Do freelancers in Islamabad pay sales tax on IT services exported to foreign clients?

An Islamabad freelancer billing a client in Dubai or Toronto sits under two tax laws at once: the Income Tax Ordinance, which taxes the income, and the Islamabad Capital Territory (Tax on Services) Ordinance, 2001, which charges sales tax on services. On the sales tax side, the export is charged at zero. The text used here is the ICT Ordinance as amended to 30 June 2025, the latest edition in this corpus.

What does the law say?

The general charge. Section 3(1) of the ICT Ordinance charges sales tax “at rates specified in column (4) of Table-1 of the Schedule” on the value of taxable services “rendered or provided in the Islamabad Capital Territory”. A proviso applies the separate rates and conditions of Table-2 to the services listed there.

The export rule. Section 3(1A), inserted by the Finance Act, 2021, reads: “Notwithstanding the provision of sub-section (1), the export of services shall be charged at the rate of zero per cent.” Because it starts with “notwithstanding”, it overrides the Schedule rate for any service that is an export of services.

IT services in the Schedule. Table-1, serial number 11 lists “IT services and IT-enabled services” at fifteen percent. Its explanation says IT services include “but not limited to” software development, software maintenance, system integration, web design, web development, web hosting and network design. IT-enabled services include call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry operations, cloud computing services, data storage services, locally produced television programs and insurance claims processing. Table-2, serial number 11 separately lists “Services provided by software or IT-based system development consultants” at five percent, subject to the condition that no input tax adjustment or refund shall be admissible.

Definitions borrowed from the Sales Tax Act. Section 2 says words used but not defined in the ICT Ordinance have the meaning given in the Sales Tax Act, 1990. The ICT Ordinance itself does not define “export of services”, and this page does not settle exactly where the line falls between an export and a local service.

How does it work in practice?

For a freelancer based in Islamabad, the practical split is by client:

Client	ICT sales tax rate
Foreign client, service exported	Zero per cent, section 3(1A)
Client in Islamabad, IT or IT-enabled service	Fifteen percent under Table-1, serial 11, or five percent under Table-2, serial 11 where that entry applies

Section 3(3) applies the Sales Tax Act, 1990 provisions on registration, records, returns, payment and penalties to tax under the ICT Ordinance. A zero rate is still a rate of tax, not an exemption, but the ICT text does not itself say whether a person making only zero-rated exports must register. That question is not resolved here.

Why this matters for income tax. Section 154A(2)(c) of the Income Tax Ordinance lists, among the conditions for final tax on export proceeds, that “sales tax returns under Federal or Provincial laws have been filed, if required under the law”. Its proviso says this condition does not apply to an exporter under section 154A(1)(a), the PSEB-registered software, IT and IT-enabled services category. For other exporters, whether ICT sales tax returns are required feeds into the final-tax question.

Worked example (illustrative figures)

Saad is a web developer working from G-11, Islamabad. In one month he bills:

1. A client in the United States, work exported: Rs. 900,000. Sales tax at zero per cent: Rs. 900,000 x 0% = Rs. 0.
2. A company in Blue Area, Islamabad, for a website: Rs. 200,000.
   • If Table-1, serial 11 applies at fifteen percent: Rs. 200,000 x 15% = Rs. 30,000.
   • If Table-2, serial 11 applies at five percent: Rs. 200,000 x 5% = Rs. 10,000, with no input tax adjustment or refund.

The export carries no ICT sales tax. The local job does, at one of the two Schedule rates. The Ordinance text in this corpus does not say which of the two entries covers a web developer like Saad.

What if …?

What if I live in Rawalpindi, Lahore or Karachi? The ICT Ordinance states that it “extends to whole of Islamabad Capital Territory”. Services provided from the provinces fall under provincial sales tax on services laws. Those laws are outside this corpus, so their rates and export rules are not stated here.

What if the Board adds IT services to a negative list? Section 3(4), added by the Finance Act, 2025, lets the Board specify a negative list of exempt services in Table-3 by notification. No Table-3 entries appear in the text held here.

What if I am PSEB-registered? The ICT rate on the export is still zero. The PSEB point matters on the income tax side, through the proviso to section 154A(2)(c).

Common mistakes

• Applying the fifteen percent rate to foreign clients. Section 3(1A) overrides the Schedule for the export of services.
• Assuming the ICT Ordinance covers all of Pakistan. It covers Islamabad Capital Territory only.
• Treating zero-rated as the same as outside the law. Section 3(3) still brings in the Sales Tax Act rules on registration and returns, as far as they apply.

What to check in the official text

Read section 3 of the ICT (Tax on Services) Ordinance, 2001 in full, including sub-sections (1A), (3) and (4), and Table-1 and Table-2, serial number 11, in the source PDF. For the income tax side, read section 154A(2)(c) of the Income Tax Ordinance and its proviso. Board general orders under the second proviso to section 3(1), any Table-3 notification, and the provincial services laws are not held in this corpus.