How much of the economic sludge can the new fiscal budget actually help to relieve? Every industry has its strong points to consider, hence making a business case to one association or another as to why or why not it should be in the tax net. But when you look at the Information Technology sector, you simply cannot look at it in isolation because it has an impacting effect on every other industry. Call it the common denominator or whatever other buzzword you’d like, Information Communications Technology touches the boundaries of several hundred industries. In many cases, they drive the competition and enable traditional Pakistani enterprises to compete more effectively in international markets.

Technology is an enabler. It makes sure that businesses can run on it. Much like physical infrastructure, the progress of roads and other infrastructure which enable logistics will be severely hindered, if you put strain on the services which enable the growth. If you tax the industry itself, instead of being able to have the requisite impact, the costs will be too much for any other organization to bear. And once that happens, not only will we be killing off hundreds of thousands of jobs, we’ll be putting our economy into some serious economic distress in the long term. So what needs to happen?Support the ecosystem. You’d be surprised how self-sustaining most companies are. They don’t need capital support or an injection of financial subsidies. Because the arena is so competitive, the companies standing are usually the ones who have survived the test of time. It’s the ecosystem that needs to be given a boost. Make sure that policies that are put into effect make the vertical (read: silo) attractive for investment. And if you’re wondering how telecoms come into the picture here, well, they do as long as you look beyond the wow figure of 90 million people. Mobiles are a platform that can potentially be the largest buyer of mobile solutions, provided the solutions sector finds it feasible to serve them that way. Referred to as the ‘fourth screen’, mobile platforms will be huge economic contributors with the enablement of mobile commerce. Give people more reasons to use an integrated solution that drives complementing business, and something they will be more inclined to take advantage of the convenience.

Growth of the domestic ecosystem to sustain itself is critical for it to have a multifold impact on the international market. If you have an unfriendly domestic market, the amount of local businesses that will leak through the brain drain phenomena, will be irrecoverable. We’re all living in financially distressing times, but that doesn’t mean that the ecosystem that we make for industries that will feed growth to every other industry vertical it interacts with, needs to be as unfriendly or uninviting. Sajjad Syed, Managing Director for SAP Pakistan explains, “It is becoming increasingly obvious that the present economic downturn is not a temporary phenomenon. The world and the buying patterns of customers have changed for ever. In such an economy where companies are becoming increasingly cost conscious and profitability driven, more and more emphasis will be on ‘time to value’ for IT systems. Stakeholders such as CEO or CFO’s are no longer going to wait years in order to see results of their investments.

They would like to see quick returns on shorter, more focused projects. The other phenomenon that will impact business is the increased focus of the regulator or the board. Hence the operations of the organizations will have to be transparent. Increasingly companies will need to invest in technologies and systems that allow them to be transparent to their stakeholders and embark on projects where they can see quick returns.”

The Monetary Policy
According to the Monetary Policy Statement of Q4 FY 2009, expected deficit for FY 2009 is $9 billion whereas, foreign exchange reserve is expected to be brought up to $9.1 billion due to controlled government borrowings and phased loans from the IMF.  As per the monetary policy statement, the monetary aggregates have registered a downfall in the first nine months of the outgoing fiscal year due to low savings/deposits. An inflow of Rs.60 billion to Rs.80 billion is expected to touch the revenue base predicted in the budget for the outgoing FY of 2008 to 2009.  However, due to monetary tightening undertaken under IMF specifications, credit to the private sector is under restraints as the discount rate has been raised from 13% to 14%.
According to the second quarterly reports on the Retail Payment System, the quantity of credit/ debit cards in circulation increased by 11.7% over the previous quarter at a quantity of 7.8 million.

Furthermore:
˜Number of ATM machines : 3,523 growing by 7.6% as compared to 4.9% from the previous quarter;
˜ATM transactions: Valued at Rs.1529 billion registering a negative growth of 2.3 % in value as compared to an increase in value of 22.3% in the previous quarter.
˜Real-time Online Banking: Valued at Rs.3 trillion registering a decrease of 11.84% in value as compared to a decrease in value of 12.84% in the previous quarter.

