Taxation for IT Companies in Pakistan: Holidays and Exemptions Spell Good News

Taxation for IT Companies in Pakistan: While many Pakistani companies and tech forums talk about the latest positive developments in Pakistan’s tech startup industry, one oft-ignored highlight is the current taxation system for IT companies in Pakistan. If you are thinking about starting up a technology firm in Pakistan or you currently run such a firm, you’ll be happy to know that the Pakistan government has granted an income tax exemption for IT companies till 30th June 2016.

Let me repeat:

All software and internet based businesses in Pakistan are exempt from income tax till 2016.

According to the Pakistan Software Export Board (PSEB), the government of Pakistan is interested in attracting foreign IT firms as well as developing local talent. It lists the major initiatives taken in this regard below:Taxation for IT Companies in Pakistan.

  • Provision of low-rent Software Technology Parks (STPs), with fiber-optic connectivity, libraries and conference rooms.
  • 100% ownership of equity allowed to investing foreign IT/ITeS companies.
  • Income Tax exemption for IT companies till 2016.
  • 100% repatriation of profits allowed to IT companies.
  • Seven years’ tax holiday for venture capital funds.
  • Minimum rate of 30% depreciation on computer equipment.
  • The State Bank of Pakistan (SBP) has allowed banks to open Internet Merchant Accounts.
  • Availability of instant, reliable and high-speed connectivity.

While the current deadline for this tax holiday is 30-Jun-2016, there is a strong possibility that this holiday will get extended.

Reason for Tax Exemption

In a country where it seems the tax ratio is increasing everyday on almost everything this exemption does raises an obvious question: Why?

There is no well documented reason from the government. One reason may be that the government is really interested in growing the industry. Many businesses are declining and foreign investment is slowing down. Keeping this in mind and also because online businesses are bringing a lot of money to the country, the exemption makes sense.

If taxes are imposed on online businesses the financial burden on the owner my eventually cause the government to lose easy money. Also, consider that the exemption also holds true for overseas Pakistanis who transfer money to their families via wire transfer. This makes the second point very valid that the government is interested in protecting sources of incoming cash – whichever ones are left.

What Does a Tax Holiday Mean for IT Business Owners?

Simply put, it presents a wonderful opportunity for you as an IT business owner. Even if you are not from Pakistan, you can come and do business from Pakistan and enjoy the exemption. You can also retain 100% equity of the business though you’ll obviously be expected to pay income tax.

Even though as an IT business owner you don’t have to pay any specific tax for software development-based income or an online business, income tax is one way to give something back to the society where you are earning your livelihood. It may not go to the welfare of the society but you can take pleasure in the fact that you did your part.Taxation for IT Companies in Pakistan

Sales Tax for IT Businesses

According to the Federal Board of Revenue (FBR), there are categories of transactions that qualify for sales tax. Sales tax is not levied on some software industry transactions such as:

–       Downloading material from the internet

–       Subscribing to internet-based services

–       Upgradation charges

–       Maintenance fee

–       Training fee

and more

An inexhaustive list of activities that incur a 16% sales tax are listed below:

–       Sale of CDs/DVDs with or without software

–       Sales of any other hardware medium with or without software

–       Sale of System software, which are usually essential to operate computers

–       Download which is accompanied backup copy of the software on any hardware medium and

–       Sale of customized software with transfer of all rights to make amendment/charges in the software

The PSEB claims that its tax incentives “have been instrumental in the IT industry’s development.” Do you agree? What is your take on the current taxation system in Pakistan for online businesses, software houses and IT companies?

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