IT Freelancers and Companies: Is Paying 1% With Your Tax Return Enough?

Reading time: 4 minutes
By Khalid Iqbal, ACCA | Dawars Associates – Tax & Corporate Consultants
Updated: 27 October 2026

You earned foreign income from IT services, received the money in Pakistan and paid 1% tax while filing your return.

You may feel your tax position is complete. But there is an important question:

Did your bank deduct and report tax under the correct section when it processed your export proceeds?

If the bank did not deduct tax, or the payment was not correctly identified as eligible export proceeds, paying 1% yourself may not settle every question about your eligibility for final tax treatment.

That does not mean every missed bank deduction automatically puts you into the normal tax regime. It does mean your receipts, documents and tax treatment should be reviewed before a problem becomes an FBR notice.

How does Section 154A apply to IT exports?

Section 154A of the Income Tax Ordinance, 2001 deals with the tax treatment of certain export-of-services proceeds. It requires an authorized dealer in foreign exchange, such as a bank, to deduct tax when the relevant foreign exchange proceeds are realized.

For eligible exports of computer software, IT services and IT-enabled services by persons registered with the Pakistan Software Export Board (PSEB), the reduced rate is generally 0.25% of proceeds for tax years 2024 through 2029. Other qualifying service-export receipts may fall under the applicable 1% category, subject to their facts and the law for the relevant year. Wakalat

The rate is only one part of the analysis. The nature of the service, PSEB status, receipt channel, documentation and compliance with the conditions for final taxation also matter.

Practical point: PSEB registration may support eligibility for the reduced rate, but registration alone does not establish that every foreign receipt qualifies.

What if the bank did not deduct tax?

Consider this example:

A freelancer receives Rs. 10,000,000 from overseas clients. The bank does not deduct tax under Section 154A. At return filing, the freelancer pays Rs. 100,000—equal to 1% of receipts—and reports the income as final-tax income.

The payment is an important fact, but several questions remain:

• Were the receipts eligible service-export proceeds?
• How did the bank classify and report each transaction?
• Was the correct purpose code used?
• Can the bank verify and correct its reporting or deduction, where appropriate?
• Does the taxpayer meet the other conditions for final taxation?
• What is the legal effect of the self-paid amount in this particular case?

There is a risk that FBR may question the claimed treatment. The outcome depends on the facts and applicable law; paying 1% yourself does not automatically prove or disprove eligibility for the final tax regime.

We have not identified a court ruling that directly decides this exact missed-bank-deduction scenario. It should therefore not be treated as a settled rule that a bank’s omission automatically results in normal taxation.

Could normal tax rates apply?

Yes, a taxpayer who does not qualify for final tax treatment may have the income assessed under the normal tax regime. Depending on the taxpayer’s legal status, taxable income and the relevant tax year, the resulting liability could be considerably higher.

For an individual or AOP, applicable normal rates can reach 35%, depending on the year and circumstances. A company’s tax calculation follows different rules. The figure is not a flat rate on gross export receipts: under normal taxation, the computation generally starts with taxable income after allowable deductions, subject to applicable rules.

For perspective, on Rs. 10 million of gross proceeds:

Indicative final-tax rate	Tax on gross proceeds
0.25%	Rs. 25,000
1%	Rs. 100,000

If normal taxation applies, a separate taxable-income calculation is needed. The final amount cannot be determined from gross receipts alone.

A recent court decision: compliance matters

In AC Technologies v. Commissioner Inland Revenue, I.T.R.A. No. 419/2025, decided on 12 October 2026, the Sindh High Court considered an IT exporter’s claim to final tax treatment under Section 154A.

The taxpayer had filed a NIL quarterly withholding statement, even though tax had actually been deducted and deposited on salary and rent during that quarter. The court held that, in the circumstances of that case, the inaccurate statement did not satisfy the applicable withholding-statement condition. The tribunal’s direction to compute taxable income under the normal regime after admissible deductions remained in place. 2026 SHC KHI 1932

What does this mean for freelancers?

The decision demonstrates that Section 154A compliance conditions need attention—not just the payment of tax. However, the case concerned the exporter’s own withholding statements. It did not decide whether a bank’s failure to deduct tax can be cured by a freelancer paying 1% directly.

A NIL withholding statement is also not automatically incorrect. Its accuracy depends on whether the taxpayer was required to file it and what happened during the relevant period.

What should you do if your bank has not deducted tax?

1. Review each foreign receipt

Reconcile your foreign income against bank statements, invoices and client agreements. Identify which receipts relate to IT or other eligible exported services.

2. Ask your bank for the transaction details

Contact your bank’s branch or foreign-exchange team and request:

• The purpose code used for each relevant receipt.
• The applicable Section 154A tax deduction, if any.
• The PRC or relevant bank realization evidence.
• Confirmation of how the transaction and any tax deduction were reported.

If something appears incorrect, ask the bank in writing what correction or reporting procedure is available. Do not assume that every older transaction can be corrected in the same way.

3. Check your PSEB registration

If you intend to claim the reduced rate, review your registration and certification status for the relevant period. Keep copies of certificates and renewals, and check that the services you supplied fall within the applicable category.

4. Review your own filing obligations

Check your income tax return and any withholding statements you were required to file. If you deducted tax from salaries, rent or other payments, reconcile the deductions, deposits and statements. Also check whether any federal or provincial sales tax registration or return obligations apply.

The sales-tax-return condition for Section 154A final treatment has a specific exception for exporters covered by Section 154A(1)(a). That exception does not itself remove a separate sales tax filing obligation under another applicable law. download1.fbr.gov.pk

5. Resolve differences before filing—or review an already filed return

Do not wait for a notice if you can identify a discrepancy now. Where tax has already been paid or a return has already been filed, review the available correction or revision options based on the facts and statutory time limits. Keep written correspondence with the bank and avoid paying the same tax twice without first reconciling the position.

Frequently asked questions

Is 1% tax always final for a freelancer?

No. The receipt must fall within the relevant legal provision, and the conditions for final tax treatment must be satisfied. The correct rate also depends on the nature of the receipt and applicable eligibility requirements.

If the bank did not deduct tax, can I simply pay it myself?

You may be able to pay tax directly, but the effect of that payment on the claimed final-tax treatment needs to be assessed. Keep the payment evidence, check the receipt’s classification and discuss the bank’s reporting with a tax professional.

Does PSEB registration make every foreign payment taxable at 0.25%?

No. The income and exporter must meet the applicable requirements. A personal transfer, gift or unrelated foreign receipt should not automatically be classified as an IT export merely because the recipient is PSEB-registered.

I receive payments through Payoneer or another platform. What should I check?

Review the complete payment trail: client contract, invoice, platform statement, transfer to your bank and bank realization documents. Confirm how the bank classified the receipt. The correct treatment depends on the transaction and available evidence.

Take action before the discrepancy becomes a notice

For IT freelancers and software companies, a clean Section 154A position requires more than entering a figure in the tax return. Reconcile your receipts, confirm your bank’s reporting and review your PSEB and filing compliance.

At Dawars Associates, we assist freelancers, software houses and IT exporters with reviewing foreign receipts, Section 154A treatment, PSEB documentation and tax return compliance.

Contact Dawars Associates

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