The IT sector was among the sectors that received some relief measures in the Budget. According to the finance minister, a vital component of the Federal Budget 2023-24 is the promotion of Information technology (IT) and IT-enabled service (ITeS) exports, and the government was counting it among critical drivers for growth – for which it has also proposed the sector to be brought under SMEs definition. Getting it under the SME status means lower tax rates and exemptions that will incentivize new startups as well as medium-scale ventures. And since part of the SMEs classification, more IT companies will also benefit from the recommendation that the government would bear 20 percent credit risk of SME lending.
Regarding taxation, the IT sector will continue to enjoy existing concessionary tax rates till 2026. The Budget proposes the extension of a concessionary fixed tax rate of 0.25 percent for IT & ITeS exports for Tax years 2024, 2025, and 2026. At the same time, the Budget has also proposed to do away with the standard rate of 39 percent and set a concessionary tax rate of 20 percent on banks’ income from additional advances to the IT & ITeS sector, which will incentivize the banking sector to lend to the IT sector.
Other than that, on the exports side, the government has proposed in the Budget an exemption of sales tax on the import of IT equipment by exporters of IT and ITeS registered with the Pakistan Software Export Board (PSEB). These include all IT equipment for all segments of the IT sector, including hardware and software. And they are allowed to import IT-related equipment equivalent to one percent of their export revenue with a cap of $50,000, which is another positive for the IT companies. The Budget has also removed the Removal of regulatory duty on IT-related equipment. And there is also a one percent decrease proposed in the tax rate on IT-based system development consultants from 16 percent to 15 percent.
Besides the relief measures, some streamlining efforts include the withdrawal of the Sales Tax return filing requirement to avail concessionary tax rate of 0.2 percent for IT & ITeS exports, which means that the IT exporters will not have to register with the Pakistan Software Export Board (PSEB) and file sales tax returns, annual tax returns and withholding tax (as done previously) to avail the concessionary rate of tax. Similarly, granting the cottage industry status to the freelance exporter of IT and IT-enabled services earning up to $24,000 annually will not be required to file a sale tax return. The Budget announced that the automated tax exemption certificate would be introduced for payment to a non-resident person, expediting the processes.
Overall, the Budget proposals are favorable for the IT sector. However, the approval of these proposals and their fate with only a couple of months remaining for the current government will only be evident in the coming months.**
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