“Not a single demand of the IT industry met in budget”
Pakistan Software Houses Association (P@SHA) for IT and ITeS representing over 1,000 member companies has strongly disapproved the budget for fiscal year 2022-2023, saying that “not a single demand of the IT industry has been met in this budget.”
Despite Prime Minister Shehbaz Sharif’s remarks to target USD 15 billion in IT and IT-enabled services exports, the announced budget not only abandons but decimates the industry’s ability to deliver on this target, the organization said in its statement.
Chairman of P@SHA Badar Khushnood said that “Rather than facilitating the IT industry with more and better incentives to catalyze the existing organic growth, the previously announced one and the only benefit, i.e. ‘tax exemption’ committed till 2025 has been abruptly reneged and revoked” which he termed a “recipe for disaster for a nascent yet fastest growing exports-led sector!”
“The currently implemented regressive taxation regime has already proven disastrous to the IT industry’s growth. This year’s targeted exports of USD 3.5 billion are also not being achieved due to the introduction of an inefficient tax regime.”
In 2021, the IT industry crossed exports of over USD 2.1 billion.
The P@SHA chairman noted that the IT industry was Pakistan’s only export industry with a 75% trade surplus since the key raw material for IT exports is ‘skilled human talent’ which is already available in the country so there is no need for any imports to grow IT services exports.
“Supporting the livelihoods of 600,000 professionals & freelancers and over 10,000 companies, the IT industry has proven to be the fastest-growing industry in Pakistan. It has demonstrated the potential to address the current account deficit with a strong, self-reliant, and sustainable financial future for Pakistan.”
According to 2022, the IT industry is expected to become the 2nd largest export sector crossing all traditional sectors with the 1st position maintained by the textile industry.
“The IT industry’s outstanding performance has been met with a resounding and callous attack on its survival in the form of an anti-IT budget. It has called into question the future of Pakistan’s digital i.e. IT, ITeS, startups, freelancers, and the e-commerce industry.”
The organization underlined that “rather than ensuring ‘continuity of policy, the budget draft has not only spread a wave of uncertainty and disappointment in the IT industry but has also created doubts about the government’s understanding and political will to support the only sector that has the potential to solve Pakistan’s economic crisis in the shortest possible time with the least amount of resource requirements.”
P@SHA which has been working very closely with the Federal Ministry of Information Technology and Telecommunications (MoITT) and the Pakistan Software Export Board (PSEB) said that despite commendable support from the IT ministry team, the budget draft by the Finance Ministry failed to reflect the positive outcomes of this exemplary public-private sector collaboration.
P@SHA recommendations
In its ‘Budget Recommendations for IT/ITeS Industry’ report 2022, P@SHA suggested these policy actions for IT and ITeS, BPO, startups, freelancers and e-commerce.
For IT/ITes/BPO/Startups
- Reverse Tax Credit Regime and immediately reinstate Income Tax Exemption for IT and ITeS companies till 2025
- Allow at least 50% of the export remittances to be remitted out by IT & ITeS services registered with PSEB
- Flat 5% Cash Reward on IT/ITeS exports, instead of a growth-based strategy
- Increase IT graduates to 100,000 annually
- Allocate PKR 10 billion for skill development initiatives
- Develop a 5-year roadmap of skill development initiatives
- Create industry-approved curriculum
- Create public-private training institute for reskilling and upskilling
- Industry-driven training programs
- Incentivize job creation
- Enable STZA for the existing IT and IT-enabled services industry. Steps should be taken to enable the IT industry to become part of the STZ initiative within the next six months. Proper representation of the IT and ITeS industry should be ensured for the STZ initiative.
- Allow “Resident” Freelancers and IT/ITeS Exporters to park/hold their foreign income/savings in RDA/NPC for shorter tenures (3~12 months) without any additional local procedure (e.g. tax declaration).
- Special Export Refinance Scheme for IT/ITeS Exporters with collateral-free and lower than market interest rate (2-3%). Introduce dedicated financing windows (e.g., the SME Financing Facility)
- Zero duties and sales tax on laptop and other IT equipment
- Allocate PKR 5 billion on branding and market development, and promote #BrandPakistan as #TechDestination
- Promote Make-in-Pakistan and foster local innovation:
- A special federal-provincial joint taskforce should be formed with private-sector representation (P@SHA), and all government departments (incl. law enforcement agencies) should request procurement of software to that committee. Committee decides if a local product can be used or should it be imported.
- Amend PPRA rules to add quota for local products/SME
- Funds should be allocated to develop commonly used local products in Pakistan (e.g. Zoom, secure OS, etc.) to ensure savings on the foreign exchange and develop product-based industry
- In terms of export facilitation scheme, the companies should be provided with refund on sales taxon internet/electricity/gas/ services utilized as input goods for manufacture of outputs to be exported.
