The Pakistan IT Industry Association (P@SHA)is asking the government for a tax exemption for IT export sector employees. They’re using the argument that tax exemption given to freelancers is being abused by remote workers and this is creating an uneven playing field between remote workers and employees of the IT export corporate sector and is therefore hurting the corporate sector.

The problem identified here is correct and we do need to create a level playing field. But offering tax exemption for IT export sector employees is dangerous because it will create more problems than fixing them. Let me explain why.

Background: the remote worker problem

In 2021, the government gave a blanket tax exemption for freelancers through a 1% “final tax”.

But, without a clear definition of a freelancer in the tax code, this started getting abused by remote workers who in turn started hurting the IT export corporate sector.

Freelancers are individuals who take small jobs from multiple clients in a year. They find work through various freelancing marketplaces like Upwork, Fiverr, FlexJobs, or personal contacts. Their annual income is always less than $10,000.

Tax exemption given to these “true” freelancers does not hurt the IT export corporate sector.

Remote workers are full-time employees (with full benefits like onsite employees) of foreign businesses that do not have any physical office in Pakistan. Remote workers are working from home in Pakistan. They’re usually senior seasoned professionals making between $20,000 to $100,000 a year in salary tax-free (1% final tax).

On top of this, they’re being paid the same rate that the IT export corporate sector businesses get paid when work is outsourced to them.

As a result, remote workers are being paid 3 times their local counterparts working for IT export businesses and doing the same work.

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 globally. Pakistan is already a brain-drain country and this was hurting the IT export corporate sector, and now this remote worker problem has exacerbated the situation even further.

At the same time, employees not leaving to become remote workers put undue pressure on employers for huge salary raises because remote workers make so much tax-free. So, just in a short span of 1-2 years, most IT export sector salaries were more than doubled.

This has increased the cost of doing business which has made the IT export sector less competitive globally because other countries do not have a remote worker problem.

So, we must fix this imbalance between remote workers and the employees of the IT export corporate sector if Pakistan’s IT exports are to grow.

Tax exemption for IT export employees is dangerous

Tax exemption by nature creates an imbalance among taxpayers and creates an unnatural and rapid move toward this incentive by taxpayers from other sectors. That is why it must be specifically targeted to a small well-defined group so it does not hurt other important sectors of the economy.

We must also learn from other countries like India, Bangladesh, Vietnam, and the Philippines that are much more successful in their IT exports than Pakistan.

Interestingly, no other country offers a tax exemption for individuals. Tax exemption is only offered to targeted businesses. The reason is simple. Businesses create employment, train employees into seasoned professionals, build global brands, and develop intellectual properties like Apple, Google, and Microsoft have done.

In 2021, the tax exemption for freelancers (individuals) was offered without proper targeting and we have seen its unintended consequences in the shape of the remote worker problem.

This happened even though targeting freelancers for tax exemption was easy because they are very different from remote workers but we did not do it.

However, there is no such difference between remote workers and local employees of the corporate IT export sector businesses. That is why a brain drain started occurring from the senior members of the corporate IT export sector toward becoming remote workers.

In the same manner, no such difference exists between local employees of the IT export sector and the domestic IT sector. So, if tax exemption is now offered to the employees of the IT export sector, it will badly hurt the domestic IT sector in the same manner.

Then, next year the government will be pressured to give tax exemption for the employees of the domestic IT sector. If that is done, then we’ll see other sectors close to the IT sector getting hurt.

So, as you can see, offering tax exemption for IT export employees is a slippery slope that will lead to a chain reaction resulting in undesirable ends and hurting our economy.

The solution: tax exemption only for freelancers and IT export businesses

We must not fix the remote worker problem by giving even more tax exemptionsfora new set of individuals (IT export sector employees) because of its negative impactas explained above.

Instead, we should kill this problem at its root,fix what was done wrongly in 2021,prevent the remote workers from abusing the tax exemption given to the freelancers, and require them to pay taxeslike regular employees of the IT sector.

The solution is very simple and easy to implement and is also aligned with the international best practices.

  1. Fix the freelancer definition in the tax code and offer tax exemption only to freelancers and not all individuals. A freelancer is defined as “an individual taxpayer who must have 2 or more clients in a year to qualify, and if qualified then he gets tax exemption for up to a maximum of $10,000 a year of income”.

  2. Offer tax exemption only to IT export businesses. Tax exemption must be offered only to IT export businesses owned by individuals or AOPs with 5+ employees (EOBI registered), or owned by companies (public or private limited).

This will result in remote workers being taxed like regular employees and create a level playing field for the IT export corporate sector.

Myth: remote workers will park money overseas if taxed

This is a common fear that drives the decision-making of our policy makers who are unfortunately not very well informed on this subject.

The reality is that according to the State Bank of Pakistan data, almost 85-90% of our IT exports (including remote worker income) come from countries like the US, UK, Western Europe, Australia, Japan, Singapore, etc.

In other words, our IT exports come from very advanced economies that have well-defined taxation systems with very strict monitoring and controls over international transactions. These countries also have tax rates the same or higher than Pakistan.

