Budget 2023-24: A few goodie bags won’t undo the damage

By Staff Reporter | DAWN Jun 12, 2023

Every year, the federal budget is a cruel reminder of the Pakistani economy’s descent into chaos and the meaninglessness of numbers. The mediocrity of the size of outlays, the unrealistic targets and the crushing burden of debt are all recurring features now, with no end in sight to this madness.

However, unlike all previous editions, this budget was unique in one respect: the focus on information technology. The finance minister called it the “engine of growth” and set its promotion as one of the guiding principles. This is in stark contrast to the yesteryears when one would struggle to find more than a handful of mentions on the sector.

For starters, it extended the concessionary fixed tax rate at 0.25pc to export IT services until June 2026. In contrast, the Pakistan Software House Association (P@SHA) had asked for a complete exemption in its recommendations. In Islamabad Capital Territory, the sales tax has been proposed to be reduced by 10 percentage points to 5pc.

On the other hand, the industry body’s demand regarding the import of hardware was met. Well, at least partially. The budget has proposed that IT and enabled service companies can import hardware and software of up to 1pc of their exports without paying any tax, but capping it at an annual $50,000.

While the cap on the amount may be a little restrictive, this was a much-needed measure. Pakistan has a hardware problem which has been brewing for some time. First of all, the rupee devaluation over the past five years has made imports quite expensive. It’s not just the iPhones or other top-of-the-line handsets (where Pakistan Telecommunication Authority has played a role, too) but any computing machine.

According to TradeMap, Pakistan imported just $50.7 million of goods in Q3-2022 — the latest period available — under the HS code 8471, defined as: automatic data processing machines and units thereof; magnetic or optical readers, machines for transcribing data onto data media in coded form and machines for processing such data, not elsewhere specified or included. This includes laptops, computers and other devices.

Though it’s not entirely by IT exporters, this is still the lowest value of imports in more than half a decade, since at least the last Q4-2017. While the reason for this specific window has to do more with the across-the-board restrictions to save dollar outflow, imports under HS Code 8471 haven’t grown that much in the last many years. One major explanation for that could be the increase in average prices.

Unfortunately, TradeMap does not have recent quantity data, but numbers up to Q2-2020 show that the average price of an imported data processing machine — HS 847130 — paid by Pakistan had fallen to $113. Back in Q1-2017, that number used to be $278.

So for quite some time now, there’s been a general degradation of technology equipment being bought, if laptops are a proxy for an overall trend. Of course, the actual problem is the devaluation of the rupee here, which the budget won’t do anything about, so hardware, regardless of taxes, will continue to become more expensive.

Moving on, the budget has also proposed an exemption from filing sales tax returns for freelancers earning up to $24,000 from exports. It further plans to issue a single-pager form for this segment.

There’s also been a reasonable level of attention paid towards access to financing. Most significantly, the government plans to launch a Rs5 billion venture capital fund though it’s not yet entirely clear who’d manage the money. On that note, the Ministry of Information Technology and Telecom saw its outlay reduced to Rs6bn for FY24 from Rs6.33bn.

Similarly, the budget plans to incentivise bank lending towards IT services companies by offering them a concessionary tax rate of 20pc on income instead of the existing 39pc. As of April, the total outstanding credit to the sector — herein defined as heads 58d, 62 and 63 as per the State Bank dataset on loans classified by borrowers — was only Rs16.1bn. For context, when times were good, Airlift alone raised around Rs14bn at the prevailing exchange rate.

That said, this ‘relief’ kinda ignores the root cause of the problem from both the demand and supply sides. On the former, the interest rate environment (both the prevailing rates and the continuity) make borrowing a pretty expensive source of capital for rather petty amounts. Meanwhile, the latter doesn’t lend to anyone, largely because the government’s own fiscal indiscipline leaves little incentive for them.

Whether these measures will reap the desired effect remains to be seen, but one thing seems abundantly clear: the government is clueless about how big the trust deficit has become.

More than a year of disastrous economic management, trade restrictions, and rupee devaluations was already too much, but the final straw came in the form of an internet shutdown. A few goodie bags won’