‘New taxes will cripple IT sector’

Experts warn higher taxes will hamper digitalisation, risk brain drain

KARACHI:

The budget for fiscal year 2024-2025 burdens the skilled salaried class with higher income taxes, which can lead to a massive brain drain, exacerbating the current situation, hindering the growth of the Information Technology (IT) sector, and potentially destroying it. The General Sales Tax (GST) on IT hardware surged from 5% to 10%, taking a heavy toll on efforts towards digitalisation, IT professionals and experts said. They believe the government intends to bury the IT industry as new taxes threaten to destroy this growing sector soon.

Professor Tahir Mahmood Chaudhry, Chairman of the Computer Society of Pakistan (CSP), an eminent IT think tank, said, “The IT sector, which was our only hope, could ensure 15%-30% deliverance from the International Monetary Fund (IMF) and the World Bank (WB) in terms of IT exports. The US dollar fluctuation benefited local IT companies as they receive payments from international clients in US dollars and convert them into local currency (rupees). They must have some of their respective amounts in various places in Europe, the USA, Australia, New Zealand, and other countries to work there and pay for services such as marketing, sales, delivery, and maintenance because it is almost impossible to transfer money from Pakistan to foreign countries.”

“Secondly, ill-advised decisions are usually taken in Pakistan, as recent initiatives are being taken to hit the IT industry in the federal budget. We transfer our amount from foreign countries to Pakistan, where the government imposes taxes even on this amount, while we have already paid taxes according to the rules of foreign countries,” he said, adding that, “Thirdly, the government imposed new taxes on computer hardware, and we have to purchase hardware and IoTs (Internet of Things) at rates of Rs300 per US dollar, then convert them into rupees. These are other challenges.”

Pakistan Software Houses Association (P@SHA) Chairman Muhammad Zohaib Khan stated that the budget did not cater to P@SHA’s proposals for IT growth. None of their demands were met. Instead, the skilled salaried class is now burdened with higher income taxes, which could cause a significant brain drain. He mentioned that the Rs79 billion allocation is primarily for government projects and IT parks, with no payroll incentives for the IT industry to address remote worker issues.

Khan criticised the GST increase on IT hardware from 5% to 10%, which he believes will hinder digitalisation efforts. “The current budget does not show the promise that have repeatedly been made by the government,” he said. “We will approach the authorities to seek clarification and request necessary amendments for Pakistan’s IT sector to continue its growth trajectory.”

Khawaja Fahad Shakeel, an eminent AI Strategist, and Founder and CEO of Workforce Commerce, a Lahore-based IT company, expressed concerns that IT companies will lose highly skilled staff due to changes in income tax slabs and percentages. He warned that IT professionals might switch to freelancing, leaving local IT companies struggling to cover taxes for their trained workforce.

Shakeel highlighted the financial impact on IT professionals earning monthly salaries between Rs800,000 and Rs1 million, who will now pay Rs300,000 to Rs350,000 in taxes each month. “High taxes will open vistas for brain drain, and the IT sector, which has been growing since 2022, will be adversely affected in 2024,” he said. He argued that while the government may gain short-term benefits, the IT industry, a major source of remittances after the textile sector, will be destroyed.

“When it comes to allocation of the budget of the IT sector, it is useless as it will not promote the IT sector at all,” he said.

SI Global Solutions CEO Dr Noman Said criticised the decision to increase GST on laptops from 5% to 10%, stating it may adversely affect both consumers and the tech industry. He pointed out that the increase exacerbates challenges in the hardware manufacturing sector, where a clear vision is lacking. Said stressed the need for effective measures to curb the influx of grey market products, as compliant businesses and consumers face higher costs while non-compliant entities gain an unfair advantage.

“This policy risks stifling legitimate market growth and technological advancement,” he concluded, highlighting the need for a balanced approach and stronger regulatory enforcement.