How much income tax does a software house pay on IT export revenue, and until when does the 0.25% rate run?

A software house that exports software or IT services pays income tax on that revenue mainly through a deduction the bank makes when the foreign exchange arrives. The rate depends on one fact: whether the exporter is registered with the Pakistan Software Export Board (PSEB).

What does the law say?

Section 154A(1) of the Income Tax Ordinance, 2001 requires every authorized dealer in foreign exchange, at the time of realisation of foreign exchange proceeds, to “deduct tax from the proceeds at the rates specified in Division IVA of Part III of the First Schedule”. Clause (a) of that sub-section covers “exports of computer software or IT services or IT enabled services” where the exporter is registered with and duly certified by PSEB. Clause (b) covers services rendered outside Pakistan or exported from Pakistan more generally.

Division IVA of Part III of the First Schedule, as amended up to 30 June 2026, sets the rates:

S. No.	Type of receipt	Rate of tax
1	Export proceeds of computer software or IT services or IT enabled services by persons registered with Pakistan Software Export Board	0.25% of proceeds for tax years 2024 up to tax year 2029
2	Any other case	1% of proceeds

Section 2 of the Ordinance defines IT services in clause (30AD) to include, but not be limited to, software development, software maintenance, system integration, web design, web development, web hosting and network design.

Until when does the 0.25% rate run?

Row 1 runs to tax year 2029. Section 5 of the Finance Act, 2026 amended Division IVA so that “for the figure “2026”, the figure “2029” shall be substituted”. Before that amendment the reduced rate stopped at tax year 2026.

Section 74 of the Ordinance makes the normal tax year a period of twelve months ending on 30 June, named after the calendar year in which that date falls. So the reduced rate covers:

Tax year	Period
2027	1 July 2026 to 30 June 2027
2028	1 July 2027 to 30 June 2028
2029	1 July 2028 to 30 June 2029

The table as printed gives no reduced rate beyond tax year 2029. The Ordinance does not say what happens after that, so any later rate depends on a future amendment.

How does it work in practice?

The tax is taken at source. When a client in the United States or the UAE pays an invoice and the bank in Lahore or Karachi realises the foreign exchange, the bank deducts the Division IVA rate from the proceeds and credits the balance in rupees. The software house does not pay the tax separately on that revenue.

Section 154A(2) makes the deduction a final tax on the income from those transactions if the conditions in that sub-section are met: the return has been filed and required withholding tax statements have been filed. For a PSEB-registered exporter under clause (a), the sales tax return condition does not apply. Where the tax is final, section 169 provides that no deduction is allowed for expenses and “the tax deducted shall not be reduced by any tax credit allowed under this Ordinance”.

Worked example (illustrative figures)

Ravi Code Labs (Pvt) Ltd in Lahore is registered with and certified by PSEB. In tax year 2027 it realises export proceeds of Rs. 48,000,000 for software development work. Kohsar Digital, an Islamabad firm doing the same work, is not registered with PSEB and realises the same amount.

1. Ravi Code Labs falls in row 1 because tax year 2027 is within tax years 2024 up to 2029.
2. Tax deducted: Rs. 48,000,000 x 0.25% = Rs. 120,000.
3. Kohsar Digital falls in row 2, any other case.
4. Tax deducted: Rs. 48,000,000 x 1% = Rs. 480,000.
5. Difference: Rs. 480,000 - Rs. 120,000 = Rs. 360,000.

If both firms meet the final tax conditions and do not opt out, these deductions are their income tax on the export income for the year. Expenses such as salaries and rent do not reduce it.

What if our export revenue is received in an older tax year?

The rate in row 1 was time-limited from tax year 2024. For proceeds realised in earlier years, the older text of Division IVA applies, not the current table. A footnote in the official Ordinance records that the version substituted by the Finance Act, 2022 read that the rate “shall be one percent of the proceeds of the export”. Earlier years are not covered on this page.

What if we also earn from local clients?

Section 154A deals only with foreign exchange proceeds. Fees from Pakistani clients for IT services are a different stream with a different withholding regime and are not taxed at the Division IVA rate.

Common mistakes

• Treating 2029 as the calendar year. It is tax year 2029, which ends on 30 June 2029.
• Assuming any IT exporter gets 0.25%. Row 1 applies to persons registered with PSEB. Everyone else is in row 2 at 1%.
• Assuming the rate is final no matter what. Section 154A(2) makes it final only when the listed conditions are met, and section 154A(3) lets a person opt out each year.
• Claiming foreign tax already withheld by a client. Section 154A(2)(d) states that no credit for foreign taxes paid shall be allowed where the final tax applies.

What to check in the official text

Read section 154A and the Division IVA table in the official PDF of the Ordinance amended up to 30 June 2026, since the site text leaves rate tables out. Compare it with section 5 of the Finance Act, 2026, which made the 2029 change. Section 154A(5) says the Board, in consultation with the State Bank of Pakistan, prescribes the mode and procedure for payment, and section 154A(6) lets the Board include or exclude services. Any such instructions are outside this corpus.