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.
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:
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.
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:
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.
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.
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.
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.
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:
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.