Bridging policy gaps in IT sector
Even amid the economic turmoil of recent years, the sector has remained a resilient performer, and is set to contribute close to USD4 billion in exports by the close of the current fiscal year. By 2030, this figure is expected to surge to USD15 billion. Despite this promising outlook, numerous facets of the government's approach to the IT sector continue to impede its growth, and prevent it from realising its true potential.
In a recent press briefing, the chairman of the Pakistan Software Houses Association (P@SHA) outlined key hurdles facing the IT sector, including policy unpredictability, ad hoc taxation measures and operational bottlenecks. He emphasised how these issues undermine investor confidence and constrain the sector's economic contributions.
At the heart of these difficulties lie the frequent changes in tax regulations, ranging from export incentives to withholding taxes and other fiscal measures, which discourage long-term investment. Sudden and arbitrary changes to the tax framework weaken investor confidence, jeopardising years of effort by Pakistani software houses and IT companies to build global credibility, nurture talent and develop robust digital infrastructure.
Pakistan currently imposes one of the highest corporate tax rates in the region at 29 percent, compounded further by elevated auxiliary taxes and high input costs. In contrast, the UAE maintains a rate as low as nine percent, while Vietnam's stands at 25 percent.
Vietnam's streamlined government policies and predictable tax environment, in fact, have helped its annual exports surge to a highly impressive USD141 billion, underscoring the vast potential Pakistan could also unlock in export earnings if its IT sector were supported by a more enabling and competitive tax regime.
Persistently high tax rates risk pushing IT firms to more favourable jurisdictions, weakening local industry and forfeiting future gains. While our chronic struggle with low tax revenues is well-documented, uncompetitive tax structures will not resolve the issue, and are more likely to deter investment, drive capital outflow and ultimately worsen the revenue shortfall they aim to address.
Another critical issue is the misalignment in tax treatment between employees of IT firms operating domestically and independent remote workers employed by foreign companies. As P@SHA has noted, despite the rapid growth of remote work in recent years, remote workers remain undefined under the Income Tax Ordinance, 2001.
This legislative gap has led to a significant disparity: while IT companies must withhold an additional 30 percent income tax from employees earning over Rs2.5 million annually, remote workers earning similar incomes are not subject to the same tax burden.
This imbalance puts local firms at a competitive disadvantage, making it harder for them to attract and retain top talent, as skilled professionals prefer opportunities with foreign employers offering higher take-home pay. This also discourages international companies from establishing a physical presence in Pakistan, as they can access the same talent pool remotely without dealing with the associated tax implications. Rectifying this disparity is essential to creating a level playing field and fostering a policy environment that supports both local industry growth and foreign investment.
Pakistan stands at the cusp of a vital transformation in its IT sector, where it could emerge as a truly competitive player in the global digital economy. But this opportunity could slip away if the regulatory environment remains riddled with unclear tax rules, inconsistent incentives and constraints on digital freedoms. The authorities must pivot towards a more forward-looking, coherent and enabling policy framework that empowers innovation, protects digital rights, and attracts both talent and investment.
Copyright Business Recorder, 2025
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