The Pakistani government’s move to tax IT companies is proving to be counter-productive. What was aimed at increasing revenue is now having some negative repercussions. One of the alarming outcomes is the relocation of IT companies to foreign countries.
The government had imposed an additional 8% tax on the revenues generated by the IT industry in 2015-16. This has already resulted in nearly 40 percent of the companies moving their businesses to the United Arab Emirates.
Sajjad Syed, Chief Executive Officer of Excellence Delivered (ExD) Private Limited, one of the affected companies, confirmed the trend. He said his company outsources most of its non-core operations and is working with consultants. Their work primarily revolves around helping businesses in structuring IT systems.
He said the 8% additional tax on revenues levied has not only hindered the growth of the IT industry, but forced a large number of companies to relocate outside Pakistan.
The decision of imposing tax on IT services to generate additional revenues is actually proving to be fatal as several small companies have moved their offices to Dubai, a tax haven and only 1.5 hours away from Pakistan. – Sajjad Syed
He warned that things don’t look good for the IT sector as the booming rise of this industry has been arrested and has forced IT firms to re-evaluate their plans for expansion in Pakistan. He said that there is no other example of such draconian taxes on the IT industry anywhere around the world. Most of the countries offer subsidies for the IT sector while it’s the other way around in Pakistan. He said that companies do not desire subsidies but such high rates of tax are hurting the growth of IT companies.
Syed said that some companies have moved towards cash based systems in an attempt to avoid taxes therefore government’s tax projections will become hard to meet. On the other hand, outsourcing and relocating will result in increased employment and business in places like Dubai instead of Pakistan. Relocating companies will have little compulsion to hire Pakistanis; instead, they will certainly move their capital to other countries and outsource work to India, thus resulting in little to no gain to the Pakistani industry.
Many government officials and senior analysts have appreciated the growth of the IT sector over the past few years but the progress needs to continue. The CEO of ExD also suggested that a formal study should be conducted to capture the size of the industry.
India has announced a 3 year tax exemption status for startups set up after April this year. With our neighbor taking steps to foster entrepreneurship and the growth of their IT sector, it seems like our policy makers could do much better than to take anti-business measures, especially at a time when FDI levels are low.
Via: Express Tribune