Must a software house deduct tax when it pays local freelancers or contract developers?

When a software house outsources work to an individual developer or designer in Pakistan, the payment is for services, not salary. Section 153 of the Income Tax Ordinance, 2001 then makes the company a withholding agent. The rate depends on how the Division III table classifies the service and on whether the freelancer appears on the active taxpayers’ list.

What does the law say?

Section 153(1) requires every “prescribed person” making a payment, in full or in part and including an advance, to a resident person “for the rendering of or providing of services” to deduct tax from the gross amount payable at the time of payment. The rate is in Division III of Part III of the First Schedule. Payments for services are excluded “where payment is less than thirty thousand Rupees in aggregate, during a financial year”.

Section 153(7) lists prescribed persons. It includes “a company”, so every software house that is a company is covered. It also includes individuals and associations of persons with turnover of one hundred million rupees or more in any of the preceding tax years. “Services” includes professional services “otherwise than as an employee”.

Which rate applies for tax year 2027?

Paragraph (2) of Division III sets the rates for payments under section 153(1)(b). Two entries are relevant to IT work:

Sub-paragraph	Services	Rate
(i)	A list including software development services, and IT services and IT enabled services as defined in the Ordinance	7% of the gross amount, with a proviso that the rate is 4% for IT services and IT enabled services
(ii)	Independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently	15%

Sub-paragraph (ii) names “software engineers or developers, working independently”, which describes a freelancer. Sub-paragraph (i) names the service rather than the person, and an explanation limits it to service providers whose gross receipts are subject to withholding and who have not challenged taxation of gross receipts in court. The Schedule does not state which entry governs when an individual developer’s work fits both. This page does not resolve that.

How does it work in practice?

Not on the active taxpayers’ list. Section 100BA says tax for persons not on the list is determined under the Tenth Schedule. Rule 1 of that Schedule increases the rate of deduction by hundred percent of the rate specified in the Ordinance. The Schedule also requires the withholding agent to report complete and accurate particulars of such persons in its withholding statement.

Status of the tax for the freelancer. Section 153(3) makes tax deductible under section 153(1) a minimum tax on the recipient’s income, with exceptions for certain goods and contract payments that do not cover services.

If the company does not deduct. Section 161(1) makes a person who fails to deduct as required “personally liable to pay the amount of tax to the Commissioner”. Section 161(2) lets it recover the tax from the freelancer.

Contractor or employee. If the developer is in substance an employee, the payment is salary and section 149 applies instead, with deduction at the employee’s average rate. Section 153 covers services “otherwise than as an employee”.

Worked example (illustrative figures)

A software house in Gulberg, Lahore engages Bilal, a freelance React developer in Faisalabad, at Rs. 150,000 a month for six months. The company applies sub-paragraph (ii).

Bilal is on the active taxpayers’ list:

1. Tax per payment: Rs. 150,000 x 15% = Rs. 22,500.
2. Net paid to Bilal each month: Rs. 150,000 - Rs. 22,500 = Rs. 127,500.
3. Total deducted over six months: Rs. 22,500 x 6 = Rs. 135,000.

Bilal is not on the list:

1. Rate: 15% increased by hundred percent = 30%.
2. Tax per payment: Rs. 150,000 x 30% = Rs. 45,000.
3. Total over six months: Rs. 45,000 x 6 = Rs. 270,000.

A one-off logo design: the company pays Sana, a designer, Rs. 25,000 once in the financial year. The aggregate is below Rs. 30,000, so section 153(1)(b) does not require a deduction.

What if payments cross Rs. 30,000 partway through the year?

Section 153(1)(b) excludes payments “less than thirty thousand Rupees in aggregate, during a financial year”. It does not say how to treat earlier payments once the aggregate crosses that figure. The text is silent on this point.

What if the freelancer works through a platform?

The proviso to section 153(1) says that where the recipient is paid through an agent or third person that retains a fee, the agent is treated as paid that fee by the recipient, and the recipient collects tax along with the payment. How that applies to a particular platform is not set out further.

Common mistakes

• Assuming small firms are exempt. A company is a prescribed person whatever its size.
• Ignoring the aggregate test. The Rs. 30,000 limit is an annual aggregate, not per invoice.
• Not checking the active taxpayers’ list. The Tenth Schedule doubles the rate, and reporting errors about non-listed payees carry their own consequences.

What to check in the official text

Read section 153, paragraph (2) of Division III of Part III of the First Schedule, and rule 1 of the Tenth Schedule in the official PDF. Check the Ordinance’s definitions of IT services and IT enabled services, which sub-paragraph (i) refers to.