Can an Islamabad software house charge the reduced 5% ICT tax instead of 15%, and what does it give up?

Islamabad software businesses see two rates in the ICT Tax on Services Ordinance, 2001: fifteen percent for IT services in Table-1 and five percent for software or IT-based system development consultants in Table-2. The five percent entry is not a discount on the fifteen percent one. It is a separate entry with its own condition, and that condition removes the ability to offset input tax.

What does the law say?

Section 3(1) of the Ordinance charges sales tax at the rates in column (4) of Table-1 of the Schedule on the value of taxable services rendered or provided in the Islamabad Capital Territory. Its first proviso says that the services specified in Table-2 “shall be charged to tax at such rates and subject to such conditions and limitations as specified therein”.

The two entries that matter for IT businesses are:

Entry	Description in the Schedule	Heading	Rate
Table-1, serial 11	IT services and IT-enabled services	Respective headings	Fifteen percent
Table-2, serial 11	Services provided by software or IT-based system development consultants	9815.6000	Five percent, subject to the conditions that no input tax adjustment or refund shall be admissible

The explanation to Table-1 serial 11 says IT services include, but are not limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design. IT-enabled services include items such as call centres, graphics design, data entry operations and cloud computing services.

Is the 5% rate a choice?

The Ordinance does not frame it as one. Nothing in section 3 or the Schedule lets a service provider elect between Table-1 and Table-2. The proviso applies Table-2 to “the services specified in Table-2”, which means the question is which description a particular service fits.

That is where the text runs out. Software development appears in the Table-1 explanation as an IT service. Table-2 serial 11 covers services provided by “software or IT-based system development consultants”. The Ordinance does not define “consultant” for this entry and does not say how to separate a software house developing a system from a consultant developing one. Section 2 of the Ordinance gives undefined words the meaning they carry in the Sales Tax Act, 1990, but that Act does not define this phrase either. This page does not resolve the overlap.

What does the 5% entry give up?

The condition attached to Table-2 serial 11 is that “no input tax adjustment or refund shall be admissible”.

Under the Sales Tax Act, section 2(20)(c) treats “sales tax levied on the services rendered or provided by the person under Islamabad Capital Territory (Tax on Services) Ordinance, 2001” as output tax. Section 7(1) says a registered person shall be entitled to deduct input tax paid on purchases for taxable supplies from the output tax due for the period. On the 5% entry, the Table-2 condition takes that deduction away, and no refund is available either. Sales tax paid on laptops, servers, office fit-out and other business purchases then stays as a cost.

The Ordinance does not set out, in its own words, how far section 7 of the Sales Tax Act operates for Table-1 services. The Table-2 condition assumes an input tax adjustment would otherwise exist, but the reader should confirm the mechanism in the official text.

Worked example (illustrative figures)

Faisal runs a small development firm in Blue Area, Islamabad. In one month he bills local clients Rs. 2,000,000 before tax and pays Rs. 90,000 of sales tax on purchases used in the business. The amounts are invented. The rates are the Schedule rates.

If the services fall under Table-1 serial 11 (15%), with input tax deducted:

1. Output tax: Rs. 2,000,000 x 15% = Rs. 300,000.
2. Less input tax: Rs. 300,000 - Rs. 90,000 = Rs. 210,000 deposited.
3. Clients are invoiced Rs. 2,300,000.

If the services fall under Table-2 serial 11 (5%):

1. Output tax: Rs. 2,000,000 x 5% = Rs. 100,000 deposited.
2. Input tax of Rs. 90,000 cannot be adjusted or refunded, so it stays a cost.
3. Clients are invoiced Rs. 2,100,000.

The deposit is lower on the 5% entry in this example. The arithmetic turns the other way only when input tax exceeds 10% of the value of services, because 15% of value less input tax equals 5% of value at that point. That is a calculation, not a rule in the law.

What if the business also exports?

Section 3(1A) says that, notwithstanding sub-section (1), “the export of services shall be charged at the rate of zero per cent”. That provision sits above both tables. The 5% entry and its input tax condition concern services rendered or provided in Islamabad. The Ordinance does not say how the Table-2 condition interacts with purchases used for exported services, and this page does not resolve it.

What if clients are in Lahore or Karachi?

The Ordinance extends only to the Islamabad Capital Territory. Sales tax on services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan is levied under provincial laws that are outside this corpus.

Common mistakes

• Treating 5% as a registration option. Section 3 applies Table-2 to the services it describes. It does not offer a switch.
• Claiming input tax on the 5% entry. Serial 11 of Table-2 bars both input tax adjustment and refund.
• Assuming 5% is always cheaper. Whether it is depends on how much input tax the business pays, and on clients who may themselves be able to use the tax charged to them.

What to check in the official text

Read sections 2 and 3 of the ICT Ordinance and the Schedule in the official PDF, since the tables are not reproduced on the section page. Check the wording of Table-1 serial 11 and its explanation against Table-2 serial 11 for the specific service. Read sections 2 and 7 of the Sales Tax Act, 1990 for the input tax mechanism, and check for any notification or general order under section 3 that affects IT services.