IT companies relocating as Pakistan gets tax-hungry

Published: January 17, 2016
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PHOTO: AFP

PHOTO: AFP

LAHORE: Nearly 40% of Pakistan’s companies that provided IT services have moved their business to the United Arab Emirates, largely due to the 8% additional tax on revenues levied by the government in 2015-16, said Sajjad Syed, chief executive officer of Excellence Delivered (ExD) Private Limited .

ExD outsources non-core operations and is currently working with consultants. Their primary job revolves around helping businesses in structuring IT systems and solutions.

Pakistan’s IT sector more robust than before

But the levy of 8% additional tax has not just hindered the growth of such companies, but forced them to move elsewhere. “The decision of imposing tax on IT services to generate additional revenues is actually proving to be fatal as several small companies have moved their offices to Dubai, a tax haven and only 1.5 hours away from Pakistan,” Syed said in an interview with The Express Tribune.

“This will not bode well for the IT sector as the growth of this booming industry has already been stunted and companies are seriously re-evaluating their expansion plans in Pakistan.”

Syed, who has previously worked as managing director of German company Systems, Applications and Products (SAP) for Pakistan and Afghanistan, added that examples of such draconian tax measures are hard to find. “There is no other country in the world which has levied tax on revenues of IT services companies.

“As a matter of fact, they are subsidising the IT sector.  We are not demanding a subsidy but such high rates of tax are hurting growth prospects.”

Pakistan’s IT exports exceed $2 billion, says PSEB chief

Syed said companies now prefer working on a cash-based system, which is hurting whatever tax revenue projections the government had made. “It is Dubai that is seeing an increase in employment and business – not Pakistan.”

While most officials have appreciated the growth of the IT industry in recent years, there remains a need to keep progressing in the area. Syed stressed on the need to conduct a formal study that would capture the size of the industry.

“Its contribution could be in danger as companies that have moved to Dubai have little compulsion to hire a Pakistani, they can hire an Indian or Sri Lankan for the same job,” Syed said. “We are moving our capital to Dubai and employment to India.”

Published in The Express Tribune, January 17th, 2016.

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Reader Comments (34)

  • Karim Mizdan
    Jan 17, 2016 - 8:29AM

    There’s nothing wrong or illegal to move your start up to Dubai and save on Pakistani taxes. It is not unethical either or against the interests of the country since our own Finance Minister Ishaq Dars son and PM daughter moved to Dubai to do the same.

    They don’t pay 8 percent minimum tax, the rest of Pakistani companies shouldn’t have to if they relocate to Dubai.Recommend

  • Insane
    Jan 17, 2016 - 8:55AM

    But Lahore has metro, right?
    We are happy with that much.
    Who needs IT companies then? DuhRecommend

  • Geek
    Jan 17, 2016 - 10:32AM

    This cannot be true with the exception of a few companies with some other motives.

    UAE is very very expensive in terms of salaries, accommodation, and indirect taxations. It is in no way feasible to move to Dubai in order to save expenses or taxes.Recommend

  • Qwells
    Jan 17, 2016 - 10:43AM

    Days are gone when you were stuffing your pockets with money made of cheap and qualified work force and not paying taxes.Recommend

  • Abdullah
    Jan 17, 2016 - 10:59AM

    I dont think so its true.Rents are way high in UAE cheap areas also compared to pakistans posch areas and business parks.Secondly the revenue of a company will not change if they locate to UAE just because of tax.Thats an invalide reason.They might have moved to get more business but not because of the taxes.And dubai will be haviing corporate tax soon in 2017 and that will be around 7.5% .
    Way forward paistan is to strt digitalising everything slowly.take a start rest will follow.Recommend

  • Mahesh
    Jan 17, 2016 - 12:22PM

    You can move to India also instead of UAE, if you are an entrepreneur Indian government will give you three year tax exemption and mentor you to establish your company.Recommend

  • Ali
    Jan 17, 2016 - 12:53PM

    Finance minister’s wealth is in Dubai as well so it make perfect sense. Besides PMLN don’t even know what the acronym IT means Recommend

  • Adnoon Siddiqui
    Jan 17, 2016 - 1:07PM

    No problem let them relocate. Too bad they will not get to see Roshan Pakistan and our new metroRecommend

  • Jameel ur Rasheed
    Jan 17, 2016 - 1:34PM

    @Qwells:

    They are crying on taxes on revenues. They won’t if they are taxed normally i.e. on profits!!Recommend

  • Saad
    Jan 17, 2016 - 1:57PM

    Who wants IT companies?! We have nukes.Recommend

  • Tech executive - Islamabad
    Jan 17, 2016 - 2:04PM

    @Geek:
    The free-zones in Dubai have zero tax. so companies keep their accounts there and invoice from there, The developer still stay in Pakistan. This has multiple advantages, one all invoices from exports are tax free. You only send to Pakistan what is required for paying to developers here. Second all sales from Pakistan also become tax free with no GST or Withholding applicable on them

    the reason this is done is because IT companies usually have no power clout. They are easy target of FBR for closing their accounts to achieve their targets. Although IT companies win later but the damage is done because of tax sealing. Many companies i know have shifted and rest are slowly shiftingRecommend

  • Tech executive - Islamabad
    Jan 17, 2016 - 2:08PM

    @Qwells: The tech force is cheaper but definitely not much qualified. The companies spent a huge amount in training the resources to make the qualified.

