The Ministry of Information Technology has drafted a new tax proposals for the Federal Board of Revenue (FBR) to apply discounted rate of sales tax on computer hardware and spare parts of IT companies based on the annual volume of exports, extend corporate income tax exemption to companies till 2025 and link sales tax rates with the actual exports.
Sources told Business Recorder that the higher exports of registered companies has been subjected to lower rate of sales tax whereas low exports would be liable to higher rate of sales tax under proposed 10 slabs in the new policy sales tax vis-à-vis exports volume on an annul basis.
The FBR here on Friday received a detailed taxation plan from the Ministry of Information Technology for consideration of Federal Board of Revenue to extend corporate income tax exemption till 2025 and charge of general tax on computer hardware and spare parts at discounted rates.
Sources told Business Recorder that the Pakistan Software Export Board (PSEB), Information Technology (IT) has suggested a number of new tax incentives to the FBR for consideration in the next budget (2015-16). It has been suggested to charge discounted General Sales Tax on computer hardware and spare parts (under PCT Heading 84.71 and 84.73) from IT/ITES Companies registered with Pakistan Software Export Board based on their volume of export revenue reported by the State Bank of Pakistan during previous financial year. On annual export revenue of $50 million, sales tax discount from July 2015 has been proposed to be 10 percent and net sales tax payable would be 7 percent; export revenue $40-$50 million, sales tax discount 9 percent, net sales tax payable 8 percent; export revenue $30-$40 million, sales tax discount 8 percent, net sales tax payable 9 percent; exports $20-30 million, sales tax discount 7 percent, net sales tax payable 10 percent; exports $10-20 million, sales tax discount 6 percent, net sales tax payable 11 percent; exports $5-10 million, sales tax discount 5 percent, net sales tax payable 12 percent; exports $2.5-5 million, sales tax discount 4 percent and net sales tax payable 13 percent; exports $1-2.5 million, sales tax discount 3 percent, net sales tax payable 14 percent, exports $0.5-1 million, sales tax discount 2 percent, net sales tax payable 15 percent and year and on annual export revenue of $0.5 million, sales tax discount from July 2015 has been proposed to be zero percent and net sales tax payable would be 17 percent.
To extend corporate income tax exemption under clause 133 of the Second Schedule of the Income Tax Ordinance, 2001 till 2025 to IT / ITES Companies registered with the Pakistan Software Export Board on their export revenue/income declared with the State Bank of Pakistan. It is suggested that to extend Sales Tax exemption on computer software ((PCT Heading 8523.2990, 8523.4010, 8523.4090, 8523.5990 and 8523.8090) which was previously withdrawn through Finance Act, 2011.
According to the Pakistan Software Export Board (PSEB), Information Technology (IT) is an important emerging sector of Pakistan's economy. This sector has served as a fertile ground for the growth of a new entrepreneurial class with innovative corporate practices and has been instrumental in building Pakistan's soft image & brand equity globally for attracting foreign direct investment (FDI) leading to numerous other associated benefits.
The Pakistan IT industry has played a major role in placing Pakistan on the international map and has successfully built very valuable brand equity for itself in the global markets. The size of Pakistan IT industry has increased manifold over the last decade & Pakistan's IT industry annual export revenue for 2013-14 is estimated at $1.5 billion out of which only one/fourth of the revenue ($370 million) was repatriated back to Pakistan through banking channels as per research report of international IT Consulting Firm, M/s BearingPoint. According to BearingPoint's study, IT companies remit only the cost of their operations in Pakistan and keep the remaining revenue abroad. The annual IT export revenue repatriated back to Pakistan through banking channels as report by the State Bank of Pakistan has shown tremendous growth over the past decade from $32.89 million in 2003-04 to US $370 million in the FY2013-14 and expected to reach $1.0 billion by 2020.According to economic data reported by the State Bank of Pakistan, IT services contributed 7 percent of total export of services during FY14. There are more than 1,000 active IT companies & call centers registered with PSEB.
It said that special subsidies or export incentives are instrumental in stimulating the growth of the IT sector world-wide and have very positive spill over effects for the growth of rest of the economy. The IT sector has emerged as a major global source both for growth and employment and therefore is a key driver of global economic growth. The same structure strongly applies to Pakistan government policies to encourage & promote this most promising sector to nurture its full potential and to make Pakistan the second largest IT exporter in South Asia by 2020.
The Pakistan IT industry organized under very unfavourable conditions. During old times, local markets were absent and government policy towards private enterprise was relatively hostile. It is pertinent to mention here that over the past decade, the vibrant and dynamic policies of the government of Pakistan to grant permission to foreign IT investors for 100% equity ownership & repatriation of capital and dividend, and exemption of tax on IT exports till 2016 among others incentives have resulted in the exponential growth and development of Pakistan's IT industry. Today, Netsol Technologies, Teradata, TRG, MTBC, LMKR, Axact and many others are well known IT companies in the global market for their competencies. Also, presence of IBM, Dell, Intel, CISCO, Microsoft, Oracle, SAP, Mentor Graphics, Bentley and many other international IT companies in Pakistan shows strong confidence of the international players on the competence of the domestic IT companies and encouraging investment policies of the government.
The Ministry of Information Technology (MoIT) and the Pakistan Software Export Board (PSEB), au apex body of the Ministry of IT, has continuously attempted to support all credible public and private sector initiatives aimed at bolstering the IT industry of Pakistan and to attract investment in the IT sector. Ministry of IT& PSEB strongly realises that they have important roles in terms of providing a conducive and enabling environment, thus contributing to the growth of IT industry in Pakistan. PSEB being responsible for facilitation and promotion of Pakistan's IT industry has taken a number of initiatives in this regard. The PSEB's build its economic model/strategic framework to promote domestic IT industry include international marketing/outreach to international business community to unleash Pakistan's IT potential, quality human resource development, financial ecosystem for IT industry, physical and technical infrastructure development, public policies &domestic facilitation to local and international companies.
PSEB believes that a particular industry that has been instrumental in the growth of the Pakistan economy is the IT sector because it has become the backbone of every organisation as well as household. It has entered almost all industry verticals for instance, railways, airways, sea networks, transportation, banking & financial services, health, education, e-commerce, travel & tourism, manufacturing and services etc as information technology plays a vital role in the smooth functioning in these sectors.
The future of Pakistan's IT industry seems very bright because it has exponential potential with more growth predicting achievable export revenue target of US $1.0 billion repatriated through banking channel by 2020, generate thousands of job opportunities for the educated youth and corresponding growth in Foreign Direct Investments. IT sector is also intimately linked to other relevant sectors like biomedical technology, defence and infrastructure, thus the future of the IT sector will directly impact the growth of the nation. It is the services industry which will help boost Pakistan's economy and GDP growth in future.
The corporate income tax exemption under clause 133 of the Second Schedule of the Income Tax Ordinance 2001 to IT companies is going to expire in 2016 and IT companies have informed PSEB that it will adversely impact future IT export revenue & growth besides decline in FDI in IT sector. The withdrawal of exemption on computer hardware and spare parts by Federal Board of Revenue through SRO 1020(1)2006 amended through SRO 590(1)2012, currently charged at an applicable rate of 17 percent, and also withdrawal of sales tax exemption on supply or import of computer software through Finance Act, 2011, has negatively impacted the revenue and growth in IT sector and needs immediate reconsideration of the FBR for the growth and development of IT sector, it suggested.
The PSEB strongly believes that government should continue providing special incentives and tax benefits/exemptions to IT companies to motivate them to remit more of their export revenue through banking channels instead of keeping it abroad, it added.
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