Mobile penetration in Pakistan may have grown to abundant levels; internet penetration and the use of lap top among students may also have grown considerably, but there is no doubt that much is wanting in the context of technologization of Pakistani society in general and businesses in particular.
Some argue that a big part of that reason may be a lack of literacy, or a cultural factor which is often also termed as the ‘sethia’ mindset that everyone loves to blame. Well, there may be some luddites out there. But the pace of growth in mobile consumption has proved that if prices are right, people eventually catch up. And that – i.e. right prices — essentially lies at the heart of the problem; if the technology is cheap, there will be one less major barrier to technology adoption.
Few people know that even in today’s day and age – the age of technology that is — Pakistanis pay up between Rs10-25 for every Rs100 of IT related imports as customs duty. On top of it there is 17 percent sales tax and other charges that raise the cost of IT related products from Rs100 to up to Rs145.
According to Dr. Manzoor Ahmed’s calculations – Pakistan’s former ambassador to WTO — Pakistan is amongst the five countries with highest import taxes on IT products. For a government that envisions to technologize Pakistan’s society, its businesses and its government by 2025, removing these tax barriers should be of top priority.
The way forward being proposed by the policy circles – where the Islamabad based think tank called PRIME has been taking the lead of late – is that Pakistan should sign the global Information Technology Agreement (ITA), on which she has been dilly dallying since the last 17 years.
The ITA is plurilateral agreement, which means it is not binding for all WTO members. Under the agreement member countries are to remove all tariffs from all IT related products under the ITA list, which includes personal computers, telecommunication equipment, software, semi-conductor manufacturing equipment, analytical instruments, semi-conductors and other electronic components amongst others.
To date, the ITA has 82 Participants, accounting for 97 percent of World Trade in Information Technology have acceded to this agreement, according to a presentation given by Ms. Shaheen Viqar Deputy Chief (WTO Wing) at the Ministry of Commerce at conference recently organised by PRIME.
The list of participating countries include all developed as well as several developing countries such as Singapore, Malaysia, India, Indonesia, Jordan, Korea, Kyrgyz Republic, Mauritius, Oman, Panama, Philippines, Thailand and Turkey etc.
Does this mean that Pakistan should also join the herd? Well, consider this: a handful of four territories (China, EU, USA, and Singapore) currently hold about 64 percent share in global IT exports, according to Ms. Shaheen’s research. Keep in mind that IT trade has risen manifolds in the last two decades. For example, India, which joined ITA in 1997, has taken its IT export to $100 billion in 2015 from $5 billion in 2000; similar is the case for China, Thailand or Philippines.
This implies that Pakistan has arguably missed the bus in so far IT related export is concerned. Plus it would be a logical fallacy to assume that signing the ITA will lead to higher IT exports. There is no such necessary causation since there are many factors at play here. Yet since the positive spill over of removing tariffs can be far reaching, it makes sense to sign to the ITA.
The good news is that the intra-government process for signing the ITA has already begun. Sources tell us that the Pakistan Telecommunication Authority is currently awaiting replies from the likes of Pakistan Software Export Board, Pakistan Software Houses Association (PASHA), and the likes before it pushes the file ahead.
Some software players, however, are wary of the proposition, fearing that the budding domestic software industry might be washed away because of cheap foreign competition as a result of signing the ITA. The ITA as we know is all or nothing agreement; once any country signs it, she has to remove tariffs from all items under the list including software, and cannot pick and chose items from the list.
But it appears these fears may be a little exaggerated. Foreign softwares are already being sold at dirt cheap prices thanks to piracy and what not, so local players are already facing competition in that sense. Second, while many local buyers – such as banks – buy imported software, many others such as government, health care providers, manufacturing businesses etc buy local software. Third, about 50 percent of software sales of domestic players comprises of exports, so even if a foreign competition comes in the domestic market, it doesn’t matter as much, as it would have been the case if local players sold only in domestic market.
Perhaps this is why the general consensus within PASHA members - according to Ms. Jahan Ara, its president, is to go ahead with the ITA. She says that Pakistani software players are very competitive, and have received accolades across the region and in the world.
However, if there are still some reservations then perhaps a middle way could be found for protectionism with a defined sunset clause. That’s because Pakistan’s software industry is one of those very rare industries that are truly home-grown, it wouldn’t be too much to ask to think through the ITA before going in gung-ho.
What is so special about the software industry that differentiates itself from other box standard industries thriving on protectionism? Well the tax expenditure, if any, to protect local software industry is arguably very low; given the size of the industry. Second, it is truly a home-grown industry thriving on local human talent as against importing an inefficient plant, and then getting protection for inefficiencies. Third, the local software and tech industry in general has already started making the headlines with buy-outs and what not. Those closely following the industry say the next Facebook-equivalent could potentially be from Pakistan. So they are proving their mettle as against our box standard rent seekers in manufacturing sector; though it is unfortunate that a bulk of software exports is not even officially recorded as exports.
Keeping this mind, the government should weigh the options before going in on the ITA. One option could be to sign the ITA now but with the condition that we would implement it 3-4 years down the line when local software houses become a little bigger than they are today and the ecosystem matures accordingly. Alternatively, we don’t sign the ITA right now but unilaterally remove tariffs from all IT related products, except those on software imports. Again, with a sunset clause – say 3-4 years – before the gates are opened.
Either way, the tariffs in IT related products should go. According to Dr. Manzoor’s calculations the FBR collects a grand total of Rs8-9 billion (Rs3-4bn customs; the rest sales tax) from IT related products. Foregoing this revenue would be too small a cost for potentially huge – meta level - benefits.
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