FBR empowered to conduct tax audit of IT firms

KARACHI: The government has empowered the Federal Board of Revenue (FBR) to conduct audits of exporters of information technology and IT-enabled services, officials said on Friday.

They said through the Tax Laws (Second Amendment) Ordinance, 2021 the tax authorities had been empowered to conduct income tax audits of firms engaged in exports of IT and IT enabled services.

FBR officials said through the latest ordinance, which was promulgated on March 25 through a presidential order, the tax exemption available to IT services had been withdrawn.

However, the IT firms have been granted a tax credit equal to 100 percent on their exports and other services.

The sources said under exemption the tax authorities had no power to conduct examination of income.

The income tax exemption on export of computer software or IT services or IT enabled services was granted through Finance Act 2003 under Clause 133, Second Schedule of Income Tax Ordinance, 2001 and was allowed till 2016. Through various amendments this exemption was extended till June 30, 2025.

Through Tax Laws (Second Amendment) Ordinance, 2021, the clause 133 of Second Schedule to the Income Tax Ordinance, 2001 has been deleted which means no tax exemption is available to IT exports.

The sources said FBR allowed tax exemption under clause 133 of Second Schedule to Income Tax Ordinance, 2001 to the tune of Rs1.24 billion during tax year 2020. However, a new Section 65F has been introduced to allow 100 percent tax credit to persons deriving income from exports of computer software or IT services or IT enabled services up to the period ending on June 30, 2025.

The tax credit is available on a condition 80 percent of the export proceeds have been brought back into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels.

The sources said in order to avail 100 percent tax credit under Section 65F of the Ordinance, the IT firms are required to make compliance of different provisions, including return has been filed, tax required to be deducted or collected has been deducted or collected and paid,

withholding tax statements for the immediately preceding tax year have been filed and sales tax returns for the tax periods corresponding to relevant tax year have been filed. Further, the sources said the FBR and its tax offices have been given powers to conduct an audit of the IT firms under Section 177 and Section 214C of the Income Tax Ordinance, 2001.