IT sector deplores proposed tax credit scheme, withdrawal of exemptions

LAHORE: The information technology sector has deplored the FBR’s recent proposal regarding withdrawal of income tax exemption on the export of IT services, and its replacement with a Tax Credit Scheme, wherein tax credit is subject to fulfilment of many conditions such as filing of tax withholding statements and sales tax returns.

In a statement issued on Friday, [email protected], the official representative of the IT industry, said, “The IT & IT-enabled service sector recorded a 40pc growth in exports during FY21 despite the pandemic, and is on track to exceed $2 billion by the end of the current financial year.”

[email protected] said that the industry’s close engagement with the PM’s Office, through IT Task Force and [email protected], had resulted in the announcement and work on initiatives like STZA as well as reforms in State Bank and Securities & Exchange Commission of Pakistan.

The association said with the recent growth pattern, complemented by several supporting initiatives from the PM Office, has triggered a phenomenal interest from global investors towards Pakistan, adding that the existing tax incentives have been instrumental in the competitiveness of the IT industry viz-a-viz traditional competitors like India, Bangladesh, Philippines and Vietnam.

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“However, the Federal Board of Revenue’s (FBR) approach towards tax treatment has been detrimental to the growth of the IT sector as its policies aim solely at raising revenue by all means,” the statement read. “By coming up with these conditions, FBR appears to have ignored the fact that export of IT services is exempt from sales tax, and hence there appears no justification to ask the industry to file sales tax returns.”

The association contended that sales tax on services was a provincial subject and was, therefore, outside the FBR’s domain.

“FBR has further required full withholding of income tax on all payments and filing of withholding tax statements, which will open a pandora box of tax inquiries whereby not just the so-called ‘tax credit’ be disallowed for alleged non-compliance with withholding tax regime on the whim of the tax officer, but additional tax demands will be raised for tax not withheld,” the association said.

[email protected] further noted that exemption available to startups for initial three years after registration with PSEB is also proposed to be withdrawn and replaced by the same tax credit scheme. The motive appears to push the nascent startups and SMEs to incur additional costs and time for tax compliance alone and will reduce the ease of doing business for 90pc of this sector, it added.

“Such abrupt changes in tax policies will not only scare away new entrants/investors but will cause colossal damage to the growth trajectory of existing players,” the statement read.

[email protected] urged the prime minister to take action, invite industry stakeholders to discuss their concerns and discourage any such proposals that could hamper industry growth.

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Taimoor Hassan
The author is a staff member and can be reached at [email protected]

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