IT Industry Seeks Recognition, Awaits Incentives

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by Tauseef Mallik and Rabia Garib

Pakistan isn’t alone in its wholehearted appreciation of Government support for any industry or sector. Just like most other countries, if you’re lucky, you’ll grow the sector as much as you can before the authorities can throw hurdles to regulate you. The IT and ITeS sector reports $655.2 million exports in fiscal year 2016-2017. Software Development, BPO Services, Mobile App Development, Animation and Consulting, System Integration and Game Development are the most productive areas. Exports for 2017-18 are expected to cross the $900 million mark.

Shehryar-HyderAs the government mulls options to extend fiscal and non-fiscal incentives for the IT sector, the country’s leading IT experts and industry gurus discuss alternative policies and lobby to get these incentives customized in the best interest of the industry.

TheNewSpaces reached out to P@SHA’s Secretary General, Shehryar Hydri on the Association’s roadmap for the next year along with the support needed from the Government. P@SHA is a representative body of more than 500 IT and ITeS companies in the country.

In order to facilitate more and more IT firms and encourage their participation by providing them favorable working condition, P@SHA urges the government to extend the income tax exemption on IT and ITeS exports till 2029, as the current extension expires in 2019. By doing so, it will eventually encourage more companies to report their earnings whereby, a cumulative growth of the industry will be possible.

It also calls for the removal of 2% – 8% minimum tax on services for IT and ITeS, and the removal of custom duty and sales tax over imports of specific items.

P@SHA seeks an end on provincial sales tax over exports and a decrease in tax on domestic sales from 13-16% down to 5%. It also calls for reducing long term financing rates for IT/ITES companies.

Effective Policies That Can be Emulated
You don’t have to look too far when it comes to growth-friendly policies for IT sector. In fact there are several examples closeby which will help the industry to grow farther and faster.

As an example, Bangladesh currently offers 10% cash reward on ICT exports and has made all IT-related imports tax-free. Chengdu City, China has lifted income tax from salaries, allowing firms to retain talent for senior management.

Our next-door neighbor India is said to have established 113 Special Economic Zones (SEZ) to facilitate IT sector development, allowing duty-free import on setting up new units. According to P@SHA, the SEZs in India are allowed to retain 100% in convertible foreign exchange along with 5% cash reward on IT exports.

In addition to this it offers complete exemption on stamp duty on purchase/lease of land/office space/building. Zoning and space for incubation centers and startups is a big problem in emerging markets where real estate prices and dealings continue to be a challenge, this area needs government intervention in order to arrive at a long-term solution.

The Indian Government ensures uninterrupted power supply to SEZs from state utility, providing 100% exemption on electricity duty for a period of 5 years. SMEs are also given 25% subsidy on power. Philippines is also said to facilitate tax and duty free imports for IT sector, in addition to the blanket exemption from all types of local, national and withholding taxes.

Human Resource Development
Access to quality and skilled human resource that is aligned with the needs of a growing industry remains a problem everywhere. But with less than 200 universities for a population of almost 200 million people, can the task still remain so impossible?

When asked about the initiatives to increase the availability and retain the quality human resource, Shehryar suggested that the workable solution to this exists in multi-stakeholder partnerships in setting up institutes of higher education. And no, this doesn’t mean that the Big Enterpriss settle in like vultures and promote their own curriculum for an isolated mass learning program; just that the consultation with the industry players has to begin from the time students enroll into institutions.

Government and the concerned bodies related to the IT industry should ensure job security, provision of better opportunities and competitive pay-scales in order to make the reversal of brain-drain possible.

If the IT industry continues to grow and works on implementation of modern solutions in a secure and stable environment, it is expected that the human resource migration will be mitigated itself.

Shehryar laments that the IT and ITeS sector has never been recognized as an industry in Pakistan, and therefore never given SEZs for further enhancement. He said the IT industry needs nearly 2.5 million square feet of IT-ready space every year at an affordable Rs40 per square feet rate to expand operations. We’re missing a huge opportunity if this doesn’t fall into place with the inability to import things like specialized equipment, 3D printing machines, units that can help with manufacturing and innovation.

If government establishes SEZs in the country, this step is expected to boost growth and improve Pakistan’s band image as an advanced IT destination. The industry would positively respond to this and efficiently utilize this incentive in growing its businesses.

The said incentive would help in creating employment opportunities, increasing exports and attracting foreign direct investment (FDI). Increased foreign remittances are expected through introduction of duty drawbacks, but P@SHA also urges the smaller companies and freelancers to report their foreign exchange earnings through SBP defined remittance codes.

Shehryar says, “Global outsourcing business has suffered in recent years, forcing customers to seek cost effective destinations. This favors Pakistan as we are still price competitive with easy access to human resource. With increased government support to the IT and ITeS sector, we hope to grow our share of the global outsourcing market.”

Shehryar highlights the three big challenges faced by the incumbent government: employment, foreign exchange earnings and FDI. He says the IT and ITeS sector is capable of addressing these challenges and therefore should be a business priority area for the government. “The Government needs to work on a long-term plan — a 10 to 20-year roadmap — for supporting this sector before it could start measuring results. The authorities cannot expect economic boost through an annual plan where the industry and investors remain uncertain about policy changes every year.”

Shehryar laments that the lack of government support has hindered the organic growth of IT and ITeS sector. Pakistan is currently missing out on the opportunity this sector promises in terms of creating job opportunities, earning foreign exchange and attracting FDI — the three largest challenges for the government.

Thought-leaders and industry experts have highlighted the following areas which need immediate attention by the government in order to enhance the productivity and efficiency of IT sector in Pakistan:

  • Cash rewards, duty drawbacks for software exporters — at least 3-7%;
  • Introduction of fiscal incentives as listed above to relax taxation and ease access to financing — similar to the incentives offered to textile industry;
  • Give industry status to IT and ITeS in line with other industries such as leather, sporting goods, surgical goods and others;
  • Create special economic zones for IT and ITeS;
  • Support international marketing and access to markets;
  • Red Carpet treatment and easy visas for foreign visitors.
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