We need to strengthen local IT companies and help them better market their products and services abroad to earn foreign exchange
In the aftermath of Covid-19 outbreak and lockdown, now being gradually relaxed in Pakistan, the debate about untapped potential of information technology (IT) sector has garnered fresh significance. An increase in export of information technology (IT) and IT-enabled services (ITeS) could have earned us much needed foreign exchange in these testing times besides providing work-from-home jobs for millions of workers.
This sector of economy has great potential for the local market as well as cross-border businesses. IT sector growth and exports are important to strengthen economy, ensure digitisation of government departments, attracting investment, promotion of infant industries and generation of attractive job opportunities for the youth. It is a highly neglected sector despite tall claims by the federal and provincial governments.
Let us analyse the pre-Covid-19 position of the country’s IT and ITeS exports. According to a report, export remittances surged to “$901.486 million at a growth rate of 23.94 percent during the first nine months (July-March) of fiscal year 2019-20 compared to $727.353 million during the same period last year”—for details visit https://www.pasha.org.pk/knowledge-center/industry-reports/reporting-of-it-exports/.
The development is encouraging, but does this represent the true potential of a country of 220 million people requiring 2 million new jobs every year for its teeming youth who make up 65 percent of the population?
In an article, titled IT For Economic Growth, (The News, February 19), Dr Atta-ur-Rahman had aptly observed that “Pakistan’s IT exports have underperformed by a factor of at least 20, standing at only $1 billion whereas Indian IT exports are over $130 billion and those of the Philippines $26 billion. Artificial intelligence alone has been predicted by McKinsey Global to have a market of $14 trillion by 2025”.
An incentive package has been announced by the Ministry of Information Technology and Telecommunication [MoITT] for the promotion of IT sector, aiming at increasing exports from the current level of around $1 billion to $10 billion by 2023. This package was prepared “after a thorough analysis of other important IT destinations of the region like Philippines, China, Bangladesh and India”, the MOITT says. Special Technology Zones are to be set up under the policy to promote IT/ITeS exports for which an allocation of Rs 6.5 billion in the forthcoming budget has been proposed by the ministry to the Planning Commission.
It is absolutely necessary under the circumstances to address the following issues on an urgent basis to revive the economy and make IT industry a catalyst for growth:
The registered segment of IT Industry employs about 125,000 people (in private sector). Payroll makes up over 70 percent of the input cost. Given an imminent global and domestic slow down, payments are delayed and forecasts are uncertain. Contracts are being cancelled or deferred. Many companies have started lay-offs in order to manage their cash-flows and prevent losses. An immediate relief package consisting of 25 percent of the monthly payroll is recommended to prevent lay-offs and keep the companies afloat for a few months.
It is suggested that IT Companies be exempted from payment of withholding tax (WHT) and general sales tax (GST) on utilities and internet, at least till December 2020.
It is suggested that these companies be exempted from paying WHT on both goods and services.
It is suggested that as GST collecting agents the companies be provided some relief. Currently, the customer invoice processing period of 60 days exceeds the GST due date.
It is suggested that there is a need to provide running finance and leases at 0 percent KIBOR available for current borrowing/leases as well as new borrowings at 0 percent KIBOR rates with a limit of up to 20 percent of the average annual revenue of the last 3 years. This is because the companies need additional borrowing in order to service existing borrowings and fresh borrowings for operations.
It is suggested that immediate payment of past years tax refunds by the Federal Board of Revenue (FBR) and disposal of pending cases, except where there are established gross contraventions, will help.
The IT industry has stressed that the State Bank of Pakistan should relax the FE 25 circular of 1998 to facilitate the IT and ITeS exporters to allow easier foreign exchange movement into Pakistan.
According to a report September 24, 2018 report , “the Khyber Pakhtunkhwa government has enhanced efforts to boost the volume of information technology exports to $10 billion over the next five years, as per Prime Minister Imran Khan’s vision”.