Since our FBR is very weak in such matters, people assume the same about all other countries.

On top of this, the foreign employers who hire remote workers are usually larger companies if they can afford to pay $20,000 to $100,000 a year of salaries.

Such companies always follow the law and will not allow remote workers to get paid through proxy or in another tax haven country either because of their own tax rules or if FBR simply documents and publishes a rule that 100% of remote worker salary must be sent to Pakistan since it is taxed.

Additionally, all payments made to remote workers are through banking channels so at any time when FBR builds the capacity, it can easily audit and catch the small number of culprits who park money in tax haven countries.

So, in reality, it is very difficult for remote workers to keep money abroad. They cannot park it in a tax haven country. And, if they keep it in the first world countries, they get taxes so there is no incentive for it. Besides, countries like India and Bangladesh have the same tax evasion culture as Pakistan. But they tax their IT professionals on foreign income without any known problems.

Myth: IT export employees will leave the country if taxed

This argument makes absolutely no sense. All the evidence says that IT professionals move abroad because they find much better opportunities and earn a lot more money overseas, and even more importantly in the case of the first world countries they also have a path to citizenship for themselves and their families. Tax is never a consideration in their decision.

That is why, the Middle East despite being a tax haven is not their first choice but the last one.

Anybody who does not move abroad does so because of his personal/family reasons or because he is not qualified enough to find a good job overseas.

The article does not necessarily reflect the opinion of Business Recorder or its owners

Iqbal Mustafa Khan

The writer is the president of Alachisoft, a US-based software company with offshore offices in Islamabad, Pakistan. Iqbal has been an IT entrepreneur since 1998 starting from Silicon Valley, California. He has a BS & MS in Computer Science in 1988-90 from Indiana University, Bloomington, Indiana

