While the economy is struggling to boost goods exports, growth momentum has decisively shifted to the services sector, led by information technology. IT export receipts have expanded by 2.7 times in the last five years and nearly fivefold in the last decade, with the current base still expanding at a brisk pace. So far in FY26 (4MFY26), proceeds are up 28 percent; at this trajectory, IT exports could hit $4.3 billion by year-end.
Other service segments are also rising, especially “other business services,” up 20 percent in 4MFY26 and on track to reach $1.9 billion, possibly outpacing even rice exports this year.
Part of this surge is thanks to widening gaps in income tax treatment. The gulf between tax rates for local employees and freelancers has created irresistible incentives for workers to channel their earnings from abroad. For example, a Pakistani earning more than $3,000 locally may face tax above 30 percent, but as a registered freelancer, the same income to an overseas client is taxed at just 1 percent, final and full. Senior professionals in IT and finance increasingly work remotely for foreign employers, using legal structures such as incorporation in the Gulf to reduce or eliminate local tax liability. By law, salary paid from a foreign source is tax-free, facilitating the “aqama holder” phenomenon.
The arbitrage goes further. Remittances sent home from such arrangements are also tax-exempt, and some firms treat employees as consultants or contractors, converting payroll to contract fees taxed at just 1 percent. Officially, these flows, whether from freelancers or firms, are logged as services exports. Given the tax arbitrage and an SBP policy allowing 50 percent of proceeds to be held in foreign currency, the appeal grows. While positive for inflow and currency hedging, this policy deepens structural tax inequality.
Larger IT firms, adhering to strict payroll taxation, are at a competitive disadvantage. A professional earning a gross Rs 2 million monthly could save upwards of Rs 600,000–700,000 by shifting to freelance status. As small firms lure talent away from big employers with these savings, even finance firms, including banks and AMCs, are forced to pay more to keep employees, squeezing margins in payroll-driven businesses.
Goods exporters face their own perverse incentives. Services exports are taxed at just 0.25 percent (final), compared to 29 percent plus super tax on goods. There are persistent rumours of textile firms partially re-routing exports through IT shell companies to exploit lower tax rates, though the largest exporters call this practice impractical.
The end result is an uneven playing field and worsening tax arbitrage. Official data lacks granularity. SBP’s services export breakdown omits distinctions between corporate flows and freelancing, while remittance data reveal only regional patterns. Anecdotally, flows from the UAE soared 41 percent in FY25 even as Pakistani workers’ migration dropped 72 percent in 2024, suggesting remittances now have less to do with labour abroad and more with creative tax planning.
There is growing suspicion that these incentives are fueling disguised flows and tax avoidance. A tax rate of 0.25 percent for ICT exports, near-zero for freelancers, but up to 35 percent for domestic salaried employees is unsustainable and distorts behaviour. FBR and SBP should estimate the fiscal cost of these loopholes, and the Ministry of Finance must address this tax rate delta in the next budget.
Pakistan’s policymakers have built a system where the clever, not the productive, are rewarded. Unless tax policy is swiftly rebalanced, the country will remain a services success story built less on genuine competitiveness and more on legal acrobatics. The state should tax ingenuity, not reward it, at least not when it comes to dodging the taxman.
Copyright Business Recorder, 2025
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar