All You Need to Know About IT Incentives

In a historic move on Tuesday, several incentives were approved by Prime Minister Imran Khan to facilitate the information technology (IT)/information technology-enabled services (ITeS) sector, freelancers, and startups.

Before their approval, tax exemption benefits which were the biggest demand of the sector, and other fiscal and non-fiscal incentives for the industry were proposed by the Ministry of Information Technology and Telecommunication (MoITT).

The Ministry of Information Technology and Telecommunication presented outstanding issues and related proposals before the prime minister for boosting the domestic IT sector to meet the desired business potential and compete in the international market.

Easing Forex Retention for IT/ITeS Companies

The MoITT proposed to create a new instrument for offering foreign currency accounts (on the pattern of Special Convertible Rupee Accounts (SCRA)) to IT/ITeS companies registered with the Pakistan Software Export Board (PSEB) with the following features:

1. Only allow dollar deposits against invoices from abroad
2. 100 percent retention in foreign currency allowed
3. No restriction on movement
4. Facilities of financing using US Dollar (USD) balance as collateral. Eligibility for PSEB’s export remittance incentive scheme to promote conversion to PKR.

The foreign currency regime for IT/ITeS companies is not aligned with their operational need. Most of the companies keep their major revenue parked in international accounts. The finance minister proposed that specialized foreign currency accounts should be opened for IT companies allowing them to retain their dollar revenues without converting them into Pakistani Rupee (PKR).

According to the IT Ministry, this will help bring internationally parked foreign currency to Pakistan, encourage foreign companies to bring their businesses to Pakistan, create employment/job opportunities and promote entrepreneurship in the country.

Easing Forex Retention for Freelancers

Similarly, the foreign currency regime for the freelance sector was revisited. MoITT proposed to introduce an RDA-like specialized/flexible banking account for freelancers with easy inflow/outflow of foreign currency (FCY). The following features were proposed:

1. Only allow dollar deposits against invoices from abroad
2. Freelancers are allowed to retain up to $200,000
3. Remittances above the aforementioned threshold be converted to PKR
4. No restrictions on FCY movement
5. Facilities of financing, USD balance to be used as collateral
6. The account linked with Federal Board of Revenue (FBR) for auto-filing.

It was emphasized that the freelance sector is on the growth trajectory and there is a need to enable maximum facilitation to support the growing pace rather than introducing any regulatory regime for this sector.

According to the IT Ministry, this will help bring foreign currency retained abroad by IT/ITeS freelancers to Pakistan and help attract forex inflows of $1 billion annually for firms and freelancers.

Tax Regime

The IT Ministry proposed tax exemption for IT/ITeS firms for five years, tax exemption for freelancers (registered with PSEB) for five years, resolution of double taxation of IT firms by defining IT/ITeS as services, and reduction of capital gains tax on venture capital funding into startups to zero percent (current 29 percent) for the next five years.

The ministry explained that the IT/ITeS and freelance sectors are not operating like typical traditional export sectors. India’s IT exports last month surpassed Pakistan’s total national exports (including products and services). Any abrupt regime transition that occurs without the participation of key stakeholders has a detrimental impact on investor sentiment. Officials argued that the same thing happened in the IT sector in March of last year when the tax regime was modified without consulting the MoITT.

Taxation Reforms

For including the venture capital firms in the mix, the ministry suggested the reduction of Capital Gains Tax on VC funding into startups to zero percent for three years in the next budget.

Fast Tracking STZ Benefits to IT Sector

The IT Ministry proposed that sectors under the Capital Development Authority (CDA) in Islamabad be declared as Special Technology Zones (STZs). Officials proposed a similar concept to be implemented in Lahore, Peshawar, Karachi, and Quetta.

It was acknowledged that STZs projects are long-term prospects. While keeping in view last year’s 47 percent growth of IT/ITeS sector and 75 percent growth target for the current financial year, the officials said speedy projects are required on the infrastructure side, which can fulfill the immediate demand of the sector.

Seed Funding for Startups

MoITT proposed the enactment of the Pakistan Technology Startup Fund under the supervision of IGNITE and the ministry itself. The proposed fund would be responsible for the following:

1. Provide seed funding to 30-50 startups annually
2. Rs. 500 million to Rs. 1 billion to be invested each year by IGNITE (matched by private investors)
3. To be run by a venture capitalist (VC) from the private sector
4. Overseas Pakistanis will also be invited to participate in the fund

According to the ministry, the enactment of this proposal would attract local and international VC funding into IT startups, thus creating jobs and replenishing forex reserves.

Prime Minister Imran Khan and Federal Minister for Finance & Revenue Shaukat Tarin offered their unprecedented and unconditional support to the Ministry of IT and Telecom and directed concerned divisions to ensure completion of the proposed tasks within the given timelines.

Most of the proposals are expected to be written into law between March and May, while a few will be added as constituents of the next fiscal year’s budget.