KARACHI: The Karachi Tax Bar Association (KTBA) has requested the Federal Board of Revenue (FBR) to retrain financial institutions on not collecting withhold-tax from exporters of software/IT-enabled services under section 154A of the Ordinance.

The KTBA stated in a letter to the FBR that banks’ interpretation of “Section 154A – Export of Services” (inserted in the Income Tax Ordinance 2001 by Finance Act, 2021) with regard to withholding/collection of export earnings from computer software and IT-enabled Services has been incorrect.

It stated that the exemption available to exporters of computer software and other IT-enabled services under clause (133) Part I of the Second Schedule to the Income Tax Ordinance, 2001 was replaced (subject to certain conditions) by a one-hundred percent tax credit under Section 65F, which was inserted provisionally via the Tax Laws (Second Amendment) Ordinance, 2021 and definitively in the Finance Act, 2021.

The letter continued, “It is thus safe for a taxpayer to claim tax credit indigenously, subject to compliance with the restrictions set forth in sub-section (2) of Section 65F ibid, without seeking a formal exemption from the concerned Commissioner of Inland Revenue.”

Furthermore, it stated that financial institutions that facilitate export proceeds have begun deducting tax on export proceeds of computer software/other IT-enabled services under the newly introduced Section 154A of the Income Tax Ordinance, 2001 (Ordinance), despite the fact that such exporters were entitled to a 100% tax credit under Section 65F of the Ordinance.

Alternatively, some banks have imposed a requirement for a Commissioner Inland Revenue exemption certificate on the basis of section 159 read with section 154A of the ordinance.

The KTBA believes that, rather than enforcing the requirement of an exemption certificate under section 159 read with section 154A of the ordinance, the FBR will issue instructions to banks not to collect withholding tax under section 154A of the ordinance from exporters of software/IT-enabled services on the condition that such taxpayers provide registration from PSEB/P@SHA along with a copy of their exemption certificate.