Environment for IT business

Updated January 04, 2016


PAKISTAN’S IT exports were documented at $500m in 2014-15, but unofficial estimates go up to $2bn per annum.

Industry experts say much of the extra $1.5bn income from IT exports is routed as remittance. However, they add that it is the business environment that ‘compels’ IT exporters to operate as they do.

These include taxation issues at the federal and provincial levels, inadequate legal mechanism to protect the IT business, lack of market access for young entrepreneurs, non-availability of quality human resource and insufficient infrastructure. All these factors raise the cost of doing business in the formal sector.

IT exports proceeds are exempted from income tax until June 2016. Despite this, a major tax issue impeding the IT companies’ growth relates to the concept of the minimum income tax.

And while the sales tax rates are already very high in the provinces, there is double taxation owing to ambiguity in taxation jurisdiction. There is no clear definition for IT products and services, and tax enforcement authorities often seal IT firms’ premises, killing their business for good.

An incomplete and outdated legal framework has restricted local and foreign investment into the ICT industry. Several laws await promulgation, including the ‘Data Protection Act’, ‘Confidentiality Law’ and ‘Privacy Law’

Pakistan Software Houses Association (P@SHA) Chairman Syed Ahmed says tax-related issues forces companies to open their offices in other countries and to hide under the radar. However, he believes that the situation can be reversed if the government takes some timely corrective measures.

He also suggests that the income tax exemption on IT exports earnings be extended till 2021, and that the provincial GST on IT services be brought down to 4-6pc. Provincial sales tax authorities must also recognise call centres as part of the IT industry and the higher GST rate of 19.5pc that is applicable on telecom services should therefore not be applied on them.

He also proposes that provincial tax authorities honour voluntary registration and declare an amnesty for firms’ all previous liabilities, while the EoBI and the SBP must also honour voluntary registration.

Meanwhile, an incomplete and outdated legal framework has restricted local and foreign investment into the Information and Computer Technology (ICT) industry. Several laws await promulgation, including the ‘Data Protection Act’, ‘Confidentiality Law’ and ‘Privacy Law’.

According to the State Bank of Pakistan’s annual report for 2014-15, Pakistani companies face severe competition from firms in countries that provide legal cover to data protection and security in accordance with international requirements.

Similarly, Pakistan’s Patent Ordinance 2000 does not include ‘software registration’, which is a major concern for local IT programmers, data processors and researchers with regards to the security of their innovations, source codes and programmes.

This insufficient legislation is directly hurting the export growth of computer software and is also discouraging the private sector from undertaking costly research and development activity. The draft legislation is lying with the National Assembly, awaiting approval. The law will likely give confidence to investors in the IT sector regarding data and intellectual-property protection.

Around 1,150 IT exporters, including call centres and software houses, are registered with the Pakistan Software Export Board (PSEB), while over 2,000 IT companies are registered with the SECP. There is a huge potential to increase this number exponentially.

This year, 19 starts-up have raised considerable investments. However, no big client is ready to come to Pakistan. Lack of a predictable policy, especially tax policy for the IT sector, and the country’s ‘image problem’ are major irritants. The market access for Pakistani IT exporters can be facilitated by resolving the visa issues. The availability of trained human resource is another big problem.

Meanwhile, there are over 100,000 freelancers who are contributing hundreds of millions of dollars to the IT sector and IT exports. Pakistan ranks fourth in the world in this category, after America, India and Poland. The export proceeds of freelancers are shown as remittances under central bank data.

A PSEB official says the board is extending facilitation, especially partial support, for holding exhibitions in leading markets. The government has almost finalised the list of investors for the establishment of IT technology parks in Karachi and Islamabad.

The IT exporters, however, look to the commerce ministry to come up with facilitation measures in its three-year Strategic Trade Policy Framework 2015-18.

According to a commerce ministry report, Pakistan’s IT sector has not been given the status and support that other developing countries have accorded to their technology sectors. For example, India’s IT exports have crossed $100bn, whereas Pakistan’s recorded IT exports are less than $500m.

The P@SHA will soon be launching its ‘Digital Pakistan 2020’ campaign, which aims to raise awareness about the IT industry and the role it can play in the nation’s future. The focus of the campaign will be on the taxation regime, market access, quality human resource and infrastructure.

Published in Dawn, Business & Finance weekly, January 4th, 2016