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Taxing Pakistan's IT Sector

Updated 31 Mar, 2021 02:19pm
What the withdrawal of the income tax exemption from IT/IT enabled services means.

To meet the requirements of the revival of a $6 billion International Monetary Fund (IMF) program, Prime Minister Imran Khan approved the withdrawal of around 80 income tax exemptions earlier this month under the Income Tax Amendment Bill 2021. The IMF has asked Pakistan to withdraw income tax exemptions worth Rs 140 billion. One of the industries impacted by this withdrawal is the IT and IT enabled services sector.

While it is thought that the revenue impact may be nominal as the exemption is being converted to a 100% tax credit, the IT industry has shown strong concerns regarding the many conditions that the tax credit is subject to. The tax credit regime will allow documentation of software export; IT and IT enabled services revenue as availing a tax credit requires filing of tax withholding statements and sales tax returns. The withdrawal of tax exemption and the conversion to a tax credit regime is applicable on exports of computer software or IT services or IT enabled services, up to the period ending June 30, 2025. The IT industry has been showing an impressive growth pattern – 40% in FY 2019-2020 – and is expected to exceed $2 billion by the end of this financial year.

However, participants of this sector believe that this growth trajectory was a result of several supporting government initiatives including the existing tax incentives. The sector’s growth attracted global investors and improved Pakistan’s competitiveness in the industry. Withdrawing these support mechanisms and replacing them with tax credit programs can negatively affect this growth trajectory and scare away investors as well as new entrants from this industry.

The additional compliance requirements of the tax credit regime are likely to affect the growth trajectory of the industry negatively and industry experts believe that the IT sector, unlike expert export sectors such as textiles, still needs government support for growth. The IT sector representatives feel that the sector is entitled to continued tax exemption support from the government because, unlike other industries, it has never availed any subsidies such as reduced electricity and gas tariffs, cash rebates, and sales tax refunds.

The inconsistency in tax policy is being cited by many as a damaging factor for investor confidence. While Pakistani freelancers have just recently started earning well and developing a strong reputation on international platforms, the decision to withdraw tax exemptions will discourage individuals and companies from rendering their services abroad or marketing their intellectual properties to foreign clients.

The leading payment gateway for IT enabled service providers and freelancers in the field, Payoneer has also become a target after it was revealed that the company paid an amount of Rs 60 billion to 70,000 Pakistani citizens without paying taxes over the last few years. The company responded to these investigations by reminding its customers and the Pakistani government that it is each individual business’ responsibility to report its income to local tax authorities, and while the company is devoted to providing a good level of service with security at a low cost, it is not Payoneer’s responsibility to report incomes earned from export of goods or services to local governments. The freelance community of Pakistan is showing concern given the latest tax reforms and is desperately in need of a policy for well-regulated payment gateways.

The Prime Minister’s objective in the implementation of tax reforms under the current bill is plugging existing loopholes in the system, reducing discretionary powers of tax collectors, making the tax code simple and introducing automation to make the revenue system transparent. While these are important objectives for the tax branch of the country, the unintended impacts on IT service providers and the export revenue generated by this sector also need to be considered. The P@SHA (Pakistan Software Houses Association) is urging the government to take into account the concerns of the IT and ITeS sector and devise the right policy framework to facilitate ease of doing business. The IT sector is confident that given right regulatory framework, it can exceed the Prime Minister’s export growth expectations and create additional employment opportunities.

Sadia Kamran is a freelance writer.