Internet penetration per user in Pakistan is 11%, whereas the average penetration of developing countries is 32%. Comparatively, Pakistan ranks at 142 out of 186 countries in global internet penetration. On business side, Pakistan’s software exports are currently one-hundredth of Indian software exports.
Higher taxes on IT products discourage connectivity, resulting in yearly gross domestic product (GDP) growth reduction of 1-2 percentage points. The related World Trade Organisation (WTO) regime which obliges elimination of tariffs on all IT-related products is known as Information Technology Agreement (ITA).
ITA was concluded in 1996 by 29 countries which eliminated tariffs on IT-related imports. Including India, now 86 countries have signed on the ITA that covers over 97% of world trade of IT products.
In 2001 and 2002, as part of overall tariff reforms, Pakistan decided to join the ITA. For this purpose, customs duties were eliminated on most IT products. However, subsequently these reforms were gradually reversed and now no IT product is free of customs duty.
Signatories of ITA are required to eliminate tariffs on computers, telecommunication equipment, semiconductors, semiconductor manufacturing machines and other IT-related products.
It is easy to conclude that Pakistan is not manufacturing any of these items. One exception is a state-owned entity, Haripur Telephone Industry, which survives on government subsidies.
Despite no apparent local industry, which is the most famous alibi of protectionists, Pakistan has been deliberating on acceding to ITA for the past 18 years. This is despite the fact that in 2001-02, Pakistan had removed customs duties on most IT products. However, in the subsequent years, these duties were re-introduced. Pakistan is now amongst five countries with the highest import taxes on IT products.
Offsetting revenue loss
One apparent lobby for keeping the tariffs on IT-related industry is the Federal Board of Revenue (FBR), which obviously gains from tax collection on imports, its mainstay of revenue collection unlike all other tax machineries in the world. In 2013, the FBR collected Rs3.4 billion in customs duties and Rs5.5 billion in income and sales tax.
According to an assessment conducted by Deloitte (UK), Pakistan is likely to offset losses in customs revenue by gains in taxes due to gains in the supply chain related with IT in a course of two years by 2017 (see graph). Already, implementation of WTO Basic Telecom and Financial Services Agreements in 2003 by Pakistan resulted in attracting huge investment and increase in employment.
Most countries that accede to this agreement have experienced a surge in foreign investment and outsourcing business. These countries became part of the electronic global supply chain.
For example, when the Philippines acceded to ITA many multinationals established their manufacturing facilities there. As a result, the country’s electronics exports have been growing rapidly over the years.
Currently, exports of only electronic items of the Philippines total approximately $25 billion, which exceeds the value of all Pakistani exports.
Similarly, since India joined the ITA, it has emerged as a significant player in exports such as software, information technology (IT) and information technology-enabled services. Its export of computer and information services increased from $5 billion in 2000 to $51 billion in 2013.
The annual software exports from Pakistan hovers around $500 million, one-hundredth of Indian exports.
The sector has attracted considerable foreign direct investment (FDI) inflows. Cumulative FDI inflows in computer services (including hardware and software) from 2000 to 2012 were $12.6 billion, which accounted for 7% of India’s total FDI.
The government stands to benefit from acceding to ITA at it has a commitment of introducing IT-based systems for improving services and governance. Since IT helps improve transparency and delivery of services, so ITA will help reduce the cost of introducing such initiatives.
As we want providers of services and manufacturers of goods in the private sector to also introduce IT-based systems and upgrade their processes and systems, the ITA will reduce their costs and facilitate private businesses.
Increased use of ITA had a multiplier effect. IT capital has a higher return at the aggregate level than other types of capital. The World Bank has found that in low and middle-income countries, such as Pakistan, every 10% increase in broadband penetration accelerates economic growth by 1.38%.
Exports of IT products have been expanding at a faster pace than other products. Only those countries have become part of global value chains which allow unhindered import and export of such parts and equipment.
Pakistan needs to accede to ITA: not for WTO but for the larger good of its own people and economy. It is high time that the ministries of IT, commerce and finance as well as private sector stakeholders come on board to realise this potential.
Ali Salman is the executive director of PRIME Institute, an independent think tank in Islamabad. Dr Manzoor Ahmad served as Pakistan’s Ambassador to WTO from 2002-08
Published in The Express Tribune, May 18th, 2015.
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