Covid-19 crisis—Budget 2020

Economic revival & IT sector

Huzaima Bukhari & Dr. Ikramul Haq

In the aftermath of Covid-19 outbreak and lockdown, now gradually being lifted in Pakistan, the debate about untapped potential of Information Technology (IT) sector has assumed renewed interest. It has also great importance as increase in export of information technology (IT) and IT enabled Services (ITeS) could have earned us much needed foreign exchange during these testing times and providing jobs for millions while sitting at home. There are many questions and issues related to IT sector that need serious debate/answers/solutions to overcome unsatisfactory growth in this vital area of economy that has great potential for local as well as cross border business. IT sector growth and exports are important to strengthen economy through innovations and improving productivity, ensure digitization of public sector departments, attracting local and foreign investments, promotion of infant industries and generation of jobs opportunities for youth. It is till today, a highly neglected sector, despite tall claims by the federal and provincial governments to promote it and tap its real potential.

Let us analyse the pre-Covid-19 position of country’s IT and ITeS exports.  According to a report, export remittances surged to “$901.486 million at growth rate of 23.94 percent during the first nine months (July-March) of fiscal year 2019-20 compared to $727.353 million during the same period of last year”—for further detail visit https://www.pasha.org.pk/knowledge-center/industry-reports/reporting-of-it-exports/. This appeared very encouraging, but is it the real potential of a country of 220 million, where 65% population is that of youth and we need annually two million jobs for them? The complete IT industry profile is available at: https://invest.gov.pk/sites/default/files/inline-files/IT.pdf

In an article [IT for economic growth, The News, February 19, 2020], it was aptly observed that “Pakistan’s IT exports have underperformed by a factor of at least 20, standing at only $1 billion whereas Indian IT exports are over $130 billion while in the Philippines they are at $26 billion. Artificial Intelligence alone has been predicted by McKinsey Global to have a market of $14 trillion by 2025”.

Undoubtedly, the Ministry of Information Technology and Telecommunication [MoITT] in recent months has taken extraordinary measures to boost the IT sector, especially its exports under the dynamic leadership of its Secretary, Shoaib Siddiqui, who  directed the management of Pakistan Software Export Board (PSEB) to devise a comprehensive marketing plan and prepare strategy to accelerate growth of Pakistan’s IT sector. A comprehensive incentive package is announced by the MoITT for promotion of IT sector, aiming at increasing exports from the current around $1 billion to $10 billion by 2023. This package was prepared “after a thorough analysis of other important IT destinations of the region like Philippines, China, Bangladesh and India”, the MOITT adds. It is decided to establish Special Technology Zones to promote IT/ITeS exports for which allocation of Rs 6.5 billion is proposed to the Planning Commission by MoITT in the forthcoming budget 2020, expected to be announced in the second week of June, 2020.

Information is available on the website of MoITT that on May 8, 2020, its Secretary chaired a meeting that was attended by senior ministry officials, Managing Director of PSEB and Chairman of Pakistan Software Houses Association (P@SHA), ensured “close coordination with the IT industry to minimize the impact of Covid-19 pandemic on it and take all possible steps for providing maximum facilitation and assistance to the industry during these challenging times”. The Secretary was apprised that “in order to ensure business continuity of BPO-Call Centers, a working group was created to handle associated issues in a rapid and effective manner”. MoITT worked out with P@SHA and PM Task force on IT & Telecom some immediate relief measures to meet the economic toll of Covid-19 outbreak and lockdown.

Under the existing circumstances, it will be absolutely necessary to address the following issues on urgent basis, if we want to revive the economy and make IT industry as a catalyst for growth:  

• The registered segment of IT Industry employs about 125,000 people (in private sector). Over 70% of input cost of the industry is payroll. Because of imminent global and domestic slow down, payments are extensively delayed and future forecasts are uncertain. Contracts are being cancelled or deferred, companies have started lay-offs in order to manage their cash-flows and prevent losses. It recommends immediate relief of 25% of the monthly payroll to prevent lay-offs and keep the companies afloat and sustainable for a few months, at the least.
• IT Companies be exempted from paying withholding tax (WHT) & General Sales Tax (GST) on utilities and internet, at least till Dec-2020.
• Companies be exempted from paying WHT on goods and services, in order to manage their cash flow and cost of services. Companies are facing a tough decision to either pay taxes to the government or salary to employees.
• IT companies are mostly working as GST collecting agents, the customer invoice processing period is generally 60 days more than the GST due date. Companies in existing circumstances, due to liquidity crunch cannot pay these from their own pockets.
• There is a need to provide running finance and leases at 0% KIBOR [Karachi Interbank Offer rate] available for current borrowing/leases as well as new borrowings at 0% KIBOR rates with a limit of up to 20% of the average annual revenue of the last 3 years because companies need additional borrowing in order to service existing borrowings, as well as fresh borrowings to keep operations running smoothly.
• Immediate payment of past years tax refunds by Federal Board of Revenue (FBR) and disposal of pending cases of IT Industry, except where there are established gross contraventions.