    Second because of last 8 years, the companies have very low profit margins and barely survived. Now the companies have some chance of growth and they are being taxed heavily. For this reason, usually most tax companies although being very good. Don’t prefer providing their services in Pakistan as local work is heavily taxedRecommend

  • Kaleem
    Jan 17, 2016 - 2:37PM

    I am running an IT company. Firstly readers needs to understand what is IT company. More than 80% of our IT companies are software houses which export software. They are exempted from paying any tax till 2016. So this relocation thing is widely exaggerated. Anyone working in software industry can confirm continuous expansion in our IT sector.

    IT companies which are offering Software as service (SaaS) need to pay tax. These companies are resellers mostly and they represent less than 5% of overall IT companies. The relocation also helps them selling their products better. Recommend

  • Asad Shairani
    Jan 17, 2016 - 2:42PM

    Very misleading. The 8% additional tax cost is little compared to the extra amount which employees will demand in the UAE. I have been working for a decade in the software industry and do not know a single firm which has moved (compared to expansion) to the UAE on the basis of cost/tax issues. Recommend

  • Arpit Jain
    Jan 17, 2016 - 2:55PM

    @Geek: I think you didn’t read correctly. “We are moving our capital to Dubai and employment to India.” Basically they will not hire people in UAE but rather in any other country where labour is cheap and they won’t have to pay high taxes.Recommend

  • sharath Chandra
    Jan 17, 2016 - 3:17PM

    Its more important to have Nukes, the 8% tax is for the increasing the nukes.Recommend

  • nasser
    Jan 17, 2016 - 3:22PM

    Please name those companies who have relocated to other countries and have shut their offices in Pakistan. Please…..Recommend

  • nasser
    Jan 17, 2016 - 3:25PM

    @Mahesh:
    Bro I am interested. Please send some literature in this regard. Also I do not want anything from those regions which have tax holidays under special CVS ial zones. Recommend

  • Hameed
    Jan 17, 2016 - 3:39PM

    @Mahesh:

    You can move to India

    These guys eat cows though. Unlikely to live long there.Recommend

  • salman
    Jan 17, 2016 - 3:41PM

    8% tax on REVENUE?

    Seriously? Is this what the best and most experienced economic team of pmln have come up with?

    And people say pmln is pro business! What a joke….Recommend

  • Jameel ur Rasheed
    Jan 17, 2016 - 3:45PM

    @Mahesh:

    these IT companies in question have already enjoyed a 5 years long total tax exemption tenure. It’s just that they are used to for not paying taxes. So they would be exiting India in next three years. Also even as of now, their export sales is tax free till June 16Recommend

  • kamran
    Jan 17, 2016 - 3:46PM

    I am not sure when will they learn, India is taking out all IT business.

    They train people on different ERP platforms and provide infra structure we distribute lap tops for watching movies.

    Dont worry we need one fixed lane for bus with effective policing but we build out whole infra-structure and we say sell PIA because we dont do business.

    No cares just enjoy the show thanks God Zareb appears transparent.

    Being incompetent is worse than being corrupt and being corrupt is worse than after being competent.Recommend

  • Muhammad
    Jan 17, 2016 - 4:16PM

    Only the booked revenue is moved abroad everything else remains here in Pakistan. This way Pakistan becomes only a cost center where salary and bills are paid which will be taxed as per tax structure. The corporate revenue and foreign exchanged earned will initial and essentially land in the UAE or where ever.

