How is income from local Pakistani clients taxed for a software house that also exports, and is the tax clients deduct adjustable?

A software house that exports and also works for Pakistani clients is taxed under two separate systems. Export proceeds go through section 154A. Local fees go through the normal rules for business income, with tax deducted at source under section 153.

What does the law say about local fees?

Section 18(1)(a) makes “the profits and gains of any business carried on by a person at any time in the year” chargeable under the head “Income from Business”. Fees from local clients for software development, maintenance, hosting or IT-enabled services are part of those profits.

For a company, the rate is in Division II of Part I of the First Schedule. The Table as substituted by the Income Tax (Amendment) Act, 2025 sets:

Type of company	Rate
Banking company	42% for tax year 2027 and onwards
Small company	20%
Any other company	29%

“Small company” has its own definition in section 2, which is not covered on this page. Most software houses that are not small companies pay 29% on their local taxable income.

How is tax deducted by local clients?

Section 153(1)(b) requires every prescribed person making a payment “for the rendering of or providing of services” to deduct tax, unless payments are less than Rs. 30,000 in aggregate during a financial year. Prescribed persons listed in section 153(7) include the Federal Government, companies, AOPs constituted by law, non-profit organisations, and individuals and AOPs with turnover of Rs. 100 million or more in any preceding tax year.

The rate is in paragraph (2)(i) of Division III of Part III of the First Schedule. It lists “software development services, IT services and IT enabled services as defined in section 2” at 7%, and then provides: “the rate of tax shall be 4% in case of IT services and IT enabled services as defined in section 2.” Section 2(30AD) says IT services include software development, software maintenance, system integration, web design, web development, web hosting and network design. An Explanation limits paragraph (2)(i) to a provider whose services are subject to withholding on gross receipts and who has not challenged taxation of gross receipts in court.

Is the deducted tax final, adjustable or minimum?

Section 153(3) says the tax deductible under sub-section (1) on the income of a resident person “shall be minimum tax”. The proviso lists exceptions for goods sold by a manufacturer or listed company and contracts executed by a listed company. There is no exception for services, so tax deducted on a software house’s local fees is minimum tax. The Explanation to section 153(3) says the income it relates to is “the amount on which tax is deductible”.

Section 168(1)(b) treats deducted tax as “tax paid by the person from whom the tax was collected or deducted”, and section 168(2) allows a credit for it in computing tax due. Section 168(3) lists final taxes that get no credit, including section 154A(2), but not section 153. So the deduction is credited against the Division II tax, while its minimum character sets a floor on the tax for that income. Section 153 as it stands contains no carry-forward rule for any excess, unlike section 113(2)(c).

Worked example (illustrative figures)

A software company in Rawalpindi, not a small company, for tax year 2027. Local fees from corporate clients: Rs. 30,000,000. Clients deduct 4%: Rs. 1,200,000.

Case 1: profitable local work. Local taxable income after apportioned expenses is Rs. 6,000,000.

1. Tax at 29%: Rs. 6,000,000 x 29% = Rs. 1,740,000.
2. Credit under section 168 for tax deducted: Rs. 1,200,000.
3. Balance payable with the return: Rs. 540,000.

Case 2: thin margins. Local taxable income is Rs. 1,500,000.

1. Tax at 29%: Rs. 435,000.
2. Tax deducted is Rs. 1,200,000, and it is minimum tax under section 153(3).
3. Because the deduction is minimum tax, tax on this income is not less than Rs. 1,200,000. Section 153 contains no rule for refunding or carrying forward the Rs. 765,000 difference, and the Ordinance does not define “minimum tax” in the section itself.

Export proceeds are handled separately under section 154A and do not change either case.

What if …?

The company is not on the active taxpayers’ list. The Tenth Schedule can raise withholding rates for persons not on the list. That is covered on a separate page.

The client is an individual below the turnover line. An individual with turnover under Rs. 100 million in every preceding tax year is not a prescribed person, so no tax is deducted. The fees are still business income.

The company is in Islamabad. Sales tax on IT services under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 is a separate tax, covered on another page. Provincial sales tax on services in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan is outside this corpus.

Common mistakes

• Treating the 4% as a final tax. For services, section 153(3) makes it minimum tax.
• Treating it as a pure advance payment. It is credited, but cannot be recovered below the minimum.
• Applying section 169 to local fees. Section 169 covers only the final taxes it lists, such as section 154A(2).

What to check in the official text

Read sections 18, 153 and 168, Division II of Part I and paragraph (2) of Division III of Part III of the First Schedule in the Ordinance amended to 30 June 2026. Confirm whether your client is a prescribed person under section 153(7), and whether the section 113 minimum tax also affects your local turnover.