The IT industry has also stressed upon the State Bank of Pakistan to relax FE 25 Circular of 1998 to facilitate the IT and ITeS exporters to allow foreign exchange to enter Pakistan smoothly.

According to a report of September 24, 2018, “the Khyber Pakhtunkhwa Government has enhanced efforts to boost the volume of Information Technology (IT) exports to USD 10 billion in the next five years, as per Prime Minister Imran Khan’s vision for the benefits of people”.

In 2020, the figures speak otherwise. In fiscal year 2018, our IT and ITEs exports reached $1,065 million  as per data of State Bank of Pakistan (SBP). Many argue that “the actual IT exports were closer to $5 billion  as the SBP does not include various non-IT sectors such as financial services, automobiles, and health care”. Pakistan IT exports surged 13.4% to $1.06 billion in fiscal year 2018 from $939 million in fiscal year 2017. About $320 million of IT exports revenue in fiscal 2018 came from software exports while the rest was made up of services such as consulting, telecom and call centers. The growth was even more robust in the prior year with IT exports rising 19.1% from $789 million in fiscal year 2016 to reach $939 million in fiscal year 2017.

It needs to be highlighted that Pakistan has zero income tax on IT & ITeS exports and for PSEB registered IT start-ups, 100% foreign ownership of IT & ITeS companies is possible, 100% repatriation of profits to foreign IT & ITeS investors and tax holiday for venture capital funds till 2024. Despite these incentives, we could not promote the IT sector as engine of growth both for domestic sectors and on the export front. Irritants in the tax system are:

• The internet service providers are required under section 236 of the Income Tax Ordinance, 2001 to collect 12.5% advance tax. The 100% export-oriented IT entities are not subjected to income tax but subjected to withholding tax and to get waiver from it from the Commissioner of Inland Revenue (CIR) is an uphill task. Those doing business locally are subjected to heavy withholding taxes of 10% that is considered as minimum tax even if you have lower taxation on net income. But if total taxable income attracts higher rate then you have to pay the same. This is worst kind of taxation one can think of in any civilized society and especially when we want to promote IT sector and many direct exporters take services from indirect exporters—the intermediaries—suffering heavy taxation and passing on the burden to the exporters. 
• According to data available on the website of Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on December 31, 2019 [data is not updated since then even after lapse of almost 5 months] is 165 million (78.2% teledensity), out of which 76 million are 3G/4G subscribers (35.9% penetration), 3 million basic telephony users (1.1 teledensity) and 78 million broadband subscribers (36.9 penetration). All these are subjected to withholding tax and according to FBR Year Book 2018-19, total collection during fiscal year 2018-19 was only Rs. 17.19 billion [for 10 months, collection was suspended by an order of Supreme Court of Pakistan in a suo muto case] whereas in fiscal year 2017-18 it was Rs. 47.38 billion. The data for the current fiscal year, July 2019 to April 2020 is not available on the website of Federal Board of Revenue (FBR) or in any other documents. Earlier, FBR used to publish quarterly review of tax collection etc, a practice it has give up now.
• On the one hand, we want to promote the IT sector and on the other it is most heavily taxed. After vacation of stay by Supreme Court on April 24, 2019 in Human Rights Case (HRC No. 18877/2018, 95 million unique mobile users [total subscribers are over 165 million but many have multiple and/or dormant SIMs] are paying 12.5% advance income tax. The detail of indirect taxes paid by them is 19.5% sales tax on services to all the four provinces, for users in Islamabad Capital Territory 17% federal excise duty, plus 10% service/maintenance charges. According to submission of PTA, during the period of stay [June 11, 2018 to April 23, 2019] by Supreme Court, Rs. 90 billion tax was not collected by mobile companies.  

The above scenario must be taken into account by the MoITT as heavy taxation of telecommunication sector is one of the main impediments for growth of IT sector. It should take up the matter with Dr. Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance and Revenue for withdrawal of withholding provisions and reduction in rate of federal excise in ICT and with provincial governments to reduce the rate of sales tax on services that is obnoxiously exorbitant at 19.5%.  How we can promote e-commerce and export of IT and ITEs with such erratic taxation on mobile/internet use?     

In the background of challenges faced by international community due to shrinking of global economy in the wake of Covid-19, we need to concentrate on economy of scales and provide competitive rates for various IT related services to capture the vacuum created due to closure of many enterprises in this field in the rest of the world. It is only possible if we reduce cost of doing business, our electricity and other utilities are too costly as compared to nearby countries, our main competitors. Take the case of United Arab Emirates, where infrastructure is much advanced for IT sector and cost of doing business is much lower. Our policy makers are oblivious of these realities or they are unable to undertake much-needed and long-overdue structural reforms in the energy sector and in taxation system—the two main areas that are growth slayers in our case.

