MoITT to Raise IT Taxation Issue With FBR and Finance Ministry

Ministry of Information Technology & Telecom is expected to take up the issue of the withdrawal of income tax exemption from the IT and IT-enabled service sector with the Ministry of Finance and Federal Board of Revenue (FBR) to amend the proposed Income Tax Amendment Bill 2021 submitted to the National Assembly Secretariat.

Addressing a press conference here at the Islamabad Press Club on Monday, Chairman Pakistan Software Houses Association, Burqan Saeed, stated that the IT industry, the concerned Ministry, IT Task Force, and any stakeholder was not consulted before taking such a big step to hamper the growth of the IT sector. The industry has written a letter to the FBR to give time for this crucial export sector, and the Ministry of IT has also assured that it would approach the FBR for reversal of the decision.

He requested Prime Minister Imran Khan to intervene and stop the authorities from imposing taxes on the IT exports through the proposed Bill.

“It is unfortunate that the FBR has not taken any input or view of the IT sector or relevant Ministry before taking such a major anti-export measure. The sudden change in the tax policy would stop new investment and hurt existing investment due to total reversal of taxation regime for the IT export sector,” Burqan Saeed regretted.

Nadeem A Akhtar, President and CEO InfoTech Private Limited, informed media that such abrupt changes in tax policies would not only scare away new entrants/investors but would cause colossal damage to the growth trajectory of existing players.

IT Sector, unlike traditional export sectors (Textile and others), is the only sector that never asked for or availed any of the subsidies, rewards, or incentives like reduced electricity and gas tariff, cash rebates, and input sales tax refunds. Tax Exemption on IT exports till 2025 is proving to be the only substantial support the IT sector is offered and replacing it with a complex tax credit regime laden with additional compliance requirements would negatively impact the IT exports growth trend, Nadeem added.

Burqan stated that a complex tax credit system is being introduced, which would create unnecessary documentation for the IT sector. The Commissioner Inland Revenue would determine the eligibility for extending tax credit facility to the IT companies after fulfillment of laid down conditions. Under the draft Bill, the conditions of documentation are so harsh that it would not be possible to seek tax credit from the tax officials. It is understood that the IT sector would start receiving notices like other sectors.

Referring to the conditions of the tax credit scheme, he said that the conditions like filing of sales tax returns and withholding tax statements have no link with the IT exports. The IT sector is already facing heavy taxation at the time of input, like 19.5 percent provincial sales tax, 12.5 percent advance income tax, and 10 percent activation charges that were promised to be reduced gradually. The Ministry of IT and other ministries are very supportive given futuristic challenges being faced by the IT sector.

He stated that the IT & IT-enabled service sector has given record export growth despite the pandemic with a 40 percent increase in 2019-2020 and is on track to exceed $2 billion by the end of this financial year. It is understood that the passage of the Finance Bill in the same form would stop the IT sector from achieving the said targets.

He urged the Prime Minister to take immediate action, invite industry stakeholders to discuss our concerns, and discourage any such proposals, which hamper the industry growth. He also requested the concerned authorities to deal with matters relating to IT and ITeS with caution.

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Chairman Pakistan Software Houses Association stated that the government intended to take IT sectors into the tax credit regime, which has failed in the case of non-governmental organizations (NGOs). It seems to be an attempt to stop this sector from further growth. The proposed tax credit scheme for the IT sector is so complicated that even chartered accountants have failed to understand the same.

Referring to Bangladesh, he said that the IT sector has not only been granted tax exemption but also 10 percent cash rewards/rebates in Bangladesh. On the other hand, the replacement of exemption with the tax credit scheme would only result in harassment to the IT sector by the Commissioners of Inland Revenue. The IT sector would receive different kinds of notices from the FBR’s field formations. The conditions to register with sales tax of provincial authorities and filing of withholding tax statements are unnecessary for this sector. If the IT sector is not being facilitated in taxation matters, people will move to countries like Bangladesh.

He questioned what would be the future of freelancers and small IT service providers, unable to hire tax consultants for maintaining documents under the proposed tax credit scheme.

Burqan Saeed stated that the documentation of the IT sector is evident from the fact that we have to first register with the Securities and Exchange Commission of Pakistan (SECP), then the Federal Board of Revenue (FBR), and all provincial sales tax authorities. Besides, we have to register with the EOBI/social security/disability program and operate under the provincial laws and pay local taxes and stamp duty. Now they are proposing income tax on IT and IT-enabled services.

However, FBR’s approach towards Tax Treatment has been detrimental to the growth of the IT Sector as its policies aim solely at raising revenue by all means. Recent news of the withdrawal of Income Tax Exemption on the export of IT services, and replacing with a Tax Credit Scheme, where the tax credit is subject to fulfillment of many conditions such as filing of tax withholding statements and sales tax returns amongst others, will negatively impact IT exports growth trend. I

n coming up with these conditions, FBR appears to have ignored the fact that the export of IT services is exempt from sales tax, and hence there appears no justification to ask the industry to file sales tax returns. Even otherwise, sales tax on services is a provincial subject and is outside FBR’s domain.

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“FBR has further required full withholding of income tax on all payments and filing of withholding tax statements which will open a pandora box of tax inquiries whereby not just the so-called ‘tax credit’ be disallowed for alleged non-compliance with withholding tax regime on the whim of the tax officer, but additional tax demands will be raised for tax not withheld. Not only that, even full compliance with these conditions is not a bar for FBR to carry out its audits,” said Saeed.

“We further note with worry that exemption available to start-ups for initial 03 years after registration with PSEB is also proposed to be withdrawn and replaced by the same tax credit scheme. The motive appears to push the nascent start-ups and SMEs to incur additional costs and time for tax compliance alone and would reduce the ease of doing business for 90% of this sector,” he added.