In 2020, the official figures do not show the kind of progress. In fiscal year 2018, our IT and ITeS exports have reached $1,065 million according to State Bank of Pakistan. It has been agued that “the actual IT exports were closer to $5 billion.” The justification offered is that the SBP figures do not include various sectors like financial services, automobiles, and healthcare”.
IT exports rose 13.4 percent to $1.06 billion in fiscal year 2018 from $939 million in fiscal year 2017. About $320 million of IT exports revenue in fiscal 2018 came from software exports while the rest was made up of services such as consulting, telecom and call centres. The growth had been more robust in the previous year (19.1 percent, from $789 million in 2016 to $939 million in 2017).
Currently Pakistan has zero income tax on IT & ITeS exports. For PSEB-registered IT start-ups, 100 percent foreign ownership of IT & ITeS companies is permitted. 100 percent repatriation of profits to foreign IT & ITeS investors and tax holiday for venture capital funds are available till 2024. Despite these incentives, the IT sector has developed into an engine of growth for neither domestic sector nor for exports.
Complaints against the tax system are:
The internet service providers are required under Section 236 of the Income Tax Ordinance, 2001, to collect 12.5 percent advance tax. The 100 percent export-oriented IT entities are not subject to income tax. However, they are subject to withholding tax and getting a waiver from the Commissioner of Inland Revenue (CIR) is an uphill task. Those doing business locally are subject to 10 percent withholding tax which is also the minimum tax. If total taxable income attracts higher rate it has to be paid.
According to Pakistan Telecommunication Authority (PTA) data, the total number of cellular subscribers as on December 31, 2019 was 165 million (78.2 percent teledensity), out of which 76 million are 3G/4G subscribers (35.9 percent penetration), 3 million basic telephony users (1.1 teledensity) and 78 million broadband subscribers (36.9 penetration). All these are subject to withholding tax and according to FBR Year Book 2018-19, total collection during fiscal year 2018-19 was only Rs 17.19 billion [for 10 months, collection was suspended by an order of Supreme Court of Pakistan following a suo mutu hearing]. In 2017-18 it was Rs 47.38 billion. The data for the current year is not available.
On the one hand, we want to promote the IT sector and on the other it is most heavily taxed. After vacation of stay by Supreme Court on April 24, 2019 in Human Rights Case (HRC No. 18877/2018, 95 million unique mobile users [total subscribers are over 165 million but many have multiple and/or dormant SIMs] are paying 12.5 percent advance income tax. 19.5 percent sales tax on services is paid to the provinces, for users in Islamabad Capital Territory there is a 17 percent federal excise duty and a 10 percent service/maintenance charge. According to PTA, during the period of stay [June 11, 2018 to April 23, 2019] by Supreme Court, Rs 90 billion tax was not collected by mobile companies.
The MOITT must take into account the fact that heavy taxation of the telecommunication sector is one of the main impediments to the growth of IT sector.
In the background of challenges faced by international community due to shrinking of global economy in the wake of Covid-19, we need to concentrate on economies of scale and provide competitive rates for various IT related services to capture the vacuum caused by the closure of many enterprises in this field in the rest of the world. This is only possible if we reduce the cost of doing business.
The governments and the SBP need to support the businesses to prevent lay-offs. There is an urgent need to encourage the Small and Medium Enterprises (SMEs) engaged in IT/ITeS businesses, especially exporters, by providing low-rate finance, reduction in tax rates and all possible facilitations, incentives and opportunities in the budget. In the federal and provincial budgets, substantial allocations should be made for promoting IT sector, especially IT/ITeS exports.
The second challenge is to move towards knowledge-based economy. For this the existing disconnection between educational institutions and businesses must end. The business houses must concentrate on human resource development and fund IT departments of universities and vocational institutes.
The PSEB must organise more and more Commercial Counselor Training sessions in the coming days through video linkages to apprise them about the facts and potential of Pakistan’s IT industry in order to solicit their efforts for projecting Pakistan’s IT industry as viable and feasible outsourcing destination in key international markets. We need to have a central portal where all the IT products and companies are listed.
These are some measures we need to take to strengthen local IT companies.