Withdrawal of Income Tax Exemptions and Pakistan’s IT Sector
The Government authorized the removal of about 80 income tax exemptions through the publication of the Tax Laws (Amendment) Ordinance, 2021. The IT and IT-enabled services sector is one of the industries that would be impacted by this withdrawal.
The conversion of the exemption to a 100% tax credit is expected to have a small effect on revenue, but the IT sector has expressed serious worries about the numerous restrictions that the tax credit is subject to. The tax credit regime will permit the recording of software export; nevertheless, in order to qualify for a tax credit, IT and IT-enabled service revenue must meet specific requirements. Only if the taxpayer submits their tax return and any required tax to be deducted or collected has been
Withholding tax statements for the prior tax year and sales tax returns for the pertinent tax year are submitted. deducted or collected and paid.
Up until the time ending June 30, 2025, exports of computer software, IT services, or IT-enabled services are subject to the withdrawal of the tax exemption and the conversion to a tax credit system.
By the conclusion of this fiscal year, it’s anticipated that the IT sector will have grown by more than $2 billion, with a growth of 40% in FY 2019-2020. It was discovered that over the past few years, 70,000 Pakistani residents received payments from Payoneer totaling Rs 60 billion. The government’s numerous supportive measures, such as the 100% repatriation of IT & ITeS businesses with 100% foreign ownership, profits to foreign IT & ITeS investors, and no income tax on IT & ITeS exports.
Covid-19 has also turned out to be a gift in disguise because it has assisted Pakistan in accelerating the expansion of IT exports. The expansion of the sector attracted international investors and raised Pakistan’s level of IT industry competition. Withdrawing these support systems and substituting tax credit programs for them could have a negative impact on this development trajectory and deter newcomers and investors from the IT sector. According to experts in the IT sector, the extra compliance requirements will probably have a negative impact on the industry’s expansion. The experts think that since the industry has never utilized such government support for tax exemptions, it is eligible to receive them.
Investor confidence is said to have been harmed by the policy shift. Experts believe that the removal of tax exemptions will deter people and businesses from hiring freelancers from Pakistan, who have only recently begun earning well and building a solid image on international platforms.
The government is being urged by the P@SHA (Pakistan Software Houses Association) to address the worries of the IT and ITeS industry and create the proper policy framework to promote ease of doing business. The IT industry is confident that, given the proper regulatory environment, it can outperform the government’s export growth projections and generate more job prospects.
