Pay Less Tax: Expert Tips to Lower Your Income Tax Bill as a Freelancer in Pakistan

Being a freelancer in Pakistan can make the process of tax filing appear overwhelming. Nonetheless, ensuring accurate and timely tax submissions is crucial to evade legal complications or fines. Here’s a comprehensive, step-by-step manual on how to file your income tax return as a freelancer in Pakistan.

Income Tax for Freelancers in Pakistan

Step 1: Register for a National Tax Number (NTN):

For an individual, NTN is your CNIC number. You have to register on the IRIS website and fill out 181 forms of voluntary income tax filing. See this video for a step-by-step guide on how to fill 181 form.

• Why is NTN Important? Registering for an NTN is the first step toward legal recognition as a taxpayer. Without an NTN, you cannot file taxes, claim tax credits, or even access certain financial services. It ensures you are on the radar of the Federal Board of Revenue (FBR) and helps streamline your tax-related processes.

Step 2: Determine your taxable income:

This includes all the income earned from freelancing work, sites like fiFiverrnd upwork, etc. Consulting fees and royalties. You will also need to keep track of your expenses, such as equipment purchases, office rent, and utility bills, as these can be deducted from your taxable income.

• Tracking Income and Expenses Use a reliable accounting software or hire an accountant to maintain accurate records. Proper documentation of income and expenses not only simplifies tax filing but also helps in claiming deductions effectively.

Step 3: Calculate your taxes:

PSEB Registered

In June 2021, freelancer income in Pakistan was subject to a 100% tax credit under Section 65F up to the tax year 2022. Starting from the tax year 2023 onwards, a 0.25% tax rate applies to freelancer income, provided that certain conditions are met.

• Conditions for 0.25% Tax Rate:
  • Registration with PSEB: The Pakistan Software Export Board (PSEB) is a government body that promotes the IT industry. Registration with PSEB is mandatory to avail of the 0.25% tax rate.Income from IT Services Export: Your income must be derived from the export of IT services, ensuring it contributes to the national economy.Foreign Currency Income: The income must be received in foreign currency, emphasizing the importance of bringing foreign exchange into Pakistan.
  If a freelancer meets all these criteria, they can opt for the flat income tax of 0.25%. The tax authorities apply this tax rate to the freelancer’s total income, regardless of the amount of income.

You can lower your income tax by up to 20% by claiming a tax refund.

FBR Registered

The 1% tax rate is a flat income tax rate that is available to freelancers in Pakistan until June 30, 2026. The tax authorities apply this tax rate to the freelancer’s total income, regardless of the amount of income.

Eligibility for 1% Tax Rate:

• FBR Registration:
  Register with the Federal Board of Revenue (FBR) to avail of the concessional tax rate.

• Freelance Services Income:
  The income must derive from freelance services.

• Foreign Currency Income:
  Ensure the income is in foreign currency to qualify.

Standard Rate

The government of Pakistan introduced a new tax regime for freelancers in 2022. Under the new regime, freelancers must pay income tax on their income at a rate of 5%. However, the first PKR 1.2 million of income is exempt from tax.

The government of Pakistan does not require freelancers to pay income tax if their annual income is below the taxable threshold. The taxable threshold for the year 2023-24 is PKR 1.2 million. However, banks in Pakistan may still collect tax from freelancers if their income is above the taxable threshold.

Banks

Banks in Pakistan must collect tax from their customers on certain types of transactions. These types of transactions include:

• Cash withdrawals of more than PKR 100,000
• Deposits of more than PKR 500,000
• Transactions involving the transfer of money abroad

If a freelancer’s income is above the taxable threshold, their bank may collect tax on the following types of transactions:

• Deposits of income from abroad
• Withdrawals of cash for personal use
• Transfers of money abroad

Comparison of all Three

Tax regime	Tax rate	Eligibility
Standard income tax regime	5% (with an exemption of PKR 1.2 million)	All freelancers
Flat income tax regime	0.25%	Freelancers who are registered with the  PSEB and whose income is derived from the export of IT services in foreign currency
Concessional income tax regime	1%	Freelancers who are registered with the  FBR and whose income is derived from freelance services in foreign currency

Step 4: File your tax return:

After you have calculated your taxes, you will need to file your tax return. You can do this online through the FBR e-portal or by visiting your nearest RTO. When filing your tax return, you will need to provide your NTN, your taxable income, and your tax payment details. Make sure to keep your “admitted income tax” ( CODE: 9203) as low as possible and an unreconciled amount “zero”.

• Online Filing: The FBR e-portal is user-friendly and allows freelancers to file returns from the comfort of their homes. It is advisable to familiarize yourself with the portal and seek assistance if needed.
• Required Documents: Ensure you have all necessary documents ready, including proof of income, receipts for expenses, and any other relevant financial documents.

Tips to Lower Your Tax Bill

1. Claim All Possible Deductions:
   • Business Expenses: Deduct expenses related to your freelancing work, such as office supplies, software, and travel expenses.
   • Health Insurance: Premiums paid for health insurance can be claimed as deductions.
   • Home Office Deduction: If you work from home, you can claim a portion of your home expenses, such as rent and utilities, as business expenses.
2. Utilize Tax Credits:
   • Educational Expenses: Any expenses incurred for skill development or education relevant to your freelancing can be claimed as tax credits.
   • Charitable Donations: Donations to approved charitable organizations can reduce your taxable income.
3. Keep Accurate Records:
   • Maintain Receipts: Always keep receipts and invoices for any business-related expenses. This documentation is crucial for claiming deductions.
   • Regular Bookkeeping: Regularly update your books to ensure all transactions are recorded and categorized correctly.
4. Plan for Retirement:
   • Invest in Retirement Funds: Contributions to retirement funds can be tax-deductible, reducing your taxable income.
5. Seek Professional Help:
   • Hire a Tax Consultant: A tax consultant can provide expert advice and ensure you are taking advantage of all available tax benefits.

Conclusion

Filing income tax as a freelancer in Pakistan may seem daunting, but with the right approach, it can be managed efficiently. By understanding the tax rates applicable to freelancers, keeping accurate records, and utilizing deductions and credits, you can significantly lower your tax bill. Always stay updated with the latest tax regulations and seek professional help if needed. Ensuring timely and accurate tax submissions not only helps in avoiding legal issues but also contributes to the nation’s economic development.