8% Minimum Tax on Companies to Kill ICT Companies, Startups: PASHA

Recently imposed 8% Minimum Tax on companies will have a detrimental and disastrous effect on not only IT industry but also to technology and entrepreneurial innovation in Pakistan, said PASHA in a statement.

Press statement said that imposition of Minimum Tax will undo much of what has been achieved and put technology and innovation in Pakistan in a backward direction.

Background

Currently, withholding tax (WHT) of 8% is deductible by withholding agents when making payments to service providers, if they are companies. Service providers are entitled to offset the tax suffered against its final Income Tax liability, based on taxable income computed in terms of the provisions of the Ordinance.

Consequently the tax withheld is treated as Advanced Income Tax payments which can be all claimed back at the end of the year as refund.

However, with new Finance act, The tax withheld regardless of the whether the service provider company is profitable or loss-making in the year is its Minimum Tax liability.

The tax withheld, regardless of the whether the service provider company is profitable or loss-making, will be considered as its Minimum Tax liability

Hence for loss-making companies, this tax will be paid from their capital reserves or induction of new capital, effectively becoming a ‘capital tax’ and a ‘loss penalty’ or capital confiscation by GOP for those investing in the services sector in the country.

This change was not included in the Finance Bill 2015 presented on 5 June 2015 but was instead included in the Finance Act at the end of the month and was swiftly approved in the lower house thereafter. Hence no opportunity was given to the industry and other relevant stakeholders to raise their concern and debate this matter prior to its approval.

PASHA has  urged GOP to review this matter immediately and suspend this amendment through taking necessary action.

Impact of 8% Minimum Tax

The concept of Minimum Tax in itself is both counter-intuitive and unjust. As a basic principle of taxation, charges are levied on the profit earned by companies – that is to say that if their revenues exceed their costs in a given year, and resultantly they create new wealth, the payable tax should be a portion of the newly created wealth.

In the case of a loss, the company’s costs exceed their revenue. With the imposition of Minimum Tax, loss making companies will be paying tax at 8% of their gross revenue.

As they incurred a loss during the year and do not have the excess funds to pay this tax, they shall be forced to use their capital reserves or fresh capital injection to make the payments. Hence in this manner this can be construed to be a penalty imposed by the government for services companies who are making losses.

Resultantly, in addition to the loss incurred by the company, it will also be required to pay this Loss Penalty to the government which is both unjust to him and also against the norms of a free market economy. In other words, it is tantamount to confiscation of private capital by GOP – indeed a draconian law.

Furthermore, this will be a most debilitating disincentive for attracting foreign investment in the services sector in the country. Such Minimum or even Revenue based taxes are not practiced in any of the leading marketplaces in the world and neither in any of the emerging investment destinations.

Such an unjust and counter-intuitive measure would lose both the trust and interest of the foreign investor. In a time the country needs maximum participation of foreign investment, this amendment must not be allowed to stand.

Impact on IT Services Companies (Providing Services in Pakistan)

In the challenging economic conditions prevailing in the world markets, the leading companies in the Technology Services sectors average below 15% (Accenture, the global technology leader in the industry reported a net margin of around 15% over the past 2 years).

In Pakistan, net profit margins of the leading IT Services companies may be even less than 10%. Even in the case of extremely well-run IT service companies in Pakistan that earn 10% net margin from services provided in Pakistan, an 8% Minimum Tax results in an effective Income Tax rate of 80% – that is, 80% of profits earned are to be paid by IT Services companies as taxes.

For companies who operate at below 10% net margin, and there will be many, the operations will become unsustainable and they will be forced closure of businesses in this sector. IT Sector will take a nose-dive and will seriously hurt the economic development and employment,

Impact on Business Process Outsourcing (BPO) Companies (Providing Services in Pakistan)

By definition the BPO business model depends on high-volume of man-hours of services provided but at a much lower gross margin from other professional services. Globally speaking, well run BPO businesses are expected to turn over between 8% to 12% as their net margin before taxes.

For example, Teleperformance, a global leader in the call center outsourcing business currently operates at a Net Margin before taxes of 9% over the past three years.

In Pakistan, many BPO providers are operating at even below 8% net margin and with large volumes of business are able to sustain well maintained operations. Given the ever rising inflationary costs mainly due to high cost of energy, the imposition of 8% Minimum Tax will render the local BPO business model unviable and this will likely result in a catastrophic collapse of the industry leading to the loss of livelihood for many individual working in BPO companies.

Furthermore, it will destroy years of hard work and development that the BPO sector has accomplished in positioning Pakistan as a potential BPO supplier.

Impact on Tech Innovation and Entrepreneurship in Pakistan 

Over the past two years, we have seen great emphasis on the development of technology based innovation and entrepreneurship in Pakistan. Many incubators and civil society organizations have emerged who have worked relentlessly to promote and encourage young people who venture into this space.

We have many ecommerce businesses being set-up and with the support of the ecosystem around them, these fledgling businesses are now beginning to grow and may become a future source of revenue and employment in Pakistan.