    The only way to deal with bad legislation is to vote for people who can do better else keep on complaining.Recommend

  • IBN E ASHFAQUE
    Jan 17, 2016 - 7:31PM

    UAE offers law and order, at least a functioning court system, tax exemptions, and electricity, and water. Furthermore no worries about bhatta, or tax. Pakistanis are investing in property, retail as well as trade and doing not bad. Even our elites are investing in UAE. In one word UAE offers governance but then Pakistan offers Democracy plus a tsunami of corruption. I for one prefer the governance of UAE……Although my heart aches to see the wretchedness of my brothers in Pakistan……May Allah guide us all. Recommend

  • observer
    Jan 17, 2016 - 11:13PM

    Almost all of these off-shore companies are shell companies designed to hide and launder black money. They are not genuine companies doing genuine business.Recommend

  • Jor El
    Jan 18, 2016 - 12:08AM

    @Mahesh: Thats only for startups … Recommend

  • Jim Jamal
    Jan 18, 2016 - 12:13AM

    I would like to see some authentic numbers on this rather quoting one company exec. UAE is an expensive country to do business. Although they have no income tax, the other charges and cost of living is so high that most of the SMEs are surviving not thriving. Secondly, the govt is in process of eliminating subsidies and imposing new fees (taxes) to cover for the oil slump.

    If you are an IT company with foreign clientele then it may makes sense to exit Pakistan but if you deal with local clients, why go abroad to increase expenses – that is why spend in Dirhams while you’re earning in Rupees?

    Personally, I believe that the stupid policies by this govt will make people go for the backside methods which will be painful for all stakeholders. It is time that Information Technology should be considered and elevated to industry standard like other sectors and proper respect and benefits should be provided to local operators who are committed to bring foreign exchange and good repo to Pakistan. Recommend

  • Humza
    Jan 18, 2016 - 6:09AM

    @salman: Everyone has to pay their fair share of tax. If some company wants a free ride, let them find it and no nation should allow itself to be blackmailed by an entrepreneur whose argument here makes no sense. If 8 % tax on some IT firms is causing them to move to the UAE where rent and even labour costs are higher, let them ! They will be spending a lot more than 8 %. IT and computer businesses all over the world get incentives but there are few places that wave having to pay any tax for any extended period. People forget that Pakistan has to improve its debt / GDP ration with improved taxation as it moves to more developed society. The IMF has set benchmarks but the elected government has yet to meaningfully increase tax collection despite an overall improvement in the economy.Recommend

  • UK
    Jan 18, 2016 - 8:38AM

    In my humble opinion, I think Malaysia offers better alternative than Dubai. Dubai is over rated and expensive.

    Malaysia is truly a Tech hub in Asia and I recommend all to have a look at Malaysia.

    Best part in few years you can get permanent residence where as in Dubai you can not get it even if you work 20 years in UAE.

    Please look for places like CyberJaya (near KL) as its really like Silicon Valley of Malaysia (All big giants of the world are there).

    Cost of living is very good (comparable to Pakistan) in a way its cheaper and best part you can get to buy quality products in competitive prices.

    No Road traffic Jams like Dubai and nice weather and respect for Pakistanis are plus plus.Recommend

  • Rahul
    Jan 18, 2016 - 9:48AM

    Its contribution could be in danger as companies that have moved to Dubai have little compulsion to hire a Pakistani, they can hire an Indian or Sri Lankan for the same job,” Syed said. “We are moving our capital to Dubai and employment to India”

    So even Pakistanis don’t want to hire Pakistanis.Recommend

  • Jan 19, 2016 - 8:35AM

    @Hameed:
    You rock dudeRecommend

  • Hassan
    Jan 19, 2016 - 12:28PM

    I don’t think why some of you are taking it completely wrong… In this story it is being suggested to Govt. that due to their steps there is a possible chance that companies will hide revenues or move abroad, we all know outsourcing work to consultants in India from Dubai is really easy and cheap, they have more specialists than us.
    So Govt is kinda forcing IT sector to take these steps. No one here said that they are moving to India, They conveyed that if situation prevail, there is a chance that companies will move there capital to Dubai. While ExD is a Pakistani based company, I know it very well and they are a Pakistani multi-national IT firm and largest implementer of SAP in South Asia and MENA region. Recommend

  • Saqib
    Jan 20, 2016 - 5:41AM

    This cant be true, We recently closed our company in Dubai due to the following issues.

    Cost of living is extremely high. Accommodation is way too expensive.
    UAE Telecom authorities have restrictions on VOIP services which kills the purpose of working remotely as an offshore office for companies based in US or UK.
    Corporate internet packages are 10 times more expensive than Pakistan e.g 1mb dedicated connection costs 18000 Dhms in UAE.
    Annual renewal fee of business license including audit fee is way too high for free zone companies.

    With the above mentioned problems it is nearly impossible to move your operations to UAE

    On the contrary Bangladesh is a better option and they are offering 10 years of Tax exemption to all IT companies who want to move their operations to Bangladesh.Recommend

  • Coder
    Jan 20, 2016 - 3:06PM

    In my opinion the IT industry should not be taxed. Adding taxes will harm the economy. The middle class is already shrinking, we have a serious crisis of less job opportunities and IT sector could cater very well to this major problem. If the job crisis is not resolved, it will create far more problems than what we might gather from taxing this sector.Recommend

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