The government maintains the concessionary IT exports tax rate. Will this be enough to change the fortunes of our IT industry?

As part of its bid to encourage IT exports, the government has decided to keep unchanged the tax rate on IT exports. The effective tax rate on IT exporters remains 1 percent, which whittles down to 0.25 percent if you are also a member of P@SHA, the country’s leading association of software houses. This tax incentive was set to expire at the end of June 2026, but the government has decided to extend this facility for 3 more years until June 2029.

This incentive has been part of a broad push by industry leaders, especially P@SHA, which has lobbied for the continuation of this incentivized tax rate. In an earlier conversation with Profit, the chairman of P@SHA, Sajjad Syed, underscored the importance of continuing this measure, warning that export numbers would drop if this facility were to be removed. His reasoning was that IT companies often have long term contracts, and if they see that their incentives are getting scrapped in the middle of such contracts, they might become more circumspect in negotiating for newer business opportunities.

But the question remains whether these incentives would be enough to lead to higher IT exports. That these incentives would not reduce IT exports on their own, one can reasonably grant the government. But the state of our IT exports merits a deeper examination. While the government has been pushing the narrative of high growth in our incentives – in his speech, for instance, the Finance Minister Aurangzeb declared that Pakistan’s IT exports had grown by 20 percent and are expected to reach 4.5 billion USD by the end of the current fiscal year – industry insiders point to a different picture, where for many of the major players, revenues have stagnated.

And if we add to this the growing noise that these numbers are inflated because of companies misdeclaring their proceeds as ensuing from IT exports in order to avail the tax benefits, we see how these benefits alone might not be enough to change the fortunes of our IT industry. This is especially since the IT exports numbers – even with current incentives – are alleged to be inflated by multiple industry leaders. But let us, for argument’s sake, grant that the numbers are correct. But then again there are other pressures on our IT exports, which cannot simply be incentivized away.

The major question mark here is the IT skill level of our youth. A recently conducted national IT skills competency test conducted by the HEC revealed that skills of the IT graduates being produced by Pakistani universities were less than stellar. 61 percent of the 33,038 students who sat the test scored less than 50 percent, while only 3.6 percent scored more than 68 percent. Those who scored over 80 percent constituted only 0.4 percent of the total pool. Learning modes have become outdated, and in a context where industry tools are being developed by the day, university curricula, especially in IT, have lagged behind. The results were there to see in the results of the competency test.

This is especially concerning if we consider the crushing speed at which developments within the field of artificial intelligence are taking place. In fact, in a previous survey conducted by Profit magazine, AI emerged as a key reason for those who were pessimistic about the state of our IT exports for the near future. The reasons are clear; many of the lower-value tasks outsourced by foreign clients that our IT professionals used to perform can now be done by anyone with access to an LLM such as Claude or Gemini or ChatGPT.

With such work now being eliminated in droves, it is not a stretch to see why a lack of appropriate training and comfort with newer technologies will continue to push our exports down. Of course, the advent of AI would generate newer jobs, but given the expertise of our IT graduates, as shown in the recent competency test, it does not appear that we are ready to quickly adapt to these shifting dynamics at a large scale. And this is something that incentives on exports cannot fix on their own. Broader reforms, especially in upskilling of our graduates, need to be instituted in coordination with industry leaders as well as thought leaders within the academia. The government has, for instance, allocated 46 billion rupees for higher education, which includes support for the enhancement of research capabilities within universities as well as the promotion of digital learning and integration of AI in curricula. Whether these measures would ever see the light and, even if they do, will they be successful, remains to be seen.