Revolutionising the IT Industry

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Where are the 583,013 imaginary taxpayers?

 

Pakistan has the third-largest army of freelancers on freelancers.com; its workforce is the fifth-most on upwork.com. None of these skilled professionals is interested in paying a tax on the income being generated from their projects worth billion of rupees.

 

Pakistan’s IT industry has a come a long way. Today it stands as the country’sfastest-growing export sector. From less than $20 million in annual exports in 2000, Pakistan’s annual IT exports have crossed the $2 billion threshold with an annual growth rate between 30 and 40 percent.

But our government’s taxation of IT companies has proved counter-productive.The attempt to generate revenue ended up having some serious repercussions, including the relocation of our IT companies onto foreign soil.

We’re talking about a country in which people cheat the government when paying taxes and where the incompetent Federal Board of Revenue (FBR) recently stated that in the past year nearly 600,000 taxpayers have ‘mysteriously disappeared’ from the tax net. The FBR had been happily chirping that it had in its net 1.44 million people who regularly filed tax returns. But it turns out there are only 856,987 taxpayers in the country that the board can actually trace to their homes or workplaces.

Where are the 583,013 imaginary taxpayers?

Pakistan has the lowest number of active taxpayers per tax administrator — 64 — in South Asia. In India, taxpayers per tax administrator share stands at 537. Elsewhere, in Sri Lanka it’s 232, the United States 1,990 and Switzerland 3,182. That means just 0.6 percent of the entire population pays taxes in Pakistan, as opposed to 4.7 percent in India, 58 percent in France and 80 percent in Canada.

So the government, which had imposed an additional 8pc tax on revenues generated by the IT industry in 2015-16, said nearly 40 percent of Pakistan’s IT companies move operations to the United Arab Emirates, which may or may not be the case.

With investments that are nearly nil, the IT sector doesn’t stand a chance of becoming an actual industry until we begin investing earnestly in the most nimble minds within our own borders.\

Sajjad Syed, chief executive officer of Excellence Delivered (ExD) Private Limited, one of the affected companies, confirms the trend. He said his company outsources most non-core operations and is working with consultants. Their work primarily revolves around helping businesses structure IT systems. So small companies like his find it more feasible to shift operations from Pakistan to Dubai, a tax haven just 1.5 hours outside this country’s border.

Few actually believe the IT industry should be pampered and exempted from taxes such as the entertainment and cinema industry. In fact, many say members of the most-educated and skilled segment of our society are habitually cheating tax authorities and leaving their homeland over a relatively marginal tax.

It seems as if no one has the answer to sustaining Pakistan’s fragile economy while its IT companies are making billions from rich global contracts. Apart from them, Pakistan has the third-largest army of freelancers on freelancers.com; it workforce is the fifth-most on upwork.com. None of these skilled professionals is interested in paying tax on the income being generated from their projects worth billions of rupees. In fact, the details of the projects they are assigned, which generate personal revenue, never come with any official record that tax authorities can document.

Wahajus Siraj, of the Internet Service Providers Association of Pakistan (ISPAK), pointed out to DNA the heavy taxation that ISPs face, as opposed software developers and freelancers. Siraj say the latter enjoy a tax-free life.

“While engineers, doctors, public and private employees in all sectors are being forced to pay income tax from their already meager salaries, the software developing companies use grey channels and the freelancers go undocumented,” Siraj said.

Awais Raza Tahir is an expert in taxation and revenue policy reforms. He is of the view that the majority in the IT sector have willingly moved toward cash-based systems to avoid taxes. If this continues, the government’s tax projections will become impossible to meet. And industry gurus question taxing a small IT sector that still needs significant help from the government.

Our IT industry lags far behind Indian technology industry, which includes IT services, Business Process Management (BPM), hardware and software products, Engineering R&D (ER&D) and Internet-enabled consumer or Enterprise Services. Compared to $2 billion export per annum in Pakistan, India’s flagship IT-BPM sector is valued at $143 billion; it is expected to contribute 9.5 percent toward India’s Gross Domestic Product (GDP) and more than 45 percent in total services export in 2015-16.

To put it in other terms, the contribution of IT toward India’s GDP is equals the contributions the agriculture crops in Pakistan make to our country’s GDP.

This year the federal government has taken many significant steps to support and develop the IT sector in Pakistan. Rural Telephony and E-Services (RTEs) Program: To extend IT and Telephone services to far-flung areas four new projects started in 2016-17 under Universal Services Fund. A part of this project in Balochistan, Kharaan, Washuk, DeraBugti, Kohistan and in FATA Warisistan areas, new lines for Rs2.43 billion are being laid in these areas. For ongoing projects Rs9.52 billion will be allocated. In 2016-17 for provision of telephone services in rural areas an amount of Rs11.94 billion have been allocated.

