By Muhammad Khurram Shabbir, Ph.D. student, Finance, NUML Islamabad
“You must pay taxes. But there’s no law that says you gotta leave a tip.”–Morgan Stanley
The fiscal hands of the state collect the taxes from the deep pockets whether you like it or not. Through its tax machinery, the south Asian country Pakistan, by leaps and bounds, is making sure to reach out to the fiscal targets.
An emerging economy, Pakistan, is strangled with debt. Ever since Imran Khan became prime minister in 2018, debt levels have been continuously on the rise. However, during the COVID-19 pandemic, things have escalated significantly, especially the debt-to-GDP ratio, which is currently at 85.56%. In 2018 the debt-to-GDP ratio was 72.08%.
The Pakistan Tehreek e Insaf government, led by Imran Khan, willingly or unwillingly, had to knock the doors of the International Monetary Fund for a bailout to avert an economic crisis, which is nothing new in Pakistan’s history.
There have been series of agreements, followed by the release of the tranches by the International Monetary Fund, the most recent one of $500 million, under strict conditions. The assurance given by the political and economic institutions to the International Monetary Fund for the repayment of the funds is in the form of hefty taxes.
To meet the tough conditions of the International Monetary Fund, Pakistan has set high tax revenue targets, which are mainly being collected through its tax machinery, the Federal Board of Revenue.
Although COVID-19 has made the lives of the people difficult, with the additional burden of taxes, it’s slow-moving for the government to meet its fiscal targets. With the mounting political pressure on the incumbent government and the strict conditions imposed by the IMF, the government is at crossroads.
Among the many tax exemptions given to the industrial sector, in March, Prime Minister Imran Khan accepted a tax bill to cancel 80 tax exemptions given to the industrial sector, further bringing tax reforms to meet in line with the IMF demands.
There were also rumors circulating in the news corridors that perhaps the government is thinking to also withdraw the tax exemptions given to the IT sector for export services. However, the Federal Board of Revenue, through a 10 March 2021 statement, clarified that there was no such proposal to cancel the tax emeptions given to the IT sector with respect to exports.
The Federal Board of Revenue clarified instead that there is a proposal under discussion to give more tax concessions to the IT export sector, with the likelihood that tax credits would be increased up to 100% for this sector.
The Federal Board of Revenue clarified instead that there is a proposal under discussion to give more tax concessions to the IT export sector, with the likelihood that tax credits would be increased up to 100% for this sector
Under the current legal umbrella, as per clause 133, IT services or IT-enabled services are exempt from tax up to though 30 June 2025, on the condition that 80% of the export proceeds are brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels.
Despite the economic challenges, there has been a surge in the profits of the top 94 companies listed at the Pakistan stock exchange and part of the KSE-100 index. In the past few months, new companies have been listed on the securities and exchange commission of Pakistan.
Also, there were 47 firms with foreign equity capital on the exchange. This reveals a bullish picture of the Pakistani stock market. For the first time, most of the registered firms were IT firms. As per the officials, it’s estimated that the IT sector alone has the potential to increase exports from $1bn to $8bn.
Finance Minister Shaukat Tarin said that the IT sector would be fully supported in the coming fiscal budget, with high hopes that it would prove to be a game-changer for Pakistan’s economy for the next five to ten years.
The policymakers have also proposed an upcoming budget with special emphasis on making the industry and exports more competitive.
One recent development came from Amazon, which has decided to add Pakistan to its sellers’ list; this will certainly help exporters. It was also proposed to increase the tax-to-GDP ratio by 1-2% per annum. For the already burdened consumer, tariffs on the power sector won’t be increased; instead, the government will renegotiate its tax revenue target with the International Monetary Fund.
To facilitate the IT sector and its exports, the government has initiated many IT education programs, which are highly skill-oriented and can attract a significant chunk of revenue in the form of exports. Hence, the IT sector is a potential game-changer for the economy of Pakistan, and the policymakers are willing to give more tax credits to support it.
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Muhammad Khurram Shabbir is a Ph.D. student, Finance, NUML Islamabad
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