The government of Punjab has also championed this cause under the PITB run projects Plan 9 and Plan X. In the last one year especially, leading private equity organizations have invested considerable sums in Pakistani commerce ventures and the industry has hailed this as the opening-up of a huge landscape of investments in the sector.

In Pakistan, many e-commerce businesses are working now with no plans to be profitable for the next 3 to 5 years

Sadly, the imposition of this Minimum Tax will stunt this momentum and undo much great work done by so many people. Many of these start-ups do not plan for profitability in the short-term. For example, Amazon.com, the global leader in e-commerce, remained in losses since its inception and for 20 years prior until 2014. Yet they are seen as an icon the US economy and especially of its technology and innovation sector.

In Pakistan, many e-commerce businesses are working now with no plans to be profitable for the next 3 to 5 years. If Minimum Revenue Tax is imposed on them, these service companies will be required to pay this tax from their capital.

Thus, this will reduce the incentive for investors, both local and international to continue to support this sector. And, it will be a great failure for the country to see such a promising sector being dis-installed by illadvised taxation schemes.

Conclusion

The Minimum Tax is unjust, counter-intuitive, against the principle of free market and contrary to practices of the better marketplaces in the world.

Furthermore, it will have disastrous effects on the development of technology and innovation in the country rendering many business models unviable and thereby causing contraction in the sector unemployment.

With this in mind, PASHA pleaded that it be reversed from the Finance Act 2015 and that it be not brought into discussion again at any time in the future.

Tech reporter with over 10 years of experience, founder of ProPakistani.PK


  • Muhammad Aamir

    Time to leave Pakistan!

    • Dr. Aamir Liaquat Hussain

      Governments collect taxes not pay taxe.

      • Muhammad Aamir

        You did’t get it, Alim! I was talking about the Pakistani rulers who don’t pay tax. Prime Minister Raja Pervez Ashraf, Foregin Minister Hina Rabbani Khar, and Religious Affairs Minister Syed Khushid Ahmad Shah paid only $1,466, $716 and $466 respectively in their lifetime, Jahangir’s World Times Jan 2015, Page No.79. You know better than me how much our Uncle Nawaz Sharif pays tax, Rs.5000. Think Different!

        • Zawyar Ur Rehman

          Agreed

        • Dr. Aamir Liaquat Hussain

          First of all NS paid that tax in 2007 upon his return to pakistan and at that time he didn’t own anything here.While rest of the years after getting his businesses in his nam, he and his family paid million of tax. Only NS paid morethan 2 million in 2014 and 15.
          I knew many rulers don’t pay tax or they pay very small amount.
          Take example of our uncle IK whose tax suddenly reduced by 1 million in 2012 despite he owns millions and travel on helicopter’s.
          Lets take another example the beloved ruler Mush didn’t file any tax return until now despite he had property worth million of dollars and paying 10 million to his lawyer team for each hearing.
          Ex Cheif Kiyani own construction businesses through billion of corruption and paid 0 tax and don’t have any NTN. This list will go on and i can gave you the list of all generals who are supposed to protect us actually owned many businesses of cement construction urea and many others but never return the file.
          Don’t blame single side with wrong intentions that NS paid 5000 and didn’t know the reality and how much he paid after that. I am not defending him but your lies show your wrong intentions.

          • Khalid

            Uncle IK didn’t filed his tax returns before 2001. Before than he was a tax choor.

          • Muhammad Aamir

            I have given you many examples, why you see Nawaz Sharif only? Why you don’t understand!! I need a proof General Ashfaq Parvez Kayani didn’t pay tax as I gave you above.

            • Dr. Aamir Liaquat Hussain

              I cannot reply to each example and he is PM also and I knew his tax figures correctly.
              Gen. kiyani and Mush never file any return in FBR and you couldn’t going to find any thing. Soon Rahil will be on the list as it is not allowed to held accountable in Army as they do their own investigations.
              Jub cheif nhi dete to baqi kon day ga

              • Muhammad Aamir

                I need proof just!

                • Dr. Aamir Liaquat Hussain

                  lolz
                  Do have proofs of what you said.
                  or can you give proof of any tax paid by Mush or Kiani or their NTN number?
                  Give proofs and asked for the same

                  • Muhammad Aamir

                    I provided you proof, Idiot! Provide me any website where it’s written Raheel didn’t pay pax!! All I wrote above you can find on the internet, I gave you a solid proof, Jahagir, the best-selling magazine for the CSS exam.

                    • Dr. Aamir Liaquat Hussain

                      Thats your proof….nice
                      Rahil currently paying and deducted from his salary but he must filed return which he did not. I said soon he will be on the list.
                      Tax directory states Kiyani paid 272999 tax in 2013 which obviously deducted from the amount he received officially. Nothing in 2014 and 15. Mush while filing his nomination papers in 2013 states no tax and not recorded in tax directory of Pakistan.

                    • Muhammad Aamir

                      Website or Book, otherwise I’m not going to believe whatever you !!!Pooh!!!!!!!!!!!!

