(1) turns on services “rendered or provided in the Islamabad Capital Territory”. The Ordinance does not define where a service delivered remotely is rendered. Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan each tax services under their own laws, which are outside this corpus. This page does not state their rates or rules.

What if the service is exported?

Section 3(1A) says, notwithstanding sub-section (1), “the export of services shall be charged at the rate of zero per cent”. The related page on zero-rated IT exports covers this.

Common mistakes

• Treating income tax withholding as the only tax on IT services. The ICT Ordinance is a separate sales tax on services.
• Using a stale rate. Serial 11 was substituted by the Finance Act, 2023, and the rate in the 30 June 2025 edition is fifteen percent.
• Applying the ICT Ordinance to services rendered in a province. Its charge is limited to services rendered or provided in the Islamabad Capital Territory.

What to check in the official text

Read sections 2 and 3 and serial 11 of Table-1 and Table-2 of the Schedule in the ICT (Tax on Services) Ordinance, 2001 amended to 30 June 2025. Any amendment made by the Finance Act, 2026 to this Ordinance is not reflected in the edition held here. Check Table-3 for any Negative List notified by the Board under section 3(4), and the Sales Tax Act, 1990 for registration and return procedure.