IT Industry Seeks Tax Reforms: P@SHA Pushes for Growth-Friendly Policies

IT sector, a vital contributor to the national economy, is advocating for tax reforms aimed at fostering industry growth and attracting further investment. The Pakistan Software Houses Association (P@SHA), the leading industry body, has submitted proposals to the government outlining several key areas for reform.

Focus on IT Professionals' Salaries

One of P@SHA's primary concerns is the disparity in applicable tax rates for IT professionals. They propose a reduced payroll tax rate of 5% for individuals employed by companies registered with the Pakistan Software Export Board (PSEB) and P@SHA. This measure aims to address the current situation where remotely working individuals may face different tax burdens compared to those physically located in Pakistan.

Exemption from Income Tax for IT Exports

A key proposal involves exemption from income tax for IT exporters registered with PSEB and P@SHA. This would eliminate the need for individual exemption certificates from the Federal Board of Revenue (FBR), streamlining the process and reducing administrative burdens. P@SHA suggests incorporating a new clause in the Income Tax Ordinance (ITO) 2001 to formalize this exemption.

Clarification on Super Tax

P@SHA seeks clarification regarding super tax applicability on IT & IT-enabled services exporters for the 2022 tax year. While these companies were previously eligible for a 100% tax credit under Section 65F, some have received "unjustified notices" from tax authorities. P@SHA proposes an explanation within Section 4C of the ITO to explicitly exempt such exporters from super tax for the 2022 tax year, preventing further litigation and ensuring clarity.

Highlighting IT Industry's Importance

P@SHA emphasizes the IT sector's crucial role in Pakistan's economy. The industry has achieved significant milestones:

• Export Revenue: Crossed $2.6 billion in 2023, making it the largest service export sector.
• Trade Surplus: Holds the unique distinction of being Pakistan's only export industry with a 77% trade surplus.
• Job Creation: Supports the livelihoods of over 800,000 professionals, freelancers, and their families, along with over 10,000 companies.
• Growth Potential: The IT sector is Pakistan's fastest-growing economic segment and has the potential to address the current account deficit and contribute significantly to the nation's future prosperity.

Current IT Export Tax Rates

It's important to note that IT exports in Pakistan currently benefit from low tax rates of 1% and 0.25%. However, P@SHA argues that further reforms are necessary to create a more competitive and growth-oriented tax environment for the industry.

Looking Ahead: Balancing Revenue Needs with Industry Growth

The Pakistani government faces the challenge of balancing its revenue needs with fostering a thriving IT sector. P@SHA's proposals offer a constructive approach, aiming to create a tax system that incentivizes investment, attracts talent, and propels the IT industry as a driver of national economic growth.

Recent Developments in IT Tax

While the specific outcome of P@SHA's proposals remains to be seen, it's important to acknowledge recent developments impacting IT taxation in Pakistan:

• Removal of Tax Exemptions: In July 2021, Pakistan shifted from a complete tax exemption for the IT sector to a tax credit regime. This change has been met with criticism from industry players, arguing for a return to a more favorable exemption structure.
• Focus on Expanding Tax Base: The FBR has recently intensified efforts to broaden the tax base, with a particular focus on increasing tax collection from the IT sector. This includes initiatives to improve tax compliance and potentially identify new taxable income streams within the industry.

Global Landscape of IT Taxation

It's also valuable to consider the global context of IT taxation. Many countries offer competitive tax incentives to attract foreign investment and nurture domestic IT industries. Analyzing best practices and successful models from other nations can provide valuable insights for Pakistan as it shapes its IT tax policies.

By fostering a dialogue between industry stakeholders and the government, Pakistan can create a tax framework that stimulates the IT sector's growth while ensuring sustainable revenue generation. Achieving this balance will be key to unlocking the full potential of this dynamic and crucial economic engine.

This article was published at P@SHA Pushes for Tax Reforms to Bolster Pakistan’s IT Industry