Must a software house deduct tax when it pays local freelance or contract developers?

A software house that sends a module to a freelance developer in Pakistan pays for services, not salary. Section 153 of the Income Tax Ordinance, 2001 then makes the company collect tax out of that payment for the government. The rate comes from a table in the First Schedule, and the deduction is reported every quarter.

Who has to deduct under section 153?

Section 153(1) says every “prescribed person” paying a resident person, in full or in part and including an advance, “for the rendering of or providing of services” deducts tax from the gross amount payable at the time of payment, at the rate in Division III of Part III of the First Schedule.

Section 153(7) lists prescribed persons. It includes “a company”, so a private limited or public limited software house is covered whatever its size. It also covers an association of persons or an individual with turnover of one hundred million rupees or more in any of the preceding tax years. A sole proprietor or partnership software house below that turnover is not listed.

“Services” in section 153(7) includes professional services “otherwise than as an employee”. That line separates a contractor from staff. Salary paid to an employee falls under section 149 instead, where the employer deducts at the employee’s average rate of tax.

When does the Rs. 30,000 threshold apply?

Clause (b) of section 153(1) excludes payments for services where the payment is less than thirty thousand rupees in aggregate during a financial year. The test is the total paid to one person over the financial year. Once payments to a developer reach Rs. 30,000 in the year, the exclusion no longer covers them. The section does not say how to treat smaller payments made earlier in the year before the total crossed that figure.

Which rate applies for tax year 2027?

Paragraph (2) of Division III sets the rates for section 153(1)(b) payments. Two entries touch IT work:

Sub-paragraph	What it covers	Rate
(i)	A list of services that includes software development services, and IT services and IT enabled services as defined in the Ordinance	7% of the gross amount, with a proviso that the rate is 4% for IT services and IT enabled services
(ii)	Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently	15%

Sub-paragraph (ii) describes the person: a developer working independently, which is what a freelancer is. Sub-paragraph (i) describes the service. An Explanation limits sub-paragraph (i) to a service provider whose services are subjected to withholding on gross receipts and who has not challenged that taxation before any court. The Schedule does not say which entry governs when an individual’s work fits both. This page does not resolve that.

How does it work in practice?

Payee not on the active taxpayers’ list. Rule 1 of the Tenth Schedule says that where tax is to be deducted from a person not appearing in the active taxpayers’ list, the rate “shall be increased by hundred percent” of the rate in the Ordinance. A 15% rate becomes 30%.

Quarterly statement. Section 165 requires every person deducting tax under Division III of Part V of Chapter X to file a quarterly statement with each payee’s name, CNIC or NTN and address, the payments made and the tax deducted. Section 165(2) sets the due dates as 20 April, 20 July, 20 October and 20 January for the quarters ending March, June, September and December.

Freelancer paid through an agent. A proviso to section 153(1) covers a recipient paid through an agent or third person that keeps a fee. The agent is treated as paid that fee by the recipient, and the recipient collects tax along with the payment.

Status for the freelancer. Section 153(3) makes the tax deductible under section 153(1) a minimum tax on the recipient’s income. The provisos that soften this deal with goods and contracts, not services.

Worked example (illustrative figures)

Kohsar Labs (Pvt) Ltd in Islamabad engages Areeba, a React developer in Faisalabad, at Rs. 180,000 a month for four months in tax year 2027. The company applies sub-paragraph (ii).

Areeba is on the active taxpayers’ list:

1. Tax per payment: Rs. 180,000 x 15% = Rs. 27,000.
2. Net paid each month: Rs. 180,000 - Rs. 27,000 = Rs. 153,000.
3. Total deducted over four months: Rs. 27,000 x 4 = Rs. 108,000.

Areeba is not on the list:

1. Rate under rule 1 of the Tenth Schedule: 15% + 15% = 30%.
2. Tax per payment: Rs. 180,000 x 30% = Rs. 54,000.
3. Total over four months: Rs. 54,000 x 4 = Rs. 216,000.

A one-off icon set: the same company pays Hamza, a designer in Multan, Rs. 22,000 once in the financial year and nothing else. The aggregate is below Rs. 30,000, so section 153(1)(b) does not require a deduction.

What if the company forgets to deduct?

Section 161(1) makes a person who fails to deduct as required “personally liable to pay the amount of tax to the Commissioner”. Section 161(2) gives the company a right to recover that tax from the person from whom it should have been deducted. The same section applies where tax was deducted but not paid over.

Common mistakes

• Treating small companies as exempt. Section 153(7) lists “a company” with no size test.
• Reading the threshold per invoice. The Rs. 30,000 figure is an annual aggregate for each payee.
• Calling an employee a contractor. Services “otherwise than as an employee” fall under section 153. Salary falls under section 149.
• Skipping nil quarters. The proviso to section 165(1) requires a statement even when nothing was deducted.

What to check in the official text

Read section 153(1), (3) and (7), paragraph (2) of Division III of Part III of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF of the Ordinance amended to 30 June 2026. Check the definitions of IT services and IT enabled services in the Ordinance’s definitions, which sub-paragraph (i) refers to, and the section 165 due dates.