                    • Dr. Aamir Liaquat Hussain

                      Mr. luttle idoten I knew you never gonna believe even thay bark from their own mouths.
                      I said tax directory which is available and published by FBR each year.why don’t you go and check directory of tax for each year. For mush there is debate over news. however i attach pix for the fouji cum dollar paid citizen

                    • Dr. Aamir Liaquat Hussain

                      Did you ever heard about tax directory?
                      you only know your fouji things.
                      FBR publish tax directory each year.

                    • Muhammad Aamir

                      Bhai! I need about Raheel as you were talking above..!! I know about Musharraf, I don’t support him anyway..!! If you just give me just one proof, I will believe about that!! It’s possible about Raheel as it were with Musharraf..!!! It’s said that our generals are appointed by the USA.

                    • Dr. Aamir Liaquat Hussain

                      Read my comment again. I said Rahil will soon join them.Mean after retirement he will not pay any tax as current tax is deducted from his salary. Usually even deducted at source still you need to return file like all NS AZ and IK did but no army cheif did that which shows that how much they are interested in tax.

          • Guy Chauhan

            q sach boltay ho bhai. gaddar kehlao gey. bohot “muhibbulwatan” qom he ye.

    • Guy Chauhan

      The problem is that it’s not easy to escape from the country. It’s like living prison for people who’re middle class. Pak has bad rep in europe/canada and that too because of our people. smdh

  • IrfanAmir

    Suicidal!

  • nauman

    Keep the issue alive and put pressure like you did to stop internet taxation. I am hopeful the Govt would stop this madness.

  • Zahid Iqbal

    startup is difficult in Pakistan. Now they are imposing tax to make it more difficult. sucking government tax officials

  • Zawyar Ur Rehman

    The message of GOP to startups from the recent news is clear. They want to say,
    “Our new vision is to provide an enviroment where our Politicians can leave in peace and have all the luxuries of life. We dont care what happens to the people. We want to ride in BMWs and AUDIs and visit every country in the world using the financial help excuse. In the end, we think you are nothing and we are everything.”

    • Dr. Aamir Liaquat Hussain

      This tax will go to Army budget comprises of 20 to 25 % of the the total money of Pakistan to travel free on C130’s.

      • Banana

        They need that much money to buy condoms for your dad. He made one deuche like you, and we are suffering since.
        Even rabid dogs are more loyal than your forefathers and you. Get lost skunk.
        btw, tell you what, in your own home, your siblings and you consume more than 80% of the budget. Go figure leech.

        • Dr. Aamir Liaquat Hussain

          my advise to you idiot is that don’t lick fouji shoes.
          and yes now I buy condoms because of my one mistake and now Im suffering from people like you. Anyhow… apne ghar ma8n pichly kamry k bed ki chadar change ker dena.wo mujse gandi ho gai

      • College

        We need budget for army for our survival

        Thanks to our neighbor India

        Do you know how much they are spending ?

        They are on 8th position in world and are going to 3rd in next 2 decades (Military Expense wise)

        Source : https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

  • Mohammad Munaf

    The tax was already 6% , its the GST on Services whih has now been imposed which is 14% and 16% additional

  • Abdul

    Tax on services is applicable on all industries not just IT industry. it is minimum tax but normal tax rate is 35% (33% + 2%). 8% VS 345%??
    Further many IT services from BPOs already exempt. IT industry is more faciliated than any other in Pak

  • Khalid

    This is a withholding tax, which can be adjusted with the payable sales tax. This is done so that companies register themselves, get an NTN and file their sales and income taxes as the adjustment can only be availed by registered companies.
    For people who dont pay tax and hide their income this 8% is gonna be a cost as they cannot take the adjust WHT with payable sales tax, recently the government has increased WHT on cash withdrawals from bank also so that doing businees for people who dont file their income and sales return gets costly and they are forced to show their real sales and income.
    The only person directly affected by these taxes are the Tax Chores (thieves) and I can see many of them in the comment.

    • guest

      o bhai baat yeh ha ka yaha tax ager -ve me chala jae tu wapas practically pora wapas nai milta, adha ya us se b kam milta ha, wese theoratically sab yahe kehtey han k g pora he wapas mil jata ha.

  • College Student

    another good news

    This email I got from wi-tribe today
    ———————————————-
    In accordance with the Federal Budget 2015, the Government of Pakistan has applied 14 % Advance Income Tax* on all internet services. This change will be applicable from July 2015 and will reflect in the invoice you receive on 1st August, 2015.

    Note: This is in accordance with the government’s directive; wi-tribe is only collecting on their behalf.

    *applicable on monthly line rent only
    ————————————————-

  • Umer

    Assalam-o-Alaikum respected members
    Can anyone guide me how to contact Microsoft Senior Executives in Pakistan. I’ve been trying to claim warranty for a malfunctioning Microsoft product (purchased new) which they are offering me after repair, i do not want to accept a repaired product whatsoever
    Please guide