Just like IT export businesses, Pakistan also gives tax exemptions to freelancers on their export income. However, an incorrect interpretation of freelancers is hurting the corporate side of the IT export sector and will be very detrimental to the sector if not fixed quickly. Let me explain.
‘Freelancer’ definition
Freelancers by definition are those individuals who take small jobs from multiple clients in a year in the field of technical writing, graphics design, website development, etc. And, they mostly find work through various freelancing marketplaces like Upwork, Fiverr, FlexJobs, etc.
Some even find work through friends and family contacts abroad. But, in all cases, their annual income is usually between $4000-$8,000. These “true” freelancers do not compete with the corporate side of Pakistan’s IT export sector and are not causing any problems.
Remote workers are not freelancers
Freelancers have existed for a long time but a new phenomenon of “remote workers” arose in 2020 due to the Covid-19 pandemic where companies in the US, UK, Western Europe, etc. started hiring full-time employees as remote workers with full benefits like onsite workers. First, they hired within their own countries and then finally internationally.
Pakistan being one of the few English-speaking countries became an attractive destination for these companies to hire remote workers, just like it has been an attractive destination for outsourcing IT services that the corporate IT export sector provides.
How remote workers are damaging the corporate side?
In most countries, remote workers are always hired through local intermediary “staff augmentation” companies. These companies hire remote workers as their “local employees”, keep a cut from the foreign client’s income as their profits, and pay these remote workers locally after withholding their payroll taxes just like the rest of the “corporate” sector. As a result, these remote workers are paid just like all employees of the IT export sector and there is a level playing field between regular IT export businesses and remote workers.
However, in Pakistan, PSEB (Pakistan Software Export Board) started incorrectly classifying remote workers as freelancers even though they were not. Ironically, even FBR (Federal Board of Revenue) tax law explicitly states that remote worker’s income is not tax-exempt.
This incorrect interpretation by PSEB meant that the remote workers were now directly hired by foreign employers and paid the same rate they would pay the corporate IT export sector for outsourcing. This meant that the remote workers’ salaries were at least double the salaries of the local employees to begin. On top of this, their income became tax-free whereas local employees pay 25-35% tax on their salaries.
The result of all this is that remote workers are paid almost 3 times more than the local employees. Here are prices that foreign companies pay IT export corporate sector and which now they’re paying directly to the remote workers.
The net effect of all this is that many mid-level and senior employees of the IT export corporate sector who have been painstakingly groomed over many years are leaving in droves to join foreign employers as remote workers.
The corporate sector is unable to retain them and is therefore becoming less competitive in the global arena. Pakistan is already a brain-drain country and this was hurting the IT export corporate sector, and now this remote worker interpretation has exacerbated the situation even further.
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Job Title Hourly Monthly Annual
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Software Engineer $10-15/hr $1760-$2,640/month $21,120-$31,680/year
Senior Soft Engineer $15-20/hr $2,640-$3,520/month $31,680-$42,240/year
Technical Leader $20-25/hr $3,520-$4,400/month $42,240-$52,800/year
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Figure 1: Same Prices Paid by Clients to the Corporate Sector vsRemote Workers
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Remote workers cannibalizing corporate IT export revenue
The irony of all of this is that the remote workers are not bringing in any new IT export revenue to Pakistan. Instead, the corporate IT export revenue is shifting to remote workers. In the process, FBR is losing billions of rupees of payroll tax revenue when local employees become remote workers and stop paying taxes.
Had Pakistan adopted the right policies, the Covid-19 remote worker phenomenon would have still occurred in Pakistan but through the IT export corporate sector (as staff augmentation companies). Below are the last 10 years of IT export history.
The solution: protect the corporate sector
Most countries in the world protect and promote their corporate sector (including startups which are also corporate in nature). The reason is simple: it is only the corporate sector that builds the economy by creating new jobs, training and grooming employees, and eventually building world-famous brands and intellectual property. The corporate sector also does not leave Pakistan, unlike the remote worker who jumps at the first opportunity for self-growth.
Therefore, FBR must protect the corporate sector of IT exports as follows:
- Tax Exemption only to the corporate sector (including startups)
o Make sure only proper businesses with employees and payroll are tax-exempt and not individuals.
o Maybe give exemption only to Public/Private Limited Companies and Registered Partnerships (AOPs)
o Proper business name, website, and commercial office address
o 4+ people on payroll with withholding of payroll tax
o EOBI registration
o PSEB must verify all of this each year
- Foreign employers must use corporate sector for remote workers
o IT corporate sector businesses can hire remote workersfor foreign clients
o Remote workers must not get tax exemption and must be paid like rest of the IT sector employees.
o FBR tax law already states all of this. It just needs to be implemented.
- Fix ‘freelancer’ definition for tax exemption
o Biggest clarification: Remote workers are not Freelancers
o Freelancers work for multiple clients on short projects each year
o Freelancers earn less than $8,000 of annual income
o PSEB must verify this each year
(Kanwal Cheema is the CEO of My Impact Meter, a tech startup focusing on philanthropic impact through a marketplace and social media platform and Iqbal Mustafa Khan is the president of Alachisoft, a US-based software company with offshore offices in Islamabad, Pakistan. The views expressed in this article by these authors are not necessarily those of the newspaper)
Copyright Business Recorder, 2024
The writer is the president of Alachisoft, a US-based software company with offshore offices in Islamabad, Pakistan
The writer is CEO of My Impact Meter, a tech startup focusing on philanthropic impact through a marketplace and social media platform
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