Wednesday, April 24, 2024

IT industry expresses strong concern over proposed tax credit scheme and taking away tax exemptions for IT & ITES industry

IT & IT enabled Service sector has given record exports growth despite the
pandemic with 40% 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 into announcement and work on phenomenal initiatives like STZA, reforms at SBP & SECP.

With recent growth pattern complimented by several supporting initiatives from PM office has triggered a phenomenal interest from global investors towards Pakistan. Existing Tax incentives (till 2025) has 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 growth of IT Sector as its policies aim solely at raising revenue by all means. Recent news of withdrawal of Income Tax Exemption on export of IT services, and replacing with a Tax Credit Scheme where the tax credit is subject to fulfilment 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 export of IT services is exempt from sales tax, and hence 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worry that exemption available to start-ups for initial 3 years after registration with PSEB is also proposed to be withdrawn and replaced by the same tax credit scheme.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 will reduce the ease of doing business for 90% of this sector.

We are afraid that such abrupt changes in tax policies will not only scare away new entrants/investors but will 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 & Gas Tariff, Cash rebates, and input Sales Tax refunds. Tax Exemption on IT exports till 2025 is proving to be only substantial support IT sector is offered and replacing it with a complex tax credit regime laden 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 exceed Exports growth expectations of 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.

Syed Ali Abbas
Syed Ali Abbas
General Manager at Startup Pakistan

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