Client in New York. But here’s the catch: once the money starts coming in, the Federal Board of Revenue (FBR) also wants its share. And if you don’t handle tax filing and remittance properly, things can get messy fast.

Let’s break down what’s happening right now in Pakistan’s tax law for freelancers, what common mistakes people make, and how to stay on the safe side without paying more than you should.

Where Your Income Comes From

The tax system doesn’t treat all freelancing income the same. If your client is abroad, you are considered export income. If your client is in Pakistan, your income is treated as local income. The rules for each are very different.

Export Income – Payments from Abroad

For export income, the government has made things relatively simple:

• Final Withholding Tax: If you receive foreign payments through official banking channels, you pay a final tax at the rate of 1% of gross receipts.
• Reduced Rate: If you’re registered with the Pakistan Software Export Board (PSEB), the tax drops to 0.25%. That’s a massive relief for IT and software professionals.
• Special Relief: There’s even a 0% tax incentive until June 2025 for IT/ITES exports, provided that at least 80% of your income comes through banks.

This final tax means you don’t calculate expenses or deductions—it’s collected and considered settled—no further liability, no audit on that portion.

Local Income – Payments within Pakistan

If you earn from local clients, you’re treated like any other business or professional. That means you fall under progressive income tax slabs. For the tax year 2025–26, the brackets look like this:

• Up to Rs. 600,000 – 0%
• 600,001–1,200,000 – 15%
• 1,200,001–1,600,000 – Rs. 90,000 + 20% of the amount above 1.2M
• 1,600,001–3,200,000 – Rs. 170,000 + 30% of the amount above 1.6M
• 3,200,001–5,600,000 – Rs. 650,000 + 40% of the amount above 3.2M
• Above 5,600,000 – Rs. 1.61M + 45% of the amount above 5.6M

So, if you’re working with Pakistani startups, law firms, or marketing agencies, your tax isn’t a flat percentage; it grows with your income.

Why Things Get Complicated

On paper, the rules sound clear. But in practice, freelancers run into problems in two areas: filing status and remittance documentation.

Filers vs. Non-Filers

In Pakistan, whether you’re a filer or not makes all the difference. Non-filers face higher withholding tax on almost everything, including cash withdrawals, bank transfers, and even utilities. You also lose access to refunds and risk penalties.

For freelancers, staying on the Active Taxpayer List (ATL) is essential. If you skip filing, your bank can deduct extra tax from your remittances. That “1% final tax” suddenly becomes much more.

Remittance Issues

The second big headache is getting banks to recognize your payments as export remittances. If you don’t provide the proper documents, the money might be classified as local income and taxed at a much higher rate.

To prevent this, always request a Foreign Inward Remittance Certificate (FIRC) or Proceeds Realization Certificate (PRC) from your bank. Please make sure the correct purpose code is used (for IT exports, it’s usually 9186). Without that, the FBR won’t treat it as export income.

Many freelancers complain that bank staff don’t know what PSEB is, or they record the transaction under a general head. If that happens, insist politely, escalate to the branch manager, and if needed, file a complaint with the Banking Mohtasib.

Risks of Ignoring the Rules

1. Late Filing Penalties. If you miss the deadline, you can be fined Rs. 10,000 to Rs. 20,000. For severe delays, FBR may even add 100% extra tax on your assessed income.
2. Audit Triggers. Inconsistent filings or unexplained remittances can trigger an audit. Once that happens, you’ll need solid documentation to defend yourself.
3. Misclassification of Income. If your foreign income is treated as local, you may face tax rates up to 45% instead of 1%. That’s a painful difference.
4. Loss of ATL Benefits. Without ATL status, you end up paying higher rates everywhere, from property transfers to car registration.

How to Keep Things Straight

The solution isn’t rocket science. A few disciplined steps can save you a lot of trouble.

1. Register as a Tax Filer. Apply for NTN through FBR’s IRIS system. Once you’re a filer, everything else becomes easier.
2. Register with PSEB, especially if you’re in IT or digital services. This registration gives you access to the 0.25% tax rate and helps classify your income correctly.
3. Keep Clean Records. Maintain invoices, bank receipts, contracts, and PRCs. If the FBR questions your income, your documents are your shield.
4. Push Your Bank for Proper Coding. Don’t let lazy coding turn your export into “local income.” Correct PRC codes are crucial.
5. File Returns on Time. Even if your income is below the taxable threshold, file anyway. This keeps you on ATL and prevents unnecessary deductions.
6. Use Professional Help if Needed. If you’re unsure, hire a tax consultant. The money you save in penalties and overpaid tax usually outweighs the fee.

Final Word

Freelancing is freedom, but it comes with responsibility. Think of tax filing not as a burden, but as insurance. When your income grows and your lifestyle improves, the FBR will eventually notice. If your papers are clean, you’ll sleep peacefully, knowing you’re compliant and not overpaying.

So, register, document, and file. And when banks or tax authorities make mistakes, which they often do, don’t stay silent. Use the system, escalate, and protect what you’ve earned.

The bottom line? Freelancers don’t just need skills to earn abroad. They need awareness at home. Handle your taxes wisely, and your freelancing career won’t just bring money, but you’ll get peace of mind.