Must an Islamabad software house charge ICT sales tax on IT services to local clients, and is the rate 15% or 5%?

A software house that provides IT services to clients in Islamabad is inside the charge of the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. The standard entry for IT work carries fifteen percent. A separate five percent entry exists for software or IT-based system development consultants, but it comes with a condition that no input tax can be adjusted or refunded.

What does the law say?

Section 3(1) of the Ordinance charges “a tax known as sales tax” at the rates in column (4) of Table-1 of the Schedule on “the value of the taxable services rendered or provided in the Islamabad Capital Territory”. A proviso adds that services specified in Table-2 are charged at the rates and subject to the conditions set out in Table-2.

The two entries that matter for IT companies are:

Table	Serial	Description as printed	Rate
Table-1	11	IT services and IT-enabled services	Fifteen percent
Table-2	11	Services provided by software or IT-based system development consultants (heading 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 call centres, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centres, data entry, cloud computing, data storage, locally produced television programs and insurance claims processing.

How does it work in practice?

Section 3(2) says the tax is charged “in the same manner and at the same time” as if it were sales tax under the Sales Tax Act, 1990. Section 3(3) then applies the Sales Tax Act, its rules and notifications to collection and payment of the ICT tax “in so far as they relate to” the manner, time and mode of payment, registration and de-registration, records and audit, enforcement, penalties and other allied matters.

On registration, section 14(1) of the Sales Tax Act lists the persons who must register. Clause (f) covers “a person who is required, under any other Federal law or Provincial law, to be registered for the purpose of any duty or tax collected or paid as if it were a levy of sales tax”. The ICT tax is charged in that way, so the registration rules of the Sales Tax Act are the ones the Ordinance points to. Section 14(2A) also lets the Commissioner compulsorily register a person who should be registered but has not applied.

Section 2(20)(c) of the Sales Tax Act includes in “output tax” the sales tax levied on services rendered or provided under the ICT Ordinance. So the tax a software house charges its Islamabad clients is treated as its output tax for Sales Tax Act purposes.

The second proviso to section 3(1), added by the Finance Act, 2025, also lets the Board require any service provider in Table-1 or Table-2 to integrate with the Board’s computerised system for real-time reporting, from a date and in a manner the Board prescribes by general order. No such general order is held in this corpus.

Worked example (illustrative figures)

Blue Area Code Works (Pvt) Ltd, an Islamabad software house, bills a hospital in F-8 for a patient management system. The agreed value of the service is Rs. 2,400,000.

If the service falls under Table-1, serial 11:

1. Tax: Rs. 2,400,000 x 15% = Rs. 360,000.
2. Amount invoiced to the hospital including tax: Rs. 2,400,000 + Rs. 360,000 = Rs. 2,760,000.
3. Table-1 does not attach a “no input tax” condition to this entry.

If the service falls under Table-2, serial 11:

1. Tax: Rs. 2,400,000 x 5% = Rs. 120,000.
2. Amount invoiced including tax: Rs. 2,400,000 + Rs. 120,000 = Rs. 2,520,000.
3. No input tax adjustment or refund is admissible against this output tax.

The difference in tax on the same contract is Rs. 360,000 - Rs. 120,000 = Rs. 240,000. Whether the lower entry is worth it depends on how much input tax the business would otherwise have been able to claim, which the Table-2 condition removes.

What if our clients are outside Islamabad?

Section 1(2) says the Ordinance extends to the whole of the Islamabad Capital Territory, and section 3(1) charges services “rendered or provided in the Islamabad Capital Territory”. Services taxed by Punjab, Sindh, Khyber Pakhtunkhwa or Balochistan fall under provincial sales tax laws. Those laws, their rates and their place-of-supply rules are outside this corpus.

What if the client is abroad?

Section 3(1A) charges the export of services at zero per cent. That is covered on a separate page about ICT sales tax on IT exports and refunds.

Common mistakes

• Treating 5% as a free choice. The proviso to section 3(1) says Table-2 services “shall be charged” at the Table-2 rates and conditions. It is framed as a rule for the services listed, not an election.
• Assuming the 5% entry covers all IT work. Table-2 serial 11 is worded for “software or IT-based system development consultants”. Table-1 serial 11 names software development itself as an IT service. The Ordinance does not define the boundary between the two entries, and this page does not resolve it.
• Claiming input tax under the 5% entry. Table-2 serial 11 bars input tax adjustment and refund.
• Confusing ICT sales tax with income tax withholding. Income tax a client withholds from payments under the Income Tax Ordinance is a separate charge under a different law.

What to check in the official text

Read section 3 of the ICT Ordinance and the Table-1 and Table-2 entries in the official PDF, since the site text drops tables. The edition held here is amended to 30 June 2025; any amendment made by a later Finance Act is not reflected. Check section 3(4), which lets the Board specify a Negative List of exempt services in Table-3 by notification, and whether any such notification or a real-time integration order covers IT services. Section 14 of the Sales Tax Act sets the registration categories that section 3(3) applies.