In recent years, the information technology (IT) sector has become a significant contributor to the Pakistani economy. The sector has generated employment opportunities and has played a vital role in the country’s digital transformation. To further support the growth of this sector, the Federal Board of Revenue (FBR) has introduced key tax concessions for IT and IT enabled services. In this article, we will discuss these concessions and their implications for the sector.
Reduced Tax Rate on Export Proceeds
The IT sector has been provided a reduced tax rate of 0.25% on their export proceeds, which is a quarter of the 1% export tax rate provided to all other exporters of goods. This concession aims to promote exports of IT services and increase the competitiveness of Pakistani IT companies in the international market.
Removal from Tax Credit Regime
The sector has been removed from the tax credit regime to simplify the tax filing system and to remove hassles of compliance that were earlier required to make them eligible for 100% tax credit to claim tax exemption. This concession will reduce the administrative burden on the IT sector and make tax filing easier for them.
Liberalization of Withholding Tax Statements and Sales Tax Return Requirements
The requirements of filing of withholding tax (WHT) statements and sales tax returns have been liberalized for the sector. Only those who are required under the law will file WHT statements or sales tax returns. For individuals having a turnover up to Rs. 100 million per year, there is no requirement to file WHT statements or to deduct tax. This concession will reduce the compliance burden on small IT companies.
Liberalization of Definition of IT and IT Enabled Services
The definition of IT and IT enabled services as provided under the Income Tax Ordinance, 2001, has been liberalized by expanding its scope and making it all-inclusive. The definition is now “not limited to,” and suitable amendments have been made to include all types of IT and IT enabled services. This concession will bring more IT services under the tax net and help the FBR to generate more revenue.
Sales Tax Refund Facility
IT and IT enabled services exporters have been provided the facility of obtaining sales tax refund in respect of any sales tax that has been paid as their input on computers, laptops, stationary, and other items. This facility is not available under the Provincial Sales Tax Law. This concession will help the IT sector to reduce its input cost and become more competitive in the market.
Income Tax Exemption for Venture Capital Fund
The demand of the IT sector of reviving tax exemption for Venture Capital Fund has been accepted, and a new provision has been created for providing income tax exemption to the Venture Capital Fund for three years. This concession will encourage investment in the IT sector and promote innovation and entrepreneurship.
The key tax concessions for IT and IT enabled services in Pakistan are aimed at promoting the growth of the sector, reducing the compliance burden, and increasing the competitiveness of Pakistani IT companies in the international market. These concessions will bring more IT services under the tax net and generate more revenue for the FBR. The IT sector should take advantage of these concessions to expand their business and contribute more to the economy.