IT industry expresses strong concern over the newly proposed tax rules

IT & IT enabled Service sector has registered record exports growth despite the pandemic, with a 40 percent increase in 2019-2020 and is on track to exceed $2 Billion by the end of this financial year.

Industry’s close engagement with PM office, through IT Task Force and P@SHA, has recently resulted in work on phenomenal initiatives like STZA, reforms at SBP & SECP.

The recent growth pattern, complemented by several supporting initiatives from the PM Office, has attracted significant interest from global investors. Existing Tax incentives (till 2025) have been instrumental in our competitiveness viz-a-viz our traditional competitors like India, Bangladesh, Philippines, and Vietnam.

However, FBR’s approach towards Tax Treatment has been detrimental to the IT sector’s growth as its policies aim solely at raising revenue by all means. Recent news of the withdrawal of Income Tax Exemption on the export of IT services, and replacing with a Tax Credit Scheme, where the tax credit is subject to fulfillment of many conditions such as filing of tax withholding statements and sales tax returns amongst others, will negatively impact IT exports growth trend.

In coming up with these conditions, FBR appears to have ignored the fact that the export of IT services is exempt from sales tax. Therefore, there appears no justification to ask the industry to file sales tax returns. Even otherwise, sales tax on services is a provincial subject and is outside FBR’s domain.

FBR has further required full withholding of income tax on all payments and filing of withholding tax statements, which will open a pandora box of tax inquiries whereby not just the so-called ‘tax credit’ be disallowed for alleged non-compliance with withholding tax regime on the whim of the tax officer, but additional tax demands will be raised for tax not withheld. Not only that, even full compliance with these conditions is not a bar for FBR to carry out its audits.

We further note with worry that exemption available to start-ups for initial three years after registration with PSEB is also proposed to be withdrawn and replaced by the same tax credit scheme. The motive appears to push the nascent start-ups and SMEs to incur additional costs and time for tax compliance alone and would reduce the ease of doing business for 90 percent of this sector.

We are afraid that such abrupt changes in tax policies would not only scare away new entrants/investors but would cause colossal damage to the growth trajectory of existing players. IT sector, unlike traditional export sectors (Textile and others), is the only sector, which never asked for or availed any of the subsidies, rewards, or incentives like reduced Electricity and Gas Tariffs, Cash rebates, and input Sales Tax refunds.

Tax Exemption on IT exports till 2025 is proving to be the only substantial support the IT sector is offered, and replacing it with a complex tax credit regime, filled with additional compliance requirements will negatively impact the IT exports growth trend. Rather than creating problems, we believe that the government departments should facilitate the industry to achieve Pakistan’s Vision 2025 goals.

Pakistan Software Houses Association (P@SHA) is committed to exceeding the Exports growth expectations of the Government and creating hundreds of thousands of additional employment opportunities. The PM’s vision to expand the export base and create jobs can easily be delivered by the IT and ITES industry with the right policy framework and the ease of doing business.

P@SHA urges the Prime Minister to take immediate action, invite industry stakeholders to discuss our concerns, and discourage any such proposals which hamper the industry growth. P@SHA also respectfully requests the concerned authorities to deal with matters relating to IT and ITeS with caution. P@SHA hopes that the matter will be resolved by empowering the sector with growth-boosting policies keeping Pakistan’s interest at the top.