ISLAMABAD: Freelancers, individuals, association of persons (AOPs), companies may end up paying tax within the range of 20-35 percent of their profits instead of 0.25 percent of export proceeds under the Finance Bill 2022. The Pakistan Business Council (PBC) has also questioned the government’s strategy to grow IT exports in the light of the recommendations of the Finance Bill 2022.
Badar Khushnood, Chairman Pakistan Software Houses Association for IT and ITES (P@SHA) told Business Recorder on Sunday that through the Finance Bill 2022, the tax credit was withdrawn on income from export of software and IT services with 0.25% tax on export proceeds of such services. This means all IT companies will be in trouble and will stop bringing money to Pakistan. The implications of the Finance Bill 2022 are a disaster for the IT industry, he said.
In light of the negative implications of the Finance Bill 2022 on the IT sector, he recommended to restore tax exemption or withdraw taxes on productive assets like laptops.
He was shocked that the FBR committed to reduce the tax rate from one percent to 0.25 percent, but surprisingly Finance Bill 2022 has used the words of “full and final tax liability”, thus ending the facility of tax credit. Earlier, the law has given an option of either taking exemption certificate from the concerned Commissioner, or pay one percent tax. Contrary to this, the facility of tax credit has been withdrawn without any consultative process. The procedure of tax credit was very cumbersome, as well as inefficient. The concerned Commissioners only give exemption for a three months period and not for a full tax year period.
July-April IT exports surge to $2.198bn
In budget (2022-23), the top priority industry recommendations critical to growth IT & ITeS sector included tax package for IT/ ITeS industry, revert ‘tax credit scheme’ and reinstate ‘tax exemption’ on IT Exports till 2025, standardize definitions for IT/ ITeS industry for all purposes, issue fast-track tax resolution mechanism for existing companies, define IT as a ‘service’ clearly and not a ‘product’, incentivize exports with flat 5% cash reward, allow “50% forex retention” & hassle-free & efficient in/ out-flow, allocate 1% of preceding year’s exports via PSEB/ MoITT for skills development & up-gradation to improve talent supply, country branding/ PR and industry & infrastructure development and facilitate “zero taxes/ duties” on productive assets, e.g., laptop and other essential IT equipment.
Moreover, do not add any new taxes and/ or procedures for IT, Freelancers, E-commerce and Startups to facilitate domestic digital transformation (e.g., long-term documentation of the economy) and growth in exports. Otherwise, people will be encouraged to park a significant portion of their earnings abroad which will be a loss to the exchequer. IT and ITeS is the fastest and lowest investment option to grow Pakistan’s forex reserves. Badar Khushnood asked to ensure ease of doing business and policy continuity as much as possible.
According to the explanation of the Finance Bill 2022 issued by a leading chartered accountant firm, the income tax holiday up to tax year 2025 was available on income from export of software, IT services and IT enabled services. Through Tax Laws (Second Amendment) Ordinance, 2021, the said exemption was withdrawn and a concept of 100% tax credit was introduced as part of section 65F up to tax year 2025, subject to certain conditions. Taxpayers of same sector who do not qualify for tax credit are being subjected to 1% withholding income tax on export proceeds under section 154A.
The Bill proposes to withdraw the 100% tax credit regime with effect from July 1, 2022 and consequently, the entire sector will be subject to withholding tax under section 154A at 0.25% of export proceeds, it added.
Meanwhile, Pakistan Business Council (PBC) has tweeted that the budget proposal to convert WHT on import of materials by commercial importers to final tax is a recipe for promoting evasion. This sector is notorious for under-invoicing. The final tax liability should be assessed on the basis of tax returns.
It said it is surprising that services were not included in the trade figures mentioned by the FM in the budget speech yesterday. Even more surprising was the withdrawal of tax exemption on export of IT and IT-ES. What’s the strategy to grow IT exports, PBA asked.
Copyright Business Recorder, 2022
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