The ongoing broadband projects in southern telecom region are expected to provide coverage to over 56,000 new subscribers in un-served/underserved areas in FY 2016-17. Furthermore, 125 Educational Broadband Centers (EBC’s) and 55 Community Broadband Centers (CBC’s) are to be established under these projects with subsidy of 482.5 million.

Under the Optic Fiber Cable Program in FY2016- 17 Rs63.4 million have been allocated for on-going projects in Balochistan and Rs1.9 billion for three new projects in Khyber Pakhtunkhwa, Balochistan, Sindh and Punjab; Other than the above, work on; establishment of computer labs under Pakistan Bait-ul-Maal women empowerment centres, prime minister’s information and communication technology scholarship, prime minister’s scholarship program for talented students of Balochistan and prime minister’s national ICT internship program, is underway. For the current year 2016-17 around Rs1 billion were allocated for these schemes.

The PM has also inaugurated the establishment of cross-border optic fiber project which will further open relations between the two countries. Public Sector Development Program has been allocated Rs1.10 billion for ongoing schemes and launching new projects for Telecom and Information Technology. Out of this Rs938 million will come from Federal Budget and Rs171 million will come through foreign aid. Rs834.02 million will be utilised to complete the ongoing projects, whilst Rs90 million will be invested in three new projects to be launched in the coming fiscal year. The major budget breakdown for PSDP is as follows:

Rs230 million for Pak-China Fiber Optic Cable, Rs50 million for Pakistan Software Export Board for enhancing IT Export, Rs10 million for replacement of GSM network in Gilgit-Baltistan and Azad Jammu Kashmir, Rs50 million for GSM coverage on Karakoram Highway, Rs151. 23 million for technology parks in Islamabad, Rs1 billion for establishing computer labs under Pakistan Baitul Maal’s women empowerment centers prime minister’s ICT scholarship and prime minister’s national ICT internship programme.

According to the federal budget, the government has increased taxes on mobile phones yet again after doubling them just last year. Consumers now have to pay a tax up to Rs1500 for mobile phones. The tax will be of Rs300, Rs1000 and Rs1500 according to the set price.

Ishaq Dar revealed that broadband projects in southern telecom region will provide coverage to over 56,000 new subscribers in the under-served areas. Tax exemption has been proposed to be extended for export of IT services and products until June 2019. The IT companies taking relaxation through this exemption shall have to remit 80pc of their revenues through banking channels to Pakistan whilst keeping 20pc of the revenues outside of country for their financial needs.

Maybe it would be worthwhile to try to understand the fiscal priorities of our provincial governments.

The government of Sindh is putting in place a comprehensive Sindh Education Information and Management System based on Geographic Information System (GIS) to streamline the departments along modern lines. This will create more jobs for IT experts in that province. Sindh’s government also has announced the establishment of Human Resource Maagement, Logistic Management System, Health Regulatory Authority, Provincial Health Services Academy, Health Management Information System. They are in the province’s 2016-17 budget.

That government also has increased its IT services budget significantly from Rs370 million (2015-16) to Rs477.360 million (2016-17). The budget of the provincial IT department is 698 million rupees. The IT sector (government and services) budget for the province is 12 times less than the budget allocated for the same sector in Punjab. With so little allocated, it would seem almost impossible to complete a lengthy list of IT projects that the provincial government hopes to complete in fiscal year (2016-17).

Sources privy to how the government functions have revealed that in most cases the provincial government will lend and duplicate the software being developed by the Punjab IT department. That is the reason the IT project announcements in Sindh are almost the same as projects already completed in Punjab in recent years.

For Balochistan, no steps have been taken to support and promote the IT industry. The finance department of government of Balochistan was facing capacity issues as it prepared its budget for fiscal year 2016-17; even after en-mass transfers of officers in the aftermath of the arrest of Mushtaq Raisani on 6 May. The finance secretary was arrested by the National Accountability Bureau (NAB) on corruption charges after Rs630 million was discovered in his home. Newly posted officers, without a background in finance or budget-making, had less than three weeks to prepare the budget. But somehow the assembly still managed to announce the budget for fiscal year 2016-17 by 18 June. It is highly abnormal and seriously negligent that this province has not focused on the IT sector, especially given that it is the flag bearer and platform for the multi-billion-dollar project that is the China Pakistan Economic Corridor (CPEC).

With such a massive need in the province for IT experts to handle CPEC, the already under-developed province may miss a golden opportunity because of the poor planning and delinquent policies of the provincial government.

In Punjab, Rs44 billion have been allocated for Punjab Safe City Project in six cities of the province, including the first phase in Lahore. An amount of Rs13.95 billion has been earmarked for the governance and it sector sponsored by PITB and other government departments against last year’s Rs8.54 billion. Earlier, the Technology Incubator Plan9 and PlanX of entrepreneurship in Pakistan saw their completion at Arfa Software Technology Park. And the completion of Driving License Management Information System, Digitisation of Police and Land Record Management System also should be credited to this province.