˜Purchase through other eBanking channels (Purchase of Goods/Services Online, Internet/IVR/Call Center, Mobile) reached Rs. 39.63 billion registering an increase in value by 0.4% as compared to 12.9% in the previous quarter.
Overall, electronic payments increased in value by 8.52% as compared to 8.78% from the previous quarter. In the outgoing quarter, retail online banking has been more successful with smaller value transactions larger in quantity as compared to high value transactions.

Certain levies, Federal Excise Duties(FEDs) introduced in the budget of FY08-09 adversely affected IT related trade accordingly:

1.Federal Excise Duty on telecommunications increased from 15% to 21%.  Federal Excise Duty on banking, insurance and franchise services increased from 5% to 10%. Increased FEDs increase costs of running business and decreases likelihood for industry convergence.

2.Industrial as well as commercial consumers of electricity proposed to pay advance tax @ 10% on their electricity bills exceeding Rs.20,000 per month, hurting  SMEs (manufacturers and service providers).
As compared to the budget for the outgoing FY 2008-2009, the upcoming budget for FY 2009-2010 is expected to be more stringent in lieu of an increased discount rate. tied to the IMF loan. FEDs on the IT sector in various forms are likely to increase out of routine to increase the revenue base. However, online retail payments can open windows of opportunity if backed by a secure infrastructure.

Non-Financial Challenges
Pakistan is already the consultancy center for several IT and ITeS businesses such as TRG, Teradata, BearingPoint, amongst others. Due to this, the total export value of IT and ITeS exported from Pakistan valued more than $1.4 billion according to PSEB (Pakistan Software Export Board) during 2006-2008, registering an annual growth of approximately 46%.

It is very probable that Human Capital requirements for IT industry may be facilitated by the government, a little more efficiently, in terms of recruitment and training through the programs and systems of the PSEB. The organization might make it a necessity the IT industry can only hire people benchmarked PSEB, through their training programs and evaluations. This is a way to keep in record how accurately the 30,000-40,000 fresh graduates are being hired.
Therefore, in addition to human capital development, another area the industry will be eagerly seeking assistance is infrastructure development. This is comparatively one of the greatest potential investment zones in Pakistan.

Even though the general bills don’t reduce much, but the hope for the reduction of some tariffs, duties and the exporting and the importing costs are expected as there are a lot of ventures and agreements taking place in the IT sector of Pakistan, a point made by many speakers on CIO Year Ahead’09. These reduced costs will automatically promote new dynamics of investments, resources and marketing in the IT sector of Pakistan. As costs become more manageable, simultaneously there will be better ways of marketing to customers and increased collaboration between different industries of IT sector. Customers will be more willing to buy products based on their keen interest in the products offered, with better services and the sales force at an affordable cost.

For the Long Term:
Human Capital requirement for IT sector would be compensated by the government in terms of providing the right talent to the industries in terms of education criteria, right training skills through the IT apprentice program, IT internship program.

The right collaboration within the IT sectors of Pakistan and the government might lead to a reduction of the cost of operations or transport and simultaneously also fund the needed development areas of IT sector of Pakistan through support of government and foreign investments.

There might be more support given to the new rising IT companies, especially with huge influx of investment and new ideas of development, by the government. The support might be given in terms of improved taxing, licensing and subsidies. This would boost the productivity level and increase the success rate of the developing IT sector. And to build on the current IT success rate, which shows that there are total 1419 IT companies registered in Pakistan , foreign IT companies comparatively working in Pakistan are 60, the turn out of the total IT graduates per year are around 20,000, where as at least 15000 are usually hired. Among thousands of graduates in Pakistan, around 110,000 are kept employed on the yearly basis. The total IT industry size in Pakistan is around $2.8 billion. Eventual 100% repatriation for the profit of the IT companies.

