Budget 2023-24: incentives fail to entice stakeholders in IT sector

The government on Friday made a bunch of announcements for the IT and IT-enabled services (ITeS) sectors in budget 2023-24.

The most important point was the continuation of the concessionary fixed tax rate of 0.25% for IT exports in tax years 2024, 2025 and 2026.

“IT and ITeS will prove to be engines of growth,” said Finance Minister Ishaq Dar during his budget speech. “Our freelancers are ranked second best in the world.”

IT and ITeS companies can import required hardware and software amounting to 1% of the exports without any additional tax. However, the amount of relief is capped at $50,000 annually.

The condition of filing of sales tax returns for IT and ITeS freelance exporters earning up to $24,000 per year has been relaxed.

Automatic issuance of exemption certification of tax credit for startups was also announced.

In the budget, IT and ITeS companies received the status of small and medium enterprises (SMEs). This means that the IT sector will enjoy full benefits that SME sector receives.

Meanwhile, a venture capital fund of Rs5 billion has also been introduced for startups while regulatory duty on IT related equipment has been removed.

The government also exempted sales tax on import of IT equipment by exporters of IT and ITeS registered with Pakistan Software Export Board.

In addition, tax rate on IT based system development consultants is expected to be reduced to 15% from 16%.

Concessionary tax rate of 20% is allowed to banks on their income from additional advances to the IT and ITeS sector instead of the standard rate of 39%.

However, P@SHA Chairman Muhammad Zohaib Khan said these measures are not enough to improve IT exports by a significant margin.

Khan said that the most important thing the sector wants is sustainability in policies.

“We were previously given a tax holiday till 2025, however, we were then brought under the tax net. It doesn’t give a good impression to the investors and clients and we lose their trust,” said Khan. “There should be a consistent 10-12 year long policy and nobody should change it.”

P@SHA is Pakistan’s trade body representing the IT and ITeS sector. Khan said the ease of doing business must be increased for the IT sector.

“The sector should also be allowed to retain 100% dollars it receives against services for foreign clients in their accounts. It should also be permitted to move 50% of that amount abroad for payments as well as for exhibitions,” he added.

“The IT industry wants legally-covered consistency in fiscal, financial, taxation, exports, HR and infrastructure policies for a period of 10-15 years,” he said.

Only then can Pakistan attract FDI and long-term private-sector investments in the IT industry along with spike in exports rapidly, he said.

The official underlined that IT industry wanted nothing less than guarantee of the consistency, continuity, implementation and reliability of IT-focused policies.

“There have been multiple IT policies and incentives packages for the IT industry over the last decade however, with the change of the government, these policies and packages become redundant,” he said.

He regretted that an IT policy and incentives package was announced in the March 2022 but the measures were made redundant by the federal government in April 2022.

P@SHA chairman said that the industry wanted a tax holiday for IT and ITeS industry in income tax, tax on dividends, capital gains and profits for 10 years similar to what was available to IT firms in many other countries.

Khan said that the IT industry appreciated the idea of special technology zones (STZs).

“Special Technology Zones Authority (STZA), however, has not been able to deliver on its promises, despite being established for many years now and given funds in billions of rupees so far,” he said.

“Therefore, P@SHA advocates that benefits meant for STZs should directly go to IT and ITeS companies to effectively and efficiently help the exporters directly,” he said.