The Sindh Government has announced through the Sindh Budget 2017-18 that it plans to continue imposing sales tax on exports of information technology enabled services (commonly known as call centers and BPO services). This treatment is unique to only Sindh where exports and foreign exchange earning businesses are discouraged or asked to move their operations to other provinces/ countries. This bizarre policy move by the Sindh government has left the industry and experts baffled, commentators remains unclear what the motives behind such a move could be.
It is worth mentioning that no other province has imposed sales tax on exports of services and the Federal Government has in fact announced a 3 year income tax exemption for new Information Technology & Information Technology Enabled Services companies through he Federal Budget 2017-18 and subsequent Finance Bill 2017. The Federal Government has also announced sales tax exemption on exports of IT Services from Islamabad and other Federal territories. The Income Tax Ordinance on the other hand already grants export income tax exemption till 30 June 2019 to all exporting Information Technology & Information Technology Enabled Services companies.
Pakistan Software Houses Association for IT & ITES (P@SHA) had been in talks with the Sindh Government and Sindh Revenue Board on the matter of export services sales tax imposition for over a year, and a long due favourable policy announcement was expected through the Sindh Budget 2017-18. The announcement however through the Sindh Budget 2017-18 proposes to reduce export sales tax from existing 13% to new 3% but not abolishing it like other provinces. This has raised concerns over Sindh Government’s commitment of creating jobs in the province and increasing exports.
Sales tax being a consumer tax is not to be borne by the service provider and is intended to be paid by the customer. Therefore sales tax application remains a matter for domestic sales and in export scenarios where the customer is not in Pakistan sales tax is not applied across any industry. The Sindh Government in a first of its kind move wants businesses in Sindh to pay sales tax on exports, which translates into paying a consumer tax from the service provider’s own pocket.
The State Bank of Pakistan has issued 10 month (July 16 to April 17) exports data for IT & ITES which stands at USD 532.91 million out of which call centers contribute USD 67.09 million. Bulk of this export will now either move to other provinces or tax friendly countries, depriving Sindh of the potential export opportunities and employment for thousands of local young individuals.