Freelancer tax system comes under scrutiny for misuse

ISLAMABAD: The Pakistan IT Industry Association (P@SHA), in its budget proposals for 2026-27, has called for a clearer distinction between genuine project-based freelancers and full-time remote employees working for foreign companies, saying the current overlap is creating distortions in the digital economy.

In a statement, the association said recent reports had pointed to misuse of the freelancer tax framework, with what it described as tax arbitrage allowing IT firms to benefit from a system meant for independent gig workers. According to P@SHA, the practice reduces tax liabilities for some companies, inflates freelance income figures and limits opportunities and facilities meant for actual freelancers.

The association said freelance earnings were apparently recorded at $950 million in the first 10 months of the current fiscal year, a figure it said appeared to place Pakistan ahead of freelancers in India, China, the UAE and several other countries despite multiple global and domestic challenges. P@SHA said the trend was undermining fiscal fairness and hurting the formal IT sector.

Tax regime proposal

Reaffirming its policy position, P@SHA said it supports a facilitative environment for genuine freelancers while also prioritising sustainable growth for registered IT companies and the gradual formalisation of the wider gig economy. It recommended that the existing 0.25% final tax regime for IT exporters and authentic freelancers be continued for 10 years.

The association said policy continuity was necessary to attract international clients, maintain foreign exchange inflows and support registered technology firms. As part of its recommendations, it proposed formal classification of digital workers so that independent, project-based freelancers remain eligible for the simplified tax regime, while people working full-time for overseas employers on fixed salaries are taxed under standard income tax slabs for salaried individuals.

Tufail Ahmed Khan, Honorary President of the Global Freelancers Union, said P@SHA had correctly proposed that authentic freelancers should retain the simplified 0.25% final tax regime, while remote professionals receiving fixed salaries from foreign employers should be taxed under standard graduated salary slabs. He said the distinction was intended to create a more level playing field for domestic IT companies.

Impact on local firms

According to the proposals, local companies that spend on physical infrastructure, regulatory compliance, employee benefits and skill development are facing unfair competition for talent from unregistered remote setups. P@SHA Chairman Sajjad Syed said that by formalising the tax treatment of full-time remote workers, the association wanted to protect the local corporate sector, improve documentation of the economy and encourage individual professionals to move towards fully structured and globally competitive IT businesses.

P@SHA also said broader structural reforms were needed across the ecosystem, especially for scaling IT enterprises. It called for simpler banking procedures, smoother inward remittance systems and easier tax filing processes to remove obstacles to growth.

The association said freelancers remain important for youth employment and early-stage digital exports, but added that the long-term objective should be to help them grow into formal organisations. It also urged major national investment in advanced areas including artificial intelligence, cloud computing and cybersecurity, saying such steps, together with clear and equitable tax policies, were necessary to help position Pakistan as a global centre for formalised, high-value technology outsourcing and innovation.