IT Industry Recommends Automated Tax Regime

The IT industry has recommended an automated tax regime for the IT/ITes sector to ensure business.

Pakistan Software Houses Association (P@SHA) has prepared a report on Tax Analysis of the IT sector in Pakistan and sent recommendations to the federal government. In the report, P@SHA recommended an automated tax regime and the establishment of one window operation for taxation of the IT sector.

In the recommendations, the federal government has been asked to nominate exclusive tax commissioners for the IT and ITes sector.

According to P@SHA, FBR should nominate commissioners for the IT and ITeS sector. These commissioners should be responsible to resolve the issues faced by the IT companies and facilitating them for any FBR-related matter.

Initially, these exclusive tax commissioners should be nominated for three major cities i.e Islamabad, Karachi, and Lahore. It is also recommended that for ease of the IT companies, there must be a separate wing at FBR for the IT companies.

In the recommendations, it has been suggested that the federal government should allow IT and ITeS companies to maintain 50 percent forex with hassle-free and efficient in/outflow. According to P@SHA, 90 percent of the IT industry consists of SMEs and the biggest challenge for them is to do business with ease and low cost. The process of establishing Special Technology Zones should be accelerated.

The federal government has been asked to set up a high-level committee to resolve tax disputes related to IT companies. According to P@SHA, the sudden regulatory changes especially related to the taxation regime create uncertainty and anxiety in the ecosystem.

Unwarranted notices by federal and provincial tax bodies and authorities undermine the cost of doing business, compliance activities, and confidence. Such action by the tax authorities also discourages unregistered companies from registering, thereby affecting the growth of the IT industry.

P@SHA has also asked the federal government to resolve the issue of double taxation of IT at the Federal and Provincial levels; in all instances, GST on electricity should be lifted. According to the report, across the provinces and federal units, tax harmonization should be encouraged. Ideally, taxes on domestic services should be reduced to 5 percent with adjustment.

It has recommended the government introduce a refund on sales tax on electricity/ gas/ services utilized as input goods for the manufacture of output goods to be exported. According to them, a similar incentive was provided to the textile industry in the Export facilitation Scheme 2021, under which textile companies request refunds on the electricity/gas/services used for the production of goods that are exported.

The IT industry provides export services and therefore can be incentivized to avail refunds on sales tax on electricity/gas used. Currently, the GST on electricity is a cost for companies in the form of double taxation paid not to the federal board of revenue but also to provincial revenue authorities.

P@SHA has recommended the exemption of tax on dividends calling it an obstacle in the conversion of sole/ AOP business to corporates. According to the association currently, the tax on dividends is 25 percent (or 15 percent, depending on the type of taxable entity) which discourages companies from bringing money to Pakistan.

P@SHA has also recommended the lifting of the minimum tax under the annual income tax. Companies have to pay a minimum tax of 3 percent along with the normal tax on annual income. After the Financial Act FY2022-2023, an additional super tax is added to the income. The minimum tax is an added cost and therefore should be lifted.

According to Chairman P@SHA Muhammad Zohaib Khan, the IT & ITeS industry is an interesting intersection with the potential to bring in billion-dollar revenue and foreign direct investments, it is the only sector with a trade surplus of 77 percent in FY22. However, the current growth trend cannot exponentially grow without addressing critical policy measures like the cost of doing business.

The sudden regulatory changes especially related to the taxation regime create uncertainty and anxiety in the ecosystem. The removal of tax exemption in 2022, and the shift from the tax credit regime to the final tax regime in 2022 have a larger trickle-down effect on the growth of the IT industry.

P@SHA acknowledges the continued support from the Ministry of Information Technology and Telecommunications (MoITT) and Pakistan Software Export Board (PSEB) for helping advocate for and implement conducive policies for the industry and build an organized ecosystem, he further added.