- Across the provinces and federal units, tax harmonization should be encouraged. Ideally, taxes on the domestic services should be reduced to 5% with adjustment
Incentivize Diversity and Inclusion in the IT and ITeS industry. At least 20% of women in government institutions related to the IT industry and offices. Offer tax breaks to IT and ITeS companies with more than 20% women workforce.
Startups & VCs
- Exempt Capital Gains Tax on Venture Capital Funding into startups to zero percent (currently 29%) for the next 5 year
- Allow all Pakistanis who set up global companies in the last 3 years to register them with SBP under the scope of holding company law
- Allow startups to have dollar accounts and keep the remitted amount in them.
- When the founders sell shares or when the employees sell options, put a flat tax rate of 5% to incentivize them to bring cash back
- Improve access-to-finance:
- Collaborate with commercial banks to facilitate the framework for startups to secure funds
- Public funded VC for seed funding
To build an organized startup ecosystem in Pakistan, R&D must be incentivized. This is a support policy practiced throughout the IT economies. Such policies encourage innovation and entrepreneurship and supports entrepreneurship through guidance, mentorship, and support.
Rules and regulations related to bankruptcy need to be revised
Freelancers
- Eliminate 1% tax on freelancers’ remittances altogether for filers
- Include freelancers in the standard definitions for IT and ITeS industry
- Allow foreign currency account retention limit in FCY account to USD 100,000/- for
- freelancers registered with PSEB. The current 35% USD retention is available to IT exporting companies only
- Enable access for freelancers to financial services such as bank accounts, credit cards, home financing, car financing, personal loans, health insurance, etc
- Like Pakistan Remittance Initiative, offer freelancers rewards against the remittances they bring into the country. Extend Cash Reward to cover freelancers as well
- Provide a legal business structure similar to American LLCs that offers limited liability while being a pass-through entity for taxation purposes
- Ensure availability of reliable broadband and electricity in tier 2 & tier 3 cities. If it isn’t possible to provide it to each household, coworking spaces should be set up in these cities where local freelancers can come work without having to worry about internet connection issues and power outages.
Animations, Graphics & Games
- Allow 100% limit of utilizing export revenue to spend on game advertising with Google, Facebook, Android and other vendors.
- Allocate USD 5 Million fund for creating Centers of Excellence in major cities
- Create a USD 10 Million media fund to accelerate the export revenue of Pakistani Games and Content. Opening a massive new export stream.
- Allow import of dedicated hardware at 0% duty to allow exports to grow unrestricted.
E-commerce
- Remove the “Sales Tax Withholding” legislation introduced in FY2021 and replace it with a reporting/documentatoon mechanism whereby every marketplace provides
- merchants information and their sales data to FBR, via an automated manner only (manual mechanism would be cumbersome and error-prone). Also, apply this tax on third-party logistics (3PL) service providers for ‘Cash-on Delivery (CoD) sales.
- Introduce a cash rebate against MDR charges applicable on digital mode of
payment whereby the transaction cost for the merchant/supplier is reduced for a period of Ministry of Commerce. A flat 50% cash rebate on MDR paid by merchant during the year. A 100% cash rebate on YoY increase in MDR paid by merchant (to incentivize growth in digital payments) - The General Sales Tax (GST) regime with reduced tax rate of 5% (instead of 17%) for a period of 5 years is proposed, to increase documentation of online and offline retail transactoons, with the proviso that payments are made digitally, in line with measures taken by Punjab Revenue Authority.
- For e-commerce merchants and their suppliers, the advance/withholding tax (income tax) rate, e.g. 4/4.5% on goods and 3/8/10% on services, should be eliminated for payments made through digital mode, on a permanent basis.
- Advance/withholding tax rate for non-digital payments is proposed to be reduced to the same rate as Minimum Tax (on turnover), i.e. 0.25% across the board for 5 years. If necessary, the withholding tax rate for payments to non-filer may be 1% at the maximum, for a period of 5 years.
- Online Marketplace/platorm commission payments are subject to income tax withholding at the reduced rate of 5 percent.
- To encourage third-party logisticc enties to ensure full reporting and remain competive, the withholding tax rate of payments by the merchants should be removed, or at the very least, reduced from 3% to 1% (as of print media and ads) for a period of 5 years.
- In case of genuine business losses of more than 3 years all advance income taxes may be eliminated which otherwise further increase business loss.
- Minimum tax regime should be eliminated for all registered e-commerce related entities that conduct transactions on behalf of merchants and service providers for a period of 5 years.
- Final income tax on E-Commerce Exports, IT Exports and Freelancers should be ZERO instead of 1% to boost growth of the sector, for a period of 5 years. This proposal has already been vetted and approved by GoP, however official notification and implementation is awaited.
- Excess sales revenues on top of export value of goods should also be permitted and subject to @ 0.5% Final tax to incentivize maximum inflows of E-commerce revenues against net sales on International Online Marketplaces such as Amazon, Walmart, eBay, Etsy, etc. for a period of 5 years.