Similarly, the ‘Automation of Case and Courts Management System at Lahore High Court and District Courts Lahore’ is helping improve service delivery of law and justice to the general public. And the government is working on the ‘Local Government Automated Financial Management and Monitoring System’ to increase transparency.

The Khyber PakhtoonKhwa (KPK) government has increased the budget of its Information Technology department from Rs63 million to Rs79 million. Rs180 million have been kept in an annual Information Technology development pro- gram. By earmarking so little for the government IT departments, the KP government has shown negligence toward this important sector. It is pertinent to mention that the province is being governed by the PTI-led government which claims to be a party of the youth. But not a single word about IT, IT infrastructure, IT services and tech startups has been mentioned in the KP industrial policy as launched 31 December 2015 by Pervaiz Khattak, the provincial chief minister.

Contrary to this, our neighbor India’s IT industry has shown a growth of 13 percent and the industry is expected to reach revenues of $225 billion by 2020. When contacted by DNA, S. Kaushik, assistant dean of the Software Engineering Department at Delhi University, said, “What Pakistan lacks is education, good education and quality education. India’s investment in their IITs, IIMs, and regional engineering colleges in the 1950s is paying a dividend now. Even here, southern Indian states that have invested more in education than north India are the driving force.”

Jehan Ara, president of the Pakistan Software Houses Association for IT and ITe (PASHA), in an exclusive discussion with DNA said that taxing the fragile IT industry in Pakistan shows that the government really is not concerned with developing it.

Speaking about the imposition of 8pc tax on revenue earned by the industry last year, she said, “Many of us have started outsourcing and relocating. This will result in increased employment and business in places like Dubai instead of Pakistan. Relocating companies will have little compulsion to hire Pakistanis; instead, they will certainly move their capital to other countries and outsource work to India, thus resulting in little to no gain to the Pakistani industry.”

Sajjad Mustafa Syed, CEO of the Excellence Delivered, a global IT company operating in Lahore, said there remains ambiguity about the exact size of the IT industry in Pakistan.

“I think because of many vested interests the industry is being portrayed as undersized and it is not letting the government and the international players to rely and invest in the further development of the industry. As an expert in the field, I cannot trust that Pakistan’s IT industry shall be valued at $2 billion compared to $143 billion of India. We are behind but not that far,” Syed said.

He suggested undertaking a formal study to capture the real size of the industry.

Rehmat Ullah Wazir, Member Inland at FBR, tells Pakistan Today that the Federal Board of Revenue has proposed a tax break for IT services companies from current 8pc to 2pc.

Newspaper reports offer that Saleem Mandviwalla, who was chairing the Standing Committee meeting, said that impact of services tax should be calculated and necessary measures should be taken if tax is negatively impacting the industry and tax-collection targets. He also reportedly questioned the current practices of FBR and explained how unhealthy and disastrous it can be by taxing an industry without accurately measuring its strength. In fact, the FBR proposed this tax cut after a sizeable number of IT companies already had moved abroad.

However, GA Khan Advocate, an expert in corporate taxation at the FBR, is of the view that within the IT industry a majority of companies use money laundering tactics and no operation have been shifted to Dubai as the human resources cost in Dubai is thrice as high as Pakistan. He compared the 8pc taxation as just peanuts. And he asked about office space, rent, communication and other costs, saying that very cleverly these companies have shifted billings to UAE while retaining back-offices in Pakistan, thus hurting our government’s efforts to achieve its tax-collection targets.

As the tax holiday on IT exports expired in 2016, the Governing Board of Pakistan Software Exports Board (PSEB), during a board meeting, directed MD PSEB to prepare a summary for tax exemption on IT exports beyond June 2016. The reason? To motivate IT companies to remit more of their earnings to Pakistan instead of keeping them abroad.

Rizwan Bashir Khan, additional secretary and In-charge of IT and telecom in the federal ministry of information and technology, spoke with DNA and said that to help the startups, PSEB has launched a counseling center to guide and mentor IT startups and SMEs as well as IT graduates. It also placed contact information for counseling center on PSEB’s website. The ministry of information technology also will be offering 3,000 ICT internships in a couple of months. IT graduates will take NTS tests, then the top 1,500 of them will be placed in IT companies and IT departments of non-IT companies. Another 1,500 interns will be placed in the second phase. The goal is to create jobs for IT graduates through such internships.

Pakistan may be fast when it comes to building roads and bridges to bring the China Pakistan Economic Corridor to life. But aside from buildings, roads and machines, the country will require intelligent human resource to keep it running. With investments that are nearly nil, the IT sector doesn’t stand a chance of becoming an actual industry until we begin investing earnestly in the most nimble minds within our own borders.

Intelligent nations make plans far ahead of time.