The Information Technology (IT) sector will continue to enjoy the 0.25% income tax facility until June 30, 2026, as it has now been classified as Small and Medium Enterprises (SMEs). However, experts in the IT sector express disappointment with the budget, claiming that the government has failed to meet their demands to further boost the industry.
During the budget speech for the fiscal year 2023-24, Finance Minister Ishaq Dar acknowledged the significant role of the IT and IT Enabled Services (ITeS) sectors in Pakistan’s economic growth. Despite global economic challenges, the minister remains confident in the sector’s potential to drive growth in the coming years.
Although the government claims that Pakistan ranks second globally in terms of freelancers contributing to its business, industry experts highlight the fluctuating nature of this statistic across different platforms and timeframes. Nevertheless, the government recognizes the importance of the IT sector by extending the 0.25% income tax facility until June 30, 2026.
To address challenges faced by freelancers, the government announced exemptions from sales tax registration and filing for freelancers earning up to $24,000 annually. Simplified tax return forms will be provided to create a more favorable business environment.
The budget also includes provisions to support the IT sector, such as allowing tax-free imports of hardware and software equivalent to 1% of their exports. Additionally, a Venture Capital Fund with a budget allocation of Rs5 billion will be established to provide entrepreneurial capital.
While the categorization of the IT sector as Small and Medium Enterprises (SMEs) is expected to benefit from concessional income tax rates, experts note that the industry still faces challenges due to high inflation and market barriers resulting from political instability. The industry believes that more initiatives are necessary to boost the IT sector and address the cost of doing business in Pakistan.
According to Irfan Iqbal Sheikh, President of FPCCI, the IT industry in Pakistan is rapidly growing, with its share in exports also increasing. The sector’s inclusion as SMEs in the budget is expected to drive IT development and boost exports. Nasheed Malik, an ICT analyst from Topline, stated, “The budget is overall positive for the IT sector because there were speculations about the government imposing income tax on IT exports in line with local sales. However, the government maintained the 0.25% tax rate, which is a relief for IT exporters.”
The government’s commitment to incentivizing the technology sector reflects its potential to contribute to the country’s economy through increased export earnings, according to Waqas Ghani Kukaswadia, an ICT analyst from JS Global.
The previous government, led by Shahid Khaqan Abbasi, had granted a 100% tax exemption, which was later revoked by the current government. The IT industry emphasizes the need for long-term policies with consistency and execution to support the industry, as uncertainties remain regarding the government’s commitments, according to the P@SHA chairman.
IT and ITeS providers have requested permission to maintain 100% foreign currency accounts and transfer dollars abroad. This is crucial as they often travel overseas to meet clients, requiring dollars for marketing, branding, and product exhibitions. Allowing IT exporters to retain 100% of their funds in foreign currency accounts would ultimately benefit the country, as businesses tend to invest where they can retain their funds, emphasized Khan.
Export declines in the IT sector can be attributed to government policies and a lack of understanding of the dynamics of the IT export market among decision-makers. To revitalize the country’s economy, the government must support the IT sector and leverage its vast potential.
Published in PakWeb, June 9th, 2023.
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