Back in the old days, we used to have two days dedicated to a mainstream discussion of the economy, just around the release of the annual economic survey and the budget. Half of that was spent on the share of defence in overall expenditure and the meagre allocation to education and health.
While Pakistan’s macro uncertainty of the past few years has brought the conversation around the economy into the mainstream, nothing really beats the excitement and rush of these two days especially if one is involved in the media or financial services industry. Even if it’s the same cycle of lobbying, promises, lofty targets, shoddy data and wishful thinking.
For now, let’s just stick to what the two documents had in store for Pakistan’s technology industry which after a healthy 2021-22 was hoping to get more attention from the government.
And it kind of did, with an annexe on the IT sector in the latest Economic Survey. But the publication was nothing short of a disappointment, to me at least, as it hardly shared any new or important data point. Instead, it went on about the usual increase in IT exports or the number of broadband users — stuff that everyone who bothers to read the survey will know by heart.
A smattering of measures for IT may hamper more than help
The budget was mostly a non-event too, with most of the recommendations of the Pakistan Software Houses Association (P@SHA) ignored and in some cases, even going against them. For example, the IT body had proposed the reversal of the tax credit regime, which was introduced last year in place of income tax exemption, for IT and ITeS companies. Instead, the government has proposed that income from the export of computer software and IT/IT-enabled services be taxed at 0.25 per cent.
Given the export proceeds of $2 billion in this category in less than 10 months, and projected to hit $2.8bn by the government by the end of June, a 0.25pc tax would have implied revenues of $7 million or around Rs1.4bn. Also remember that in the last days of PTI, the administration had promised a host of new incentives for the IT industry, including a tax holiday and 100pc forex retention even though the final notification for the same never came.
One area where P@SHA apparently got its wish fulfilled was allocation towards skill development for which it proposed Rs10bn be set aside. The government responded in kind, promising Rs17bn instead that will be used for “imparting training in IT sector”. And of course, distribution of laptops, in addition to promoting exports. The specifics are still awaited.
On the digital payments side, the government has introduced an advance withholding tax of 1pc for filers and 2pc for non-filers from persons remitting money outside Pakistan through credit, debit, and prepaid cards. What that means is if you are paying online on an international platform or a store abroad, there will be an additional tax. How much impact will that have?
Let’s see. In 2021, Pakistan-based e-commerce merchants processed around Rs82.7bn while the customers spent around Rs177bn via cards using the same period. Assuming the entire difference is going towards international platforms, we are looking at Rs94.3bn or over 53pc of the total online expenditure via banking channels.
At the point of sale, most of the spending is local. Of the Rs591.5bn spent via cards in 2021, the throughput for domestic acquirers is Rs558.8bn — so Rs32.7bn went towards international merchants. Combined, we are looking at Rs127bn last year which, if taxed at an average of 1.5pc for simplicity’s sake, will yield the government just over Rs1.9bn. This is of course for last year and the numbers would certainly be higher by double digits in2022-23, but not enough to make a meaningful difference.
Other than that, the budget barely has any mention of the tech sector apart from the amount allocated to the ministry. For 2022-23, an outlay of Rs6.331bn has been set aside, which is almost 33pc lower than the originally budgeted figure of Rs9.361bn for 2021-22 but 43pc higher than the revised Rs4.399bn.
But don’t forget that in times of fiscal constraints (meaning all the time), the first casualty is the federal Public Sector Development Programme.
Published in Dawn, The Business and Finance Weekly, June 13th, 2022