The challenge before us for survival and revival of economy offers a great opportunity besides taking immediate steps to use IT as an engine of export-led growth. No doubt our economy is badly hit by economic toll of Covid-19 outbreak and lockdown, and all industries and service providers would require a long time to recoup losses. The federal and provincial governments and SBP need to give them all facilities to avoid lay-offs and to survive in difficult times. There is an urgent need to encourage the Small and Medium Enterprises (SMEs) engaged in IT/ITeS business, especially exporters, by providing low-rate finance, reduction in tax rates and all possible facilitations, incentives and opportunities in the budget 2020. In the federal and provincial budgets, substantial allocations should be made for promoting IT sector, especially IT/ITeS exports. The second challenge is how to move towards knowledge-based economy and for this the existing disconnection between educational institutions and businesses must end. The business houses must concentrate on human resource development and fund IT departments of universities and vocational institutes in this sector to produce world-class personnel with skills that are not bookish but practical to promote e-commerce, IT and ITeS exports.

The PSEB must organise more and more Commercial Counselor Training sessions in the coming days through video linkages  to apprise them about the facts and potential of Pakistan’s IT industry in order to solicit their efforts for projecting Pakistan’s IT industry as viable and feasible outsourcing destination in key international markets. We need to have a central portal where all the IT products and companies are listed.

Another major issue hindering Pakistan IT/ITeS growth, as highlighted by Dr. Atta-ur-Rahman in his article IT for economic growth, The News, February 19, 2020, “has been the image of Pakistan, lack of proper marketing as a tech destination, market access issues of IT companies (visas) and country risk perception….” Majority of IT companies are SMEs, Dr. Atta-ur-Rahman has rightly pointed out cannot “understand the international corporate/business culture and to market their products. Globally, it is a norm for countries to incentivize in their local companies to help in their marketing/sales efforts and position their technology industry as an attractive destination for the world”.

These above are some measures we need to take to strengthen local IT companies and help them to grow and better market their IT products and services abroad to earn much-needed foreign exchange for the country. The comprehensive proposal, given by Dr. Atta-ur-Rahman in the above cited article, by the MoITT and the IT industry people, must be seriously considered by the government. It will make a real difference in revival as the world is now to move towards IT tools more to conduct businesses and conduct transactions. We are lagging behind in this area and this is a golden opportunity for the policymakers to remove all the irritants discussed above and provide facilitations in the forthcoming budget.

PS.

Draft was sent to many experts for feedback and suggestions, but none responded. A very dear friend, batch mate (12^th CTP) and ex-colleague in Federal Board of Revenue, Viqar Mahmood Khilji (draft was not shared with him due to my oversight), after publication made the following comments:

While serving as CC in Berlin, I made a number of suggestions both to MoC and to PSEB but without even eliciting a single response.

Main thrust of the movers and shakers in IT sector is towards USA. No doubt it’s a big market that pays well but it is flooded with the Indians who are already quite well entrenched in Universities and leading IT companies.

During my 7 years as CC, hardly anyone from Pakistan participated in CeBit (in Hanover, Germany), the biggest IT exhibition after possibly the one in Las Vegas. Pakistan could have competed on the global level by focusing on Europe but the “be all and end all” of Pakistani Bureaucracy did not think it its worth.

NADRA did well to make an inroad into one or two countries in Africa by selling its ID card software  but that was it.

In any case it is high time to appoint experts to head relevant agencies, if Pakistan is to make any headway at all in becoming a global player.

I believe that the Indians caught on early to the idea of learning I T. They went (or were sent) to the best institutions in USA and subsequently took up jobs in Silicon Valley besides setting up their own startups.

A similar hub was created in Bangalore and qualified and well connected Indians returned home to set up companies to work in close collaboration with the companies they had left behind in USA.

Pakistan was late to start in IT sector. And it sponsored hardly anyone to go abroad for advanced study and experience.

The mushroom growth of IT institutions in Pakistan also did nothing to improve the standards of IT graduates. Instead the “herd movement” flooded the market with half baked graduates and as in other export products, here too the Pakistani companies took to providing basic services only on demand.

Pakistan hardly does any Hardware manufacturing in the IT sector let alone Software of international repute. Except for a few companies in Pakistan and a few individuals sitting in USA, There is hardly anything of significance being produced.

Pakistan needs to support IT sector in real earnest and aggressively market its IT sector. The first step would be to appoint an expert to head the relevant government agency.

Self praise by bureaucrats for a few mundane accomplishments here and there, will not work.

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).