Must a software house deduct tax when paying AWS, foreign SaaS vendors or a foreign subcontractor?

A Pakistani software house typically pays foreign providers every month: cloud hosting, code repositories, design and collaboration tools, and sometimes a developer or studio abroad. The Income Tax Ordinance, 2001 taxes the non-resident on many of these payments and collects that tax in Pakistan, either through the bank that sends the money or through the software house itself. The rates below are for tax year 2027.

What does the law say about cloud and SaaS fees?

Clause (22B) of section 2 defines a “fee for offshore digital services” as consideration for services by a non-resident for online advertising, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, e-mails, online computing, blogs, online content and online data, uploading, storing or distributing digital content, online processing of data related to users in Pakistan, online sale facilities “or any other online facility”.

Hosting, online computing, storage and e-mail services fit those words. The Ordinance names no provider and does not classify individual products. Whether a particular software licence is instead a royalty is a separate question this page does not decide.

Section 101(12A) makes the fee Pakistan-source income if a resident pays it, unless the services are used in a business the resident carries on outside Pakistan through a permanent establishment. Section 6(1) then taxes the non-resident, and section 6(2) computes the tax on the gross amount. Division IV of Part I of the First Schedule sets 15% of the gross amount of royalty or fee for technical services “or fee of offshore digital services”, and 10% in any other case.

Who deducts on a cloud or SaaS payment?

Section 152(1C) says every banking company or financial institution remitting a fee for offshore digital services outside Pakistan, chargeable under section 6, on behalf of a resident, deducts tax from the gross amount at the Division IV rate. A proviso says the bank does not deduct where the recipient is also liable to Digital Presence Proceeds tax and that tax has been collected. That separate law is not in this corpus.

Section 152(2) excludes amounts covered by sub-section (1C), so the software house does not deduct 20% on top.

What about a foreign subcontractor?

A developer or studio abroad is usually paid directly by the software house, which then carries the deduction duty.

• Fee for technical services. Clause (23) of section 2 defines this as consideration for managerial, technical or consultancy services, including services of technical or other personnel. Section 101 makes a technical fee paid by a resident Pakistan-source, with the same permanent establishment exception. Section 152(1) requires the payer to deduct at the Division IV rate of 15%.
• Any other amount. Section 152(2) requires deduction from other payments to non-residents at the rate in Division II of Part III, which paragraph (2) sets at 20% of the gross amount. Section 152(3)(d) switches this off where the non-resident is not chargeable to tax on the amount.
• Paying without deduction. Section 152(5) requires the payer to give the Commissioner a written notice before paying without deduction, naming the payee, the nature and amount of the payment and other prescribed particulars. Section 152(5A) requires an order within thirty days. Payments at a reduced treaty rate are outside this notice route, and treaty texts are not in this corpus.

The Ordinance does not say which kinds of software work are “technical or consultancy services”. Classifying a given contract means reading clause (23) against its terms.

What does section 236Y add for card payments?

Section 236Y(1) says every banking company collects advance tax when it transfers any sum remitted outside Pakistan on behalf of a person who has completed a credit, debit or prepaid card transaction with a person outside Pakistan. Division XXVII of Part IV sets the rate at 0.5% of the gross amount remitted abroad. A footnote records that 0.5% replaced 5% through the Finance Act, 2026. Section 236Y(2) makes the tax adjustable.

The Ordinance does not say how section 236Y and section 152(1C) interact when a cloud bill is paid by company card. This page does not resolve that.

Worked example (illustrative figures)

Sialkot Stack (Pvt) Ltd makes three payments in tax year 2027. No provider has a permanent establishment in Pakistan.

Cloud hosting by bank remittance: Rs. 900,000.

1. Fee for offshore digital services, paid by a resident: chargeable under section 6.
2. Bank deduction under section 152(1C): Rs. 900,000 x 15% = Rs. 135,000.

Foreign subcontractor for a mobile app module: Rs. 2,400,000.

1. If treated as a fee for technical services: Rs. 2,400,000 x 15% = Rs. 360,000 under section 152(1).
2. If not: Rs. 2,400,000 x 20% = Rs. 480,000 under section 152(2).

Design tool subscription on a company debit card: Rs. 50,000.

1. Advance tax under section 236Y: Rs. 50,000 x 0.5% = Rs. 250, adjustable.

Common mistakes

• Deducting under section 152(2) on top of the bank’s deduction. Section 152(2) excludes amounts covered by sub-section (1C).
• Paying a subcontractor first and notifying later. Section 152(5) requires the notice before payment.
• Using an old rate. A footnote shows Division IV once taxed offshore digital services at 5%. The words covering them in the 15% rate were added by the Finance Act, 2025.
• Treating the card charge as the end of the matter. Section 236Y collects advance tax on the card transaction, and section 236Y(2) makes it adjustable. It is a separate charge from the tax on the foreign vendor under section 6.

What to check in the official text

Read clauses (22B) and (23) of section 2, section 6, section 101(12) and (12A), section 152(1), (1C), (2), (3), (5) and (5A), and section 236Y. Check Division IV of Part I, paragraph (2) of Division II of Part III and Division XXVII of Part IV of the First Schedule in the official PDF. Double taxation agreements and the Digital Presence Proceeds tax law are outside this corpus.