What is Foreign Income and Foreign Remittance Key Difference Explained: This is a very important topic as most people are quite confused about this. Generally, people consider both to be the same, although they are two completely different things.
What is Foreign Income
If you provide services to a foreign client or organization while residing in Pakistan and receive international currency in exchange for it through a bank in Pakistan, this amount will be considered as foreign income.
Important Points:
Overseas earning is not called remittance but it is treated as income as per the taxation laws of the Pakistan.
There are Section 154 and other relevant provisions in the law in this regard.
Tax on Export of Services /Goods:
The tax rate on computer software, IT services or IT-related services is 0.25%, but this facility will be available only to taxpayers who are registered with the Pakistan Software Export Board.
1% of the amount will be applicable on the export of all other services or goods.
This amount will be deducted when the amount is transferred to the taxpayer’s account, and this deduction will be made through money exchange companies.
The same rate is also applicable in the cases of YouTubers and freelancers.
How to adjust Withholding tax on Export?
The amount deducted by the bank or money exchangers itself from your account and deposited with the FBR.
At the end of the year, when you file your return, the amount deducted will be shown on the FBR portal and you can adjust it.
What is Foreign Remittance:
Foreign remittances refer to the money that a person earns while living abroad and later sends back to Pakistan. This money either comes into his own bank account or into the account of his family member. It is important that these remittances are sent only through proper banking channels or licensed money exchange dealers, and not through hundi or other illegal means.
If a person brings international hard currency with him while coming to Pakistan from abroad, and declares it at the airport and converted to local currency through an exchange company, then this amount is also counted as foreign remittances.
What are the Requirements to Considered as Foreign Remittance?
Foreign remittance is not taxed; it is exempt from any taxes. However, it is necessary to provide proof for this, such as bank records or PRC (Persisted Remittance Certificate) etc
Remember! Overseas remittances will always be counted for the person receiving the money, not the person sending it.
Who is the beneficiary of foreign Remittance?
For example, if you transfer money from abroad to your bank account, it will be considered as your remittance. Similarly, if you send this money to the account of your family member like wife, children, brother or father, then the recipient will get the benefit of remittance. For example, if a person transfers Rs. 100,000 to his father’s account, it will be considered as foreign remittance for the father.
If the annual remittance exceeds Rs. 5 million, the FBR may ask for an explanation about the source of income, relationship but still, tax is not levied.
How to declare in Tax Returns?
The foreign Remittance should be declare as inflow in the wealth reconciliation statement as it is not the income of the taxpayer. On the contrary, the use of this money will be declared either as personal expenses or in the acquisition of the any assets investment of assets such as bank deposits. Please note this declaration shall be made by the recipient of the amount.
Since foreign income is considered as income of the taxpayer, it is necessary to declare it in annual return. If tax has already been deducted on it, it will be adjusted, but if no deduction has not been made, the tax due will have to be paid.
Consequences and Caution
If you mistakenly declare income as remittance in your return, you may be subject to penalty and tax, because overseas remittance is completely exempt from any taxes, while overseas earning is subject to tax.
That is why it is important that you understand the difference between the two well. If you ignore the difference, you may have to suffer losses.
Example of wrong declaration:
Let us understand this with an example
Suppose ou provided services from Pakistan and in return you received five million rupees from abroad in the year 2025. And no deducted has been made on this amount. But you mistakenly declared this amount as ” Remittance ” i.e. exempt income so that it is not taxed.
Now the FBR will send you a notice and ask for evidence, such as PRC (Proceed Realisation Certificate) or other documents. If this evidence is not provided, the FBR will include this amount in your “Income from Other Sources” and tax it at the normal rate.
How FBR Calculate Tax Liability
Since this income falls in tax slab number 5, the formula is as follows:
If your taxable income is more than 32,000,000 less than 56,000,000:
Tax = 6,50,000 + 40% (whichever is above 32 lakhs)
Now let’s calculate:
50 lakhs – 32 lakhs = 18 lakhs
40% of 18 lakhs = 7,20,000
Add 6,50,000 to this – Total tax = Rs. 13,70,000 (approx.)
Why FBR Apply Normal Tax Rate:
That is, due to just one wrong declaration, a tax of 1,370,000 can be levied on 5,000,000 whereas in reality only 1% Export of Services Tax was levied on it, i.e. only 50,000. If the taxpayer had initially paid this 50 thousand and declared the income in the correct category, no notice would have come.
Therefore, a small mistake can cause big loss and FBR hassle. Always try to file correct tax returns to avoid unnecessary notices and problems.
What is Foreign Income and Foreign Remittance Key Difference Explained:
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