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ISLAMABAD: The complex tax credit system and unnecessary documentation for information technology (IT) sector would not only stop new investment, but also hamper existing investment after withdrawal of income tax exemption from IT and IT enabled services under the proposed Income Tax Amendment Bill, 2021.

This was stated by chairman Pakistan Software Houses Association Burqan Saeed while speaking here at a presser.

He said IT industry, the concerned Ministry, IT Task Force and any other concerned stakeholder was not consulted before taking such a big step which may hamper the growth of the IT sector.

He said the industry had written a letter to Federal Board of Revenue (FBR) to give time for that key export sector and Ministry of IT had also assured that it would approach FBR for reversal of the decision.

He requested Prime Minister Imran Khan to intervene and stop the authorities from imposition of taxes on the IT exports through the proposed Bill.

“It is unfortunate that FBR has not taken any input or view of the IT sector or the relevant ministry before taking such a major anti-export measure. The sudden change in the tax policy will stop new investment and hurt existing investment due to total reversal of taxation regime for the IT export sector,” Saeed regretted.

When asked whether one percent tax would be applicable on IT exports, he stated that the legal advisers and chartered accountants were looking into the issue of any tax on exports.

However, FBR officials told Business Recorder that no tax had been proposed on the IT export services. The IT sector would avail the 100 percent tax credit facility with no tax on exports, they added.

Nadeem A Akhtar, the president and chief executive officer (CEO) Info Tech Private Limited said that such abrupt changes in tax policies would not only scare away new entrants/investors but would cause colossal damage to the growth trajectory of existing players.

He said IT sector, unlike traditional export sectors (textile and others) was the only sector which never asked for or availed any of the subsidies, rewards or incentives like reduced electricity & gas tariff, cash rebates, and input sales tax refunds.

“Tax exemption on IT exports till 2025 is proving to be only substantial support IT sector is offered and replacing it with a complex tax credit regime laden with additional compliance requirements will negatively impact the IT exports growth trend,” he added.

Saeed stated that a complex tax credit system was being introduced which would create unnecessary documentation for the IT sector.

The Commissioner Inland Revenue would determine the eligibility for extending tax credit facility to the IT companies after fulfillment of laid down conditions.

Under the draft Bill, the conditions of documentation are so harsh that it would not be possible to seek tax credit from the tax officials. It is apprehended that the IT sector would start receiving notices like other sectors.

Referring to the conditions of the tax credit scheme, he said the conditions like filing of sales tax returns and withholding tax statements had no link with the IT exports.

The IT sector is already facing heavy taxation at the time of input like 19.5 percent provincial sales tax; 12.5 percent advance income tax and 10 percent activation charges that will be promised to be reduced gradually. The Ministry of IT and other ministries are very supportive in view of futuristic challenges being faced by the IT sector.

He stated that IT & IT enabled service sector had given record exports growth despite the pandemic with 40 percent increase in 2019-2020 and was on track to exceed $2 billion by the end of that financial year. It is apprehended that the passage of the Finance Bill in the same form would stop the IT sector from achieving the said targets.

He urged the prime minister to take immediate action, invite industry stakeholders to discuss our concerns and discourage any such proposals which hamper the industry growth. He also requested the concerned authorities to deal with matters relating to IT and information technology enabled services (ITES) with caution.

Chairman Pakistan Software Houses Association stated that the government intended to take IT sectors into the tax credit regime which had totally failed in case of non-governmental organisations (NGOs).

It seems to be an attempt to stop this sector from further growth. The proposed tax credit scheme for the IT sector is so complicated that even chartered accountants have failed to understand the same.

Referring to Bangladesh, he said the IT sector had not only been granted tax exemption, but also 10 percent cash rewards/rebate in Bangladesh. On the other hand, the replacement of exemption with the tax credit scheme would only result in harassment to the IT sector by the Commissioners Inland Revenue.

The IT sector would receive different kinds of notices by the FBR’s field formations. The conditions to register with sales tax of provincial authorities and filing of withholding tax statements are unnecessary for this sector. If the IT sector is not being facilitated in taxation matters, people would move to countries like Bangladesh.

The freelancers and small IT service providers would be unable to hire tax consultants for maintaining documents under the proposed tax credit scheme, he stated.

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.

Saeed stated “the documentation of the IT sector is evident from the fact that we have to first register with the Securities and Exchange Commission of Pakistan (SECP), then Federal Board of Revenue (FBR) and all provincial sales tax authorities. Besides, we have to register with the EOBI/social security/disability program and operate under the provincial laws and pay local taxes stamp duty and local taxes. Now they are proposing income tax on IT and IT enabled services.”

However, FBR’s approach towards Tax Treatment has been detrimental to the growth of IT sector as its policies aim solely at raising revenue by all means. Recent news of withdrawal of Income Tax Exemption on export of IT services, and replacing with a tax credit scheme where the tax credit is subject to fulfillment of many conditions such as filing of tax withholding statements and sales tax returns amongst others, will negatively impact IT exports growth trend. In 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. Even otherwise, sales tax on services is a provincial subject and is outside FBR’s domain.

Copyright Business Recorder, 2021

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