'Textile millers misdeclare exports'

Senator claims surge in IT firms raises suspicion of misuse of lower tax rates

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ISLAMABAD:

A treasury legislator, Senator Anusha Rahman, said on Wednesday that textile millers were mis-declaring their exports as information technology exports to avoid the recently levied 29% income tax, in an assertion that brings into question the claimed double-digit growth in IT exports.

Senator Anusha Rahman's statement was based on the information provided by the information technology industry, and is also backed by the sudden mushroom growth in the registration of new information technology-related companies.

There are reports that textile exporters are misusing the 0.25% reduced income tax rate facility for information technology and technology-based export incomes to avoid the 29% income tax, said Rahman, former Federal Minister, during a meeting of the Senate Standing Committee on Finance. The committee meeting was chaired by PPP's Senator Saleem Mandviwalla.

Textile and other goods exporters have started misusing the facility after the government imposed a 29% income tax on exporters in the last budget. However, information technology-related exported earnings still attract a 0.25% income tax, and there is a 1% income tax on the export of services.

The Chairman of the Federal Board of Revenue, Rashid Langrial, who was also present at the meeting, did not rule out the possibility of misuse of the export facility. Langrial said that there was a possibility that exporters might be misusing this facility and assured the committee that he would probe the matter.

During the first half of the current fiscal year, information technology industry exports surged 28%, reaching $1.9 billion. Many had suspected the increase in IT exports, particularly after the government introduced the firewall to slow internet speed.

In November last year, Sajjad Mustafa Syed, Chairman of the Pakistan Software Houses Association (P@SHA) – the apex representative body of the Information Technology industry – had warned that the internet slowdown and blocking of virtual private network (VPN) services would certainly translate into an existential threat, as it would result in unrecoverable financial costs, service disruptions, and reputational losses in the export of IT and IT-enabled Services (ITeS).

The chairman of the Securities and Exchange Commission of Pakistan (SECP) presented the details of new company incorporations in January to the standing committee. The details showed that, in January alone, 652 information technology and e-commerce-related new companies were registered, accounting for 20% of all new companies registered that month and the highest number of companies registered in any sector.

The mushroom increase in IT company registrations also indicates misuse of the facility. Compared to the normal 29% income tax rate for exporters, IT exporters pay only 0.25% income tax.

The IT industry has concerns that the mis-declaration of goods exports as IT exports may lead to an unrealistic increase in the size of the business, potentially resulting in the withdrawal of the special income tax facility.

According to another indication of the misuse of the IT income tax facility, newly registered companies, which were incorporated after June of last year, are making more sales than companies that have been operating for decades, said industry insiders.

Constitutional question

The Senate Standing Committee on Finance also objected to the government's decision to introduce the Tax Laws Amendment Bill 2024 as a Money Bill, in which the Senate does not have voting rights. The standing committee had earlier approved the bill, which aims to introduce new restrictions on the purchase of property and cars by ineligible persons.

Chairman of the Standing Committee Saleem Mandviwalla said that the committee had cleared the bill after the government claimed that Speaker of the National Assembly Sardar Ayaz Sadiq had declared the bill as a Money Bill. In the case of a Money Bill, the Senate's role is limited to making recommendations, and it does not have the power to vote it down.

"When I spoke to Sardar Ayaz, he said that he did not declare any bill as a Money Bill, and it was the government that brought the Tax Laws Amendment Bill as a Money Bill," Mandviwalla said, narrating his conversation with the speaker of the National Assembly.

"The Parliament should take decisions into its own hands, and legal matters should not be left to the government or bureaucracy," said Senator Shibli Faraz, the Leader of the Opposition in the Senate.

In the case of a dispute, the final decision rests with the speaker. The standing committee decided to refer the matter to the speaker of the National Assembly, which has now resulted in another dispute.

The National Assembly Standing Committee on Finance has already deferred the approval of Clause 114-C of the Tax Laws Amendment Bill until the new budget. This clause pertains to economic restrictions.

The government is pushing hard to have the new bill passed by Parliament before the International Monetary Fund's (IMF) Review Mission arrives on March 3. However, real estate lobbyists and legislators believe the bill will stifle any remaining growth in the real estate sector and give undue power to tax officials.