Is the tax deducted on our IT export remittances a final tax, and what conditions must the company meet to keep it final?

The tax a bank deducts on IT export proceeds can be the whole of a software house’s income tax on that income, but only if the company keeps to the conditions written into section 154A. Miss one, and the export income goes back into the normal computation.

What does the law say?

Section 154A(2) of the Income Tax Ordinance, 2001 states that the tax deductible under the section “shall be a final tax on the income arising from the transactions referred to in this section, upon fulfilment of the following conditions”:

Clause	Condition	Applies to a PSEB-registered IT exporter?
(a)	Return has been filed	Yes
(b)	Withholding tax statements for the relevant tax year have been filed, if required under the Ordinance	Yes
(c)	Sales tax returns under Federal or Provincial laws have been filed, if required under the law	No. The proviso says this condition does not apply to an exporter mentioned in clause (a) of sub-section (1)
(d)	No credit for foreign taxes paid shall be allowed	Yes

Clause (a) of sub-section (1) is the one for exports of computer software, IT services or IT-enabled services where the exporter is registered with and duly certified by the Pakistan Software Export Board (PSEB). The sales tax proviso was added by the Finance Act, 2023, according to the section’s footnotes.

Section 154A(3) then says sub-section (2) does not apply to a person “who does not fulfill the specified conditions or who opts not to be subject to final taxation”.

What does “final” mean for the company?

Section 169 applies where tax deducted is a final tax under sub-section (2) of section 154A. Under section 169(2):

• the income is not chargeable to tax under any head of income in computing taxable income;
• no deduction is allowed for any expenditure incurred in deriving the income;
• the income is not reduced by any deductible allowance under Part IX of Chapter III, or by the set off of any loss;
• the tax deducted is not reduced by any tax credit;
• there is no refund of the tax, unless it exceeds the amount for which the taxpayer is chargeable.

Section 168(3) adds that no tax credit is allowed for tax that is final under sub-section (2) of section 154A. In short, the deduction is the tax, and nothing is added to it or taken off it.

How do the filing conditions work in practice?

The return. Section 114(1)(a) requires every company to file a return, and clause (ae) separately covers every person whose income is subject to final taxation. A software house cannot rely on final tax as a reason not to file. Filing the return is itself condition (a).

Withholding statements. A software house is usually a withholding agent: it deducts tax from employee salaries, from payments to contractors and on rent. Section 165 requires quarterly statements from persons deducting tax, and its proviso says every such person “shall be required to file withholding statement even where no withholding tax is collected or deducted during the period”. Section 165(6) adds an annual statement for tax deducted from salary payments. Condition (b) refers to the statements “required under the Ordinance”, so those are the ones that matter.

Worked example (illustrative figures)

Margalla Apps (Pvt) Ltd in Islamabad is PSEB-registered and realises export proceeds of Rs. 60,000,000 in tax year 2027. The bank deducts 0.25% under Division IVA.

1. Tax deducted: Rs. 60,000,000 x 0.25% = Rs. 150,000.
2. The company files its return and all four quarterly withholding statements.
3. Conditions met: Rs. 150,000 is the final tax on the export income. Its salary bill, office rent and cloud costs are not deducted from that income.

Now suppose the company skipped the quarterly statement for one quarter. Condition (b) is not met, so section 154A(3) takes the export income out of final tax. The income is then computed under the normal rules, and section 168(2) allows the Rs. 150,000 as a tax credit against the tax due. The Ordinance does not give a figure for the result, because it depends on the company’s actual profit.

What if our foreign client already withheld tax abroad?

Under final tax, section 154A(2)(d) is plain: “no credit for foreign taxes paid shall be allowed.” Foreign tax withheld by a client does not reduce the 0.25% or 1% deduction.

Common mistakes

• Thinking final tax means no return. Section 114(1)(ae) requires a return where income is subject to final taxation, and section 154A(2)(a) makes the return a condition.
• Ignoring nil withholding statements. The proviso to section 165(1) requires a statement even where no tax was deducted in the period.
• Assuming the sales tax waiver covers every exporter. It covers only the exporter in clause (a) of section 154A(1). An exporter outside that clause must meet condition (c) where a sales tax return is required.

What to check in the official text

Read section 154A(2) and (3), section 169 and section 168(3) in the Ordinance amended up to 30 June 2026. Check section 165 for the statement due dates. Provincial sales tax on services, which may affect whether a sales tax return is required, is outside this corpus.