Tax breaks for the IT export sector are crucial for growth
Pakistani industrialists once had an obsession with the physical. The focus was on traditional industries. Nowadays, however, innovation is central to the rapid development of any country. The rise of artificial intelligence, machine learning and IOTs has been described as the fourth industrial revolution. Governments in Pakistan too have recognised its importance and come up with policies to facilitate the IT sector.
The Punjab IT Policy, chalked out in 2018, had a huge impact on the industry. The policy aimed at creating a conducive environment for access to IT services and their adoption. It proposed tax cuts to facilitate entrepreneurs, freelancers and startups. In particular, it advocated tax breaks for IT exports. A policy of 100 percent tax and foreign exchange exemptions was announced for both IT companies and freelancers this year. This raised hopes in the IT sector. However, a 0.25 percent tax has since been imposed through banks on all fund inflows through the Finance Bill 2022. This has raised alarm in the IT and IT-enabled service providers who had started taking the exemption for granted. The action can hamper the growth of IT industry and the earning potential of the freelancers.
According to the Punjab IT policy paper, Pakistan earned $560 million from IT and IT-based exports during the fiscal year 2015-16. It said that “this figure could be as high as $2.4 billion and the total IT revenue, including exports and domestic revenues, close to $3.1 billion for the year.” There was a detailed plan for empowering the youth through tax breaks for freelancers and creating an entrepreneurial ecosystem to encourage them by listing plans to “engage with the State Bank of Pakistan to simplify the process of recording income by freelancers as export income and not remittances.”
Demand for software exports from Pakistan has increased recently in the developed nations. The sector has generated jobs for the youth and can continue to do so. The focus should be on harnessing the potential for long-term growth. Pakistan has 600,000 IT professionals and the exports are expected to cross the $2 billion mark
A policy shift from tax exemption to tax deduction can lead to panic and restrict foreign investment. It can also discourage freelancers from bringing their earnings into the country thereby obstructing the growth of the IT sector. The tax can discourage the youth who have just started their careers as freelancers.
Today, the Pakistani youth are acquiring a variety of skills and looking to create a place for themselves in the global gig economy. In a country with not many jobs available for the youth, freelancing can provide stability and boost the economy.
It has been claimed that the tax will amount to 25 to 30 percent of the profits of many IT companies. This will make the companies hesitant to bring their earnings to Pakistan.
In the past few years the IT sector has done well. It has enormous potential in the service sector. It is high time that we recognise the potential of our IT industry. Demand for software exports from Pakistan has increased among the developed nations. The sector has generated jobs for the youth. It continue to do so. The focus should be on harnessing the potential for long-term growth. Pakistan has 600,000 IT professionals and the exports are expected to cross the $2 billion mark.
Currently, there are more than 30 incubators and 500 startups in the country. Freelancers and IT companies can help bring foreign investment only if provided with the right incentives and tax policies. Policies like the Punjab IT policy can boost this sector and help the country grow.
The growth is impossible without the government providing necessary facilities and tax cuts. A shift from a total tax exemption can jeopardise the IT sector.
The writer is an MPhil scholar at ITU