Feared Dip in IT/ITES Exports due to the Removal of Tax exemption

In a recent webinar as part of the “Candid with P@SHA” series held by Pakistan Software houses Association for IT & ITeS (P@SHA) on “Impact of Tax Credit System on the IT Sector” (see summary HERE and video HERE), the panelists deliberated over the sudden policy change by the government on Income Tax Exemptions. The notable webinar panelists included Naseer Akhtar, CEO InfoTech, Sadia Nazeer from KPMG, and Sharif ud din Khilji from Khilji and CO.

The panelists expressed strong concern on the point that  increased requirements from this ordinance will result in higher compliance costs for startups, MSMEs & small IT/ITeS exporters with increased harassment by FBR commissioners. The panelists noted that many export-oriented companies which also have offices in other countries will refrain from sending any additional export remittance to Pakistan and will only send payroll expenses here due to fear of tax credit removal during the FBR audit process.

This sudden change in the policy based on the demands of the International Monetary Fund (IMF) is going to have adverse effects on the growth and rising exports of the IT Sector. Such inconsistencies in the policies send out a discouraging  message to enterprises and investors looking to enter into Pakistan. This decision has shown investors that any policy benefit to any sector can be reversed anytime without consulting the relevant sector.

IT & ITeS is currently the fastest growing sector of Pakistan with more than 40% growth as compared to last year. The sector has been able to do that without any substantial incentives offered by the government such as cashback on exports, subsidized electricity tariffs, loans on lower interest rates, etc. which have been offered to other sectors over the past several decades. According to the estimates, the average yield of a worker in traditional industries is around $600 per annum whereas the average yield of a knowledge-worker in the IT/ITES industry is more than $20,000 per annum. 

While other regional countries offer incentives to their IT sectors – Bangladesh offers 10% cash reward on the IT/ITeS exports despite the tax exemption, China and India have Special Economic Zones dedicated where numerous incentives and including tax reliefs are already available for the IT and ITeS sector for the past many years –  the Government of Pakistan, instead of incentivizing the rising sector, has taken back the only relief it had available.

It is high time for the Government to realize that the IT sector is going to be the only sector that can resolve the issue of balance of trade, create employment for the huge population, and transform Pakistan into a knowledge economy. It is the only sector that can rescue the country from further IMF programs with its potential for multifold export growth. If conducive policies will not be introduced and incentives will not be offered, the exports will only grow at a very slow pace and a large number of sums will be parked outside of Pakistan.