Freelancer tax system being misused

P@SHA calls for clear distinction between freelancers, remote workers

KARACHI:

The Pakistan IT Industry Association (P@SHA), in its federal budget 2026-27 proposals, has stressed the need to clearly distinguish between genuine project-based freelancers and full-time remote employees working for overseas companies, warning that blurred definitions are creating tax distortions in the digital economy.

The association's statement comes in light of recent reports indicating the misuse of the freelancer tax framework. This highlights the increasing trend of "tax arbitrage," where the tax system designed for independent gig workers, or freelancers, is being exploited by IT companies to reduce their tax liabilities. This also inflates freelance earning numbers, distorting the government tax system and depriving actual freelancers from opportunities and the facility.

This year, freelance earnings were apparently recorded at $950 million during the first 10 months of the current fiscal year, ostensibly outperforming freelancers from India, China, the UAE, and several other countries despite multiple global and domestic challenges.

According to P@SHA, this trend undermines both fiscal fairness and the formal IT sector. Reiterating its policy stance, the association said it fully supports a facilitative environment for genuine freelancers while prioritising the sustainable growth of registered IT companies and the gradual formalisation of the broader gig economy.

To provide long-term stability to the sector, the association recommended the continuation of the existing 0.25% final tax regime for IT exporters and authentic freelancers for a period of 10 years. It argued that policy continuity was essential to attract global clients, ensure steady foreign exchange inflows, and strengthen registered technology firms.

A key component of P@SHA's recommendations is the formal classification of digital workers. It proposed that independent, project-based freelancers should remain eligible for the simplified tax regime, while individuals working full-time for foreign employers on fixed salaries should be taxed under standard income tax slabs applicable to salaried employment.

Tufail Ahmed Khan, Honorary President of the Global Freelancers Union (GFU), acknowledged that P@SHA has rightfully proposed that authentic freelancers should continue to benefit from the simplified 0.25% final tax regime (FTR); whereas it recommends that remote professionals earning fixed salaries from foreign employers be taxed appropriately under standard graduated salary slabs.

This strategic distinction is designed to foster a level playing field for domestic IT companies. Currently, local enterprises that invest heavily in physical infrastructure, compliance, comprehensive employee benefits, and skill development face unfair competition for talent from unregistered remote setups.

P@SHA Chairman Sajjad Syed emphasised that, by formalising the tax structure for full-time remote workers, P@SHA aims to protect the local corporate sector, encourage documentation of the economy, and incentivise the transition of individual contributors to fully structured, globally competitive IT businesses.

Furthermore, the recommendations emphasise the urgent need for structural reforms that benefit the entire ecosystem but are particularly vital for scaling IT enterprises.

P@SHA advocated for simplified banking processes, smoother inward remittance mechanisms, and frictionless tax filing procedures to remove barriers to business growth. Acknowledging that freelancers play a vital role in youth employment and foundational digital exports, P@SHA believes the ultimate goal must be enabling these individuals to scale into formal organisations.

The association also urged significant national investments in advanced domains such as artificial intelligence, cloud computing, and cybersecurity. By prioritising these structural and technological investments, alongside clear and equitable taxation policies, P@SHA stated it remains committed to transforming Pakistan into a premier global hub for formalised, high-value technology outsourcing and innovation.