Is export of IT services from Islamabad zero-rated for ICT sales tax, and can an IT exporter reclaim input tax?

Exported services are zero-rated under the ICT Ordinance, so an Islamabad software house does not add sales tax to invoices for foreign clients. The harder question is what happens to the sales tax it pays on its own purchases. The Sales Tax Act has a refund mechanism for exporters, but it is written for goods, and the ICT Ordinance does not say in terms that it applies to exported services.

What does the law say?

Section 3(1A) of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 reads: “Notwithstanding the provision of sub-section (1), the export of services shall be charged at the rate of zero per cent.” Sub-section (1) is the provision that charges Table-1 services, including serial 11 IT services and IT-enabled services at fifteen percent. Sub-section (1A) overrides it for exports.

In the Sales Tax Act, 1990, the zero-rating provision is section 4. It charges “goods exported, or the goods specified in the Fifth Schedule” and some other goods at zero per cent. Section 4 refers to goods. It does not mention services.

Section 10(1) of the Sales Tax Act deals with refunds. If a registered person’s input tax on taxable purchases in a tax period “exceeds the output tax on account of zero rated local supplies or export made during that tax period”, the excess “shall be refunded to the registered person not later than forty-five days of filing of refund claim”, in the manner and subject to conditions the Board specifies by notification.

How does it work in practice?

The zero rate itself is clear. For an IT service exported from Islamabad, the ICT sales tax on the invoice is zero.

The refund position is less clear, and this page does not resolve it. Three points in the text pull in different directions:

1. What the Ordinance expressly borrows. Section 3(2A) of the ICT Ordinance lists specific Sales Tax Act provisions that apply to services mutatis mutandis: some sub-sections on the scope of tax, two Fifth Schedule entries read with section 4, some sub-sections on exemption, and three Sixth Schedule entries. Section 10 is not on that list.
2. What the Ordinance borrows in general terms. Section 3(3) applies the Sales Tax Act to collection and payment of the ICT tax “in so far as they relate to” payment, registration, records and audit, enforcement, penalties “and all other allied and ancillary matters”. The Ordinance does not say whether refunds fall within that phrase.
3. Registration for refund. Section 14(1)(d) of the Sales Tax Act requires registration of “an exporter who intends to obtain sales tax refund against his zero-rated supplies”. It does not say whether that includes a zero-rated supply of services under the ICT Ordinance.

The second proviso to section 10(1) also lets the Board direct that refunds against exports be paid at fixed rates and in a manner notified by it. No such notification is held in this corpus.

Worked example (illustrative figures)

Margalla Stack (Pvt) Ltd, an Islamabad IT company, has the following in one tax period:

• Services exported to a client in Toronto: Rs. 9,000,000.
• IT services to a bank in Islamabad under Table-1 serial 11: Rs. 1,000,000.
• Sales tax paid on purchases of equipment and services (input tax): Rs. 220,000.

Step 1: ICT sales tax on each supply.

• Export: Rs. 9,000,000 x 0% = Rs. 0.
• Local: Rs. 1,000,000 x 15% = Rs. 150,000.
• Total output tax: Rs. 150,000.

Step 2: compare input tax with output tax.

• Input tax Rs. 220,000 - output tax Rs. 150,000 = Rs. 70,000 excess.

Step 3: what happens to the Rs. 70,000.

If section 10(1) of the Sales Tax Act were applied to this exporter, the excess arising “on account of” the export would be refundable within forty-five days of a refund claim, subject to the Board’s conditions. The Ordinance does not expressly say that section 10 applies to an exported service. The example therefore shows the arithmetic only. It is not a statement that a refund of Rs. 70,000 is payable.

What if all our revenue is from exports?

Then output tax is zero in every period and every rupee of input tax is excess. The question of whether section 10 reaches exported services becomes the whole question. The text held here does not answer it.

What if we use the 5% Table-2 entry for local work?

Serial 11 of Table-2 charges services by software or IT-based system development consultants at five percent “subject to the conditions that no input tax adjustment or refund shall be admissible”. That condition sits on the Table-2 entry, and the Ordinance does not say how it interacts with exports made by the same business in the same period.

Common mistakes

• Treating zero-rated as exempt. Section 3(1A) charges exports at a rate of zero per cent. Section 3(4) separately allows the Board to list exempt services in a Negative List in Table-3. The two are different mechanisms.
• Assuming section 4 of the Sales Tax Act zero-rates services. Section 4 speaks of goods. The zero rate for exported services comes from section 3(1A) of the ICT Ordinance.
• Assuming a refund route exists because one exists for goods. For services under the ICT Ordinance, the refund route is not stated in terms.
• Forgetting provincial law. An IT company outside Islamabad is subject to provincial sales tax on services, which is outside this corpus.

What to check in the official text

Read section 3 of the ICT Ordinance, especially sub-sections (1A), (2A) and (3), and the Table-1 entries in the official PDF. The edition held here is amended to 30 June 2025. Then read sections 4, 10 and 14 of the Sales Tax Act, 1990. Check for any Board notification under section 10 on refunds, or any rules on refunds for exporters of services; none is held in this corpus.