The new fiscal: Services companies rue 8% minimum tax liability

Decision to have disastrous effects on development of technology and innovation, say industry experts.

Farooq Baloch July 12, 2015
Decision to have disastrous effects on development of technology and innovation, say industry experts. CREATIVE COMMONS


Another fiscal year rolled out, another budget was presented. But, like every year, the latest Finance Act has again slapped some very unpopular - rather regressive - duties on the country’s business community.

For those unfamiliar with the subject, the government has imposed an 8% minimum tax liability on services companies in the Finance Act 2015.

It will now be the minimum tax liability on a services company - the kicker is that it would have to be paid regardless of whether the company makes a loss or profit.

The new regime will prove to be devastating to services companies operating on razor thin margins, such as Information Technology (IT) firms dealing in business process outsourcing (BPO) and third-party services agents.

The new tax does not even spare technology-based start-ups, which usually don’t report any profits in the first five years.

Such kinds of minimum or revenue-based taxes are not practised in any of the leading marketplaces in the world or emerging investment destinations, according to Abacus Consulting Partner and one of the most respected executives in Pakistan’s service industry Abbas Khan.

Read: Tax proposal: Service providers to pay 8% of revenue as minimum tax

“Even in the case of extremely well-run IT companies, an 8% minimum tax would result in an effective income rate of 80%, which means 80% of the profits earned by the company will go in taxes,” said Abbas, explaining the impact of the decision on service companies.

“For many companies operating below a 10% margin - such as customs and cargo agents who operate on 4% net margin - the operations would become unsustainable and lead to the closure of business,” Abbas said, adding that it would hurt the economic development and employment in the country.

He added that the new tax regime will require even loss-making companies to pay 8% of their gross revenue, forcing the latter to use their capital reserves or fresh capital injection to make this payment. “It is confiscation of private capital.”

The new tax will also hurt the momentum gained by Pakistan’s start-up ecosystem.

In 2014, the country featured as the next possible destination for serial entrepreneurs and investors in Pakistan Start-up Report - a project of Silicon Valley-based organisation, the World Start-up Report.

The report was all praise for the country’s IT scene and concluded that “now [2014] is a very interesting time for both entrepreneurs and investors to bet their money on start-ups in Pakistan”.

The country’s pro-investor policies were one of the highlights in that report, which may not be the case under the new regime.

Moreover, the move is against the incumbent government’s own election manifesto in which the Pakistan Muslim League-Nawaz (PML-N) pledged start-up assistance to new software houses to promote entrepreneurship. It also said the party would evolve a new regulatory framework to create one million new direct and indirect jobs.

By contrast, many say that the aforesaid tax is a step in the opposite direction.

Read: Cellular companies paid Rs37.8b in taxes over last three years

The new regime would also regress the advancement made by PML-N in Punjab, the party’s political bastion where it invested millions on training and grooming of entrepreneurs at Plan 9 - the technology incubator of Punjab Information Technology Board. Unfortunately, the board’s chairman Dr Umar Saif and the man behind Plan 9 chose not to comment on the subject saying “taxation was not their domain”. However, not all is lost.

All Pakistan Customs Agents Association Vice Chairman Arshad Jamal in a recent press conference vowed to shut down all services to seaports and airport if the government did not withdraw the tax in 72 hours. “We have written detailed letters to all stake holders and are also preparing to give a presentation when we meet them in Islamabad next week,” Jamal said.

Published in The Express Tribune, July 12th, 2015.

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