Industry Expectations
By the time you read this story chances are the Budget will already have been announced, but CIO Pakistan reached out to a number of people in the industry to ask them what their expectations from the Budget were. To summarize the feedback, most people were of the opinion that they weren’t expecting anything brilliant, but they hoped that nothing goes from bad to worse – if nothing else, then announcements should maintain their status quo.

Ikram Ahmed Khan, Director, Business Beam (Pvt.) Limited, explains, “We are not hearing positive news about the upcoming Budget due to the economic situation of the Government of Pakistan. At this point, the most important step our government can take is to cut its own costs and pass along benefits to the industry and people.

However, as is becoming obvious, this does not look like the preferred course of action for the elected government. Based on the current situation, it would be highly unrealistic for me to suggest tax exemptions, however, news from the FBR (Federal Board of Revenue) is not encouraging for extending the scope of sales tax. If the government decides to implement 16% sales tax on services [as they have with the Telecom sector], I think this will kill the local IT industry. It will also increase the corruption considerably. I would strongly suggest to keep IT out of sales tax net. Maintaining the status quo from tax perspective is the most viable option now for our IT industry.” Faisal Qasim at NJI Life offers, “Since the 16% GST was levied on IT equipment a few years ago, this has increased costs. This either results in reduced buying or cutting IT projects. Bandwidth cost for connectivity across country is quite high, resulting in large running costs.
Establishing connectivity across cities is highly desirable and benefits the IT industry as a whole, resulting in multiplier effect. So if bandwidth costs are reduced, this will have a positive effect.

But not everyone is looking at the budget from such a bleak angle. Nizar Diamond Ali writes, “I am not expecting great things but yes, certain subsidies would certainly be welcome.” Nizar explains that a reduction in import duties or tariffs for banking hardware which includes machine for automatic endorsements, acknowledgments, counting/ scanning; printing devices for specialized purposes (e.g. payment instrument MICR scanners), etc. The existing cost of such devices is very high and impacts our decision-making while talking to local vendors.”

Nizar has three areas to summarize his recommendations for the Budget 2010.
1.Reduction of import of related duties for computer/ IT related or automation related hardware;

2.Revival and speedy completion of IT parks, and support by PSEB for subsidized standardization in business process management and CMM, in letter and spirit. As some of the firms are even better managed without certification as compared to those having one, utilization and selection criteria should be stringent.

3.Venture capital availability – With layoffs in financial sector, I have a growing number of professionals interested in setting up their own business/ consultancy of some kind, either full time or part time.

M. Asif Riaz, CISSP, CISM, Chief Information Security Officer at Habib Metropolitan Bank alludes to a more serious issue, closer to his heart. “Due to a gloomy business outlook, sales tax, especially on IT CapEx, should be eradicated for at least 3 years. Likewise, income tax on IT staff’s remuneration should be abolished where the annual gross is less than Rs.1,000,000.  You see,” he explains, “this would influx much needed IT staff in the market.” He also suggests that in order to increase the number of people who have highly specialized certifications, perhaps a tax exempt salary will do the trick.

When it comes to Telecoms, handset manufacturer Nokia, has been very vocal with the subject of taxes. Adeel Hashmi, Communications Manager for Pakistan, Afghanistan & Iran, Nokia Pakistan Mobile writes, “We have had a discussion in the past with the Ministry of Finance regarding reduction in import duty on mobile phones but I don’t think the government is planning to provide any subsidies on mobile phone imports this year.

In fact, there are chances that the import duty on mobile phones may increase by 3 to 5%. This would certainly have a negative impact on our consumers who are already spending less due to increasing inflation. A reduction in mobile phone import duties and taxes on cellular services would be a great support to the telecom industry. When mobile phones through legal channels would become more affordable for consumers, demand for smuggled mobile phones as well as low-quality Chinese phones would automatically go down.”

