STAFF REPORT KARACHI: While showing its grave concern over the proposed tax measures announced in the new federal budget, the IT industry representatives have cast doubt that these steps, if implemented, would have negative implications for the Information Technology-Business Process Outsourcing (IT-BPO) industry, which has been one of the fast growing sectors in Pakistan.
In the federal budget, the government has announced that taxes, previously deducted from payments (at the rate of 6pc) to a service provider, will be deemed as minimum tax whereas previously these were deemed as advance tax and adjustable against final income tax liability. It has also announced to scrape GST on computer software in tbe budget. Furthermore, the provinces are also set to impose and collect GST on IT services at the rate of 16 per cent in the upcoming fiscal year.
“IT-BPO companies operating in Pakistan at a relatively low margin will be required to pay taxes from their invested capital base, which will be tantamount confiscation of their capital,” Jehan Ara, President, Pakistan Software Houses Association for IT & ITES (PASHA) said this in her letter written to Federal Minister of Finance Dr Hafeez Sheikh.
She said that for the companies performing at ‘better than industry’ margins, effective tax rates will be exorbitantly high forcing them to discontinue their businesses in the country.
Ironically, the tax measures would also require loss-making companies to pay income tax at the minimum rate of 6 per cent, which is both counter-intuitive and against the basic principles underlying taxation.
In addition, while determining the value of invoice, reimbursable expenses must not be assumed as ‘fee earned’ since these expenses are not, in substance, an income and are merely pass-through items. She said that IT/BPO providers in particular offer to perform back-office functions to their clients.
The IT outsourcing sector has been flourishing in the country during the last couple of years with a steep growth mainly due to the rich human resource potential available at low rates as compared to the wages in other regional states.
However, experts fear that the new tax measures would squeeze the size of the industry as well as cause increase in unemployment of skilled IT professionals.
The IT and BPO providers are facing high cost of running their operations to perform back-office functions, such as, software development or call centre services to their clients. This has reduced their net profit margins in Pakistan.
She demanded of the government to retain the exemption of GST on computer software in order to maintain the growth of IT industry in the country.
“The government needs to reduce the tax on computer screens and value-added products in order to increase the penetration of IT education in the small cities of the country,” the Pakistan Computer Association (PCA) said.
The government should waive GST on computer screens couple with FED and import duties on different equipments, the Association said adding that the tax exemptions would also help in improving literacy rate as majority of the people can hardly purchase used computers on nominal rates.
The IT industry during the last around six years has posted a marvelous growth which substantiates the fact that tax retaining tax exemptions on this sector would further strengthen this sector which has the potential to earn increasingly more foreign exchange.
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