Is tax deducted when a software house pays AWS, Google Cloud or foreign SaaS subscriptions from Pakistan?

Most Pakistani software houses pay foreign providers every month: cloud hosting, code repositories, design tools, email and collaboration suites. The Income Tax Ordinance, 2001 treats many of these as “fees for offshore digital services” earned in Pakistan by a non-resident, and it collects the tax through the bank that sends the money abroad.

What counts as a fee for offshore digital services?

Clause (22B) of section 2 defines the term as any consideration for services rendered by a non-resident person for online advertising, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content and online data, uploading, storing or distributing digital content, online collection or processing of data related to users in Pakistan, any facility for online sale of goods or services “or any other online facility”.

The list is wide. Cloud hosting, online computing and storage, e-mail services and online tools used by a software house fit the words “hosting”, “online computing”, “storing” and “any other online facility”. The Ordinance does not name any provider, and it does not classify particular products. Whether a specific licence is instead a royalty under clause (54) of section 2 is a separate question this page does not decide.

Is the fee taxed in Pakistan at all?

Section 101(12A) makes a fee for offshore digital services Pakistan-source income if it is paid by a resident person, or borne by a Pakistani permanent establishment of a non-resident. There is an exception where the fee is for services used in a business the resident carries on outside Pakistan through a permanent establishment.

Section 6(1) then imposes tax on every non-resident person who receives a Pakistan-source fee for offshore digital services. Section 6(2) computes the tax on the gross amount. Section 6(3)(b) switches section 6 off where the services are rendered through a permanent establishment in Pakistan of the non-resident.

What is the rate?

Division IV of Part I of the First Schedule sets the section 6 rate at 15% of the gross amount of royalty or fee for technical services “or fee of offshore digital services”, and 10% in any other case. The words covering offshore digital services were added by the Finance Act, 2025. This is the rate for tax year 2027 under the Ordinance as amended to 30 June 2026.

Who deducts it?

Section 152(1C) requires every banking company or financial institution remitting a fee for offshore digital services outside Pakistan, chargeable to tax under section 6, on behalf of a resident, to deduct tax from the gross amount at the Division IV rate. The software house is the resident on whose behalf the bank remits.

Section 152(2), the general rule that makes payers deduct 20% from other payments to non-residents, expressly excludes amounts to which sub-section (1C) applies.

Digital Presence Proceeds Tax. A proviso added by the Finance Act, 2025 says the bank shall not deduct under section 152(1C) where the recipient is also liable to Digital Presence Proceeds Tax and that tax has been collected. That tax comes from a separate law that is not in this corpus, so this page does not explain when it applies.

Worked example (illustrative figures)

Margalla Stack (Pvt) Ltd in Islamabad pays a foreign cloud provider a monthly hosting bill of Rs. 800,000 through its bank in tax year 2027. The provider has no permanent establishment in Pakistan and no Digital Presence Proceeds Tax has been collected.

1. Pakistan-source under section 101(12A)(a): paid by a resident person.
2. Chargeable under section 6 at the Division IV rate: 15%.
3. Bank deduction under section 152(1C): Rs. 800,000 x 15% = Rs. 120,000.
4. Over twelve equal months: Rs. 120,000 x 12 = Rs. 1,440,000 deducted in the year.

The Ordinance says the tax is deducted “from the gross amount paid”. It does not say who bears the cost commercially, which is a matter for the contract and the provider’s billing terms.

What if we pay by company card?

Section 152(1C) speaks of a bank or financial institution “remitting outside Pakistan” a fee. The section does not say in terms whether a card charge is a remittance for this purpose. The State Bank’s operating rules and any FBR procedure for card payments are not in this corpus.

Common mistakes

• Deducting 20% under section 152(2) as well. Section 152(2) excludes amounts covered by sub-section (1C).
• Assuming the company has no role. The bank deducts, but section 152(1C) turns on the fee being chargeable under section 6, which depends on facts the company holds, such as whether the provider has a Pakistani permanent establishment.
• Using the old rate. A footnote to Division IV shows an older version, replaced by the Finance Act, 2022, that taxed these fees at 5%. The words naming offshore digital services in the 15% rate were added by the Finance Act, 2025.

What to check in the official text

Read clause (22B) of section 2, section 6(1) to (4), section 101(12A) and section 152(1C) with its proviso and sub-section (2). Check the Division IV rate in the official PDF of the Ordinance. Treaty relief under a double taxation agreement, and the Digital Presence Proceeds Tax law, are outside this corpus.