So what predictions does Adeel have for the local and multinational companies in both the short and long term?  “If the overall taxes will increase in Budget 2010,” he explains, “it would certainly result in higher costs for both local and multinational companies and make it more difficult for them to stay competitive. In terms of investment, the long-term effect will be negative as well because if the companies can’t make reasonable amount of short-term profits they would have to let go of some their future investment plans.”

Faisal Khaliq, CIO of Ufone says, “The current year has been the hardest for Telcos. Almost every Telco has lost money or has had a significant decrease in profits.  The key areas to hit us are:

Power issues: The impact on Telcos is more than other industries since we have thousands of locations which are widespread. With such severe outages, costs associated with fuel, maintenance and logistics are huge
- Fuel costs: This increased dramatically despite the reduction of international prices, diesel costs did not as govt took away subsidies

Taxation: Coupled with inflation and a slow economy, it is becoming increasingly difficult for the common man to spend on communication – a necessity. We are a very heavily taxed industry. We pay activation tax which in all cases is paid by industry as our now target market is low income groups. The impact of withholding tax, FED, GST and others, has a cumulative levy of approximately 33% on the user, up from the 26% last year. The fact that handsets were taxed also last year doesn’t help our case at all.”

Adeel Hashmi reinforces the sentiments by saying that, “We have suggested the policymakers to reduce duties on cell phones in order to minimize the burden on consumers and to increase business in the country as not every device is a luxury device. The government should realize the importance of mobile handset in the modern age. The mobile handset having value of under $100 could not be declared as a luxurious item and this is where the big numbers are coming in from the Pakistani market; the government should exempt and reduce the duties so that it could be used by the low income group of the country. Having said this, we also accepting it and also seconding to impose these taxes on expensive devises which may come over the price slab of Rs. 10,000 and above. A subsidy for the mobile phone industry would be a welcome initiative. It would put the telecom industry back on the path to future growth and specifically allow Nokia to focus on optimizing current capacity and adjusting cost structures of our products to remain competitive in the market and on remaining cost effective for our consumers.  And as I have always being saying, the next million users will come from the rural area of Pakistan where cost is of prime significance.”

Faisal Khaliq continues to say that “What we’d like to see in the next budget directly is a reduction in the activation tax from Rs.500 to zero ideally, since the remaining user base is low income. Reduction in usage taxes to bring it back down to the 26% mark again. This should help stimulate the industry. The budget generally needs to be business-friendly and have relief for common people to generate more economic activity.”

Economic activity is what everyone is talking about. Sure subsidies to the Textile sector and Agriculture sectors will help to stimulate the economy also, but when it comes to IT, ITeS and Telecoms, it’s all a numbers game. While technology serves millions of people, it also enables the same millions to be proactively contributing to economic prosperity. But then Dr. Aamir Matin, Country General Manager Cisco Systems Pakistan states the obvious by saying that, “Clearly reducing the duties and removing sales tax will help reduce the overall price to the end customer. And while this is needed, it is generic and applicable across all industries.”

Zohaib Khan, CEO at A2Z Creatorz writes, “We are looking for subsidies and exemptions on local sales. This figure is currently 6% of the total invoice. Service facilitation such as TT or Bank Transfer should be open and legal for all IT companies in order to make payments to the vendors worldwide.” As a software development house, Zohaib also exerts that an 85-90% subsidy or funding be made available for international IT exhibitions such as CeBIT, GITEX, in order build Pakistan Pavilion with min 20-25 IT companies. While this last suggestion is also a great one, the responsibility of this would probably not be a direct result of the Budget itself.

Summarizing
All in all, the overall expectations from the industry don’t seem very hopeful of the necessary relief certain pockets are looking for. But then, perhaps the government cannot be blamed for not knowing what will stimulate growth in the sector that has the expertise and potential to drive business for all. The fact that a booming sector doesn’t have a representative to lobby for its cause at the federal level, could be a big downfall for the entire industry.

It cannot be repeated enough times as to the dire circumstances companies are operating within. We’re certainly hoping that the general sentiment will be reciprocated in the Budget 2010 announcement – let the status quo remain intact!

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