Comments

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[email protected] Jun 21, 2024 01:47pm
Very stupid definition of freelancer given by author, only low skilled and hence low paid ones qualify as freelancers?
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Wow Jun 21, 2024 03:40pm
You have published 4 articles, all on IT services, freelancing, and taxing that industry. I feel that maybe you are trying to pave way for both to be taxed?
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Usman Jun 21, 2024 05:03pm
This guy posts the same article every few months to save his company. I'm a freelancer and the only reason I'm not leaving Pakistan is the tax exemption.
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Informed Jun 21, 2024 07:25pm
How can someone pretending to be in IT field be so uninformed. Or is their ulterior motive here to stifle their competition. What a biased clown spreading lies.
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Saleem Zia Jun 21, 2024 07:34pm
Excellent Reformist leader you had given reasonable and practical reasons to **Tax IT Professionals in Pakistan to Sustain and Develop Strong IT Profession in Pakistan**.
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Zed Jun 21, 2024 07:47pm
Interesting article. It would be good to see actual references to policy documents in India, Bangladesh, Vietnam and Phillipines perhaps in a references section at the end.
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ZA Jun 21, 2024 08:28pm
Stupidity at its peak.
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ZA Jun 21, 2024 08:28pm
Stupidity at its peak.
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Actual Truth Jun 22, 2024 05:20am
Very well written article and it captures the crux of the problem facing the IT industry. If this discrepancy is not fixed it will be the death of IT industry.
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ntbtt Jun 22, 2024 05:22am
This is a huge problem for IT Companies where they train totally unskilled, fresh graduates and turn them into IT professionals only to see them leave to work as freelancers.
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nuvens Jun 22, 2024 05:30am
Nice article and a very good read for higher management of IT corporations who are currently spending huge amounts on training and still struggling with high employee retention.
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Free_lancer Jun 22, 2024 07:32am
Utter stupidity. It is more like killing small business and freelancer in it's buds. How the hell a person can start a a business with more than one client.
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Free_lancer Jun 22, 2024 07:34am
Start paying your employees there worth and don't cry over here if they leave you for there own dreams. How can this guy be allowed to write when he is so distanced from ground reality. Elitist mind
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A. Chak Jun 22, 2024 07:57am
Freelancers are an endangered species. They are being replaced by AI at whirlwind speed.
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Builder Jun 22, 2024 01:53pm
"Interestingly, no other country offers a tax exemption for individuals" is the essence of this writing. The IF and WHERE exemption clauses need to be eliminated from tax code.
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Wow Jun 22, 2024 02:00pm
Quick question for the author. You are comparing taxation in other countries with Pakistan. Why haven't you covered dozens of countries who have launched digital nomad visas?
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RM Jun 22, 2024 04:34pm
lesser tax rate is due toefforts of (Freelancers/distant workers) bring more n more FX (export of services) with minimal use of local resources. IT companies shouldn't feel insecure from individuals.
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RM Jun 22, 2024 04:39pm
Writer apprears to be biased n instead of claiming benefits for IT firms he is asking to withdraw benefits of others and let Pak loose FX inflow.
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RM Jun 22, 2024 04:43pm
If foreign emploer has already deducted tax from salary of dist work then he can again claim benefits under Tax Treaty arrangements between Pak n other countries. Author may need to consult Tax laws.
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Usman Jun 22, 2024 05:28pm
Solution is that more people should join the field.we are a country of 250 million.its a stupid idea to stop some one from earning more.educate more in this field.
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Javaid Bhai Jun 22, 2024 06:24pm
Freelancers pay on income, corpos pay on profits after writing all house expenses as business expenses. Obfuscating the problem.
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Javaid Bhai Jun 22, 2024 06:26pm
Capitalism at it's finest: the middle class is growing out of its class due to their own efforts! Must be stopped! Protect the elite! Trickle down economics!!
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Javaid Bhai Jun 22, 2024 06:30pm
'Hurt Pakistan'!? Everyone is already over taxed and under serviced: Private schools, private hospitals, private security, private water supply, UPS and solar ...
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Javaid Bhai Jun 22, 2024 06:36pm
Malachis-soft: Customer invoice 100 USD per hr / 16,000 pm, local resource 15 USD per hr / 2,400 pm (6.5L PKR). 13,600 USD (37L pkr) hard earned value added service money by Malachis-soft.
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Javaid Bhai Jun 22, 2024 06:40pm
"they’re being paid the same rate that the IT export corporate sector businesses" 'As a result, remote workers are being paid 3 times their local counterparts working for IT export businesses" LOL!!
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Javaid Bhai Jun 22, 2024 06:41pm
Stand-up comedy at it's corporate peak!
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Moin Jun 22, 2024 08:56pm
Total non sense. jealous. they are burning so they want burn whole country. They bring money in Pakistan.
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Moin Jun 22, 2024 09:00pm
just seen this non sense man logic on Kamran khan show and here found author and that person in show is same.
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Yaseen Jun 23, 2024 09:26am
@Free_lancer, correct, this man seems to be touting the imposition of more taxes on remote workers just because they wouldn't work for miserable people like these who pay peanuts to their employees.
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Yaseen Jun 23, 2024 09:33am
Articles from this author reek of jealousy and sheer stupidity. If the IT export businesses are to be tax-free then so should be the remote workers.
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Yaseen Jun 23, 2024 09:33am
He is trying to save his business while begging for more taxes on the individuals. Shame on you low intellect creature!
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A free man Jun 23, 2024 12:40pm
Freelancers already pay 10 to 20 percent commissions on platforms like fiverr and upwork. Any further local taxes just make it unfeasible. So if there are any more taxes, I will leave Pk.
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Test Jun 23, 2024 03:58pm
I work on fiver and I have to pay 20% tax on each gig . This author is idiot he now wants me to pay 35 % tax on my 80 percent. He doesn't understand we also have to pay bills of internet and electri
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Test Jun 23, 2024 04:00pm
Why the hell you don't ask govt to reduce prices of internet so much tax and also we have to buy expensive laptop. Why will I work so much if I have to pay 35% tax here and 20% tax to fiverr.
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Test Jun 23, 2024 04:03pm
Such articles are the reason we should boycott brecorder spreading panic. He thinks money grows on trees. Getting foreign visa is not easy we are stuck here not every person has outstanding talent
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Test Jun 23, 2024 04:06pm
If you are so loyal shift your offshore company to pakistan you have not even lived here and sharing nonsense
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Test Jun 23, 2024 04:08pm
Half of pakistan cannot shift to Us or UK or Europe even if they are talented no country has enough space.
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Zain Jun 23, 2024 04:29pm
You don't understand about parking. I bring revenue when usd price is higher unlike lower. If I earn 1000 usd . rate in jan is 270 rate in feb is 300 so it is better if i bring when rate is higher.
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Tahir N. Jun 26, 2024 09:13pm
Typical Seth mentality. Don't want to see middle class educated people getting on their feet. They want to control middle class educated people as slaves.
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Tahir N. Jun 26, 2024 09:13pm
Instead of treating them better and give equity options or other incentives, they want to kill their options. People should stop working for these Seth mentality types.
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Tal Jun 27, 2024 12:46pm
Rubbish article. Id you want to destroy the freelance market of pakistan apply what this bhaisab is saying
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Ibrahim Jul 01, 2024 02:46am
I haven't read such a hilariously nonsense article in ages. The definition of a free lancer is beyond logic, many of these freelancers work with single client over upwork etc
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Ibrahim Jul 01, 2024 02:48am
This article makes no sense at all.
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Ibrahim Jul 01, 2024 02:49am
Written by someone who's crying to fill his own pockets but does not want to pay their employees to even make the both ends meet.
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Mona Jul 08, 2024 03:52pm
You are wrong. The tax rate is 0.25% for freelancers and 1% for remote workers. But that's not important. You have a conflict of interest so you shouldn't even be writing about this topic.
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Mona Jul 08, 2024 03:59pm
This article is nothing but lobbying for the IT export corporate sector in Pakistan, of whom the author is a part. You want the whole pie for yourself, don't you? Where will this corporate greed end?
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Mona Jul 08, 2024 04:01pm
@Ibrahim , yes it's a conflict of interest. They shouldn't be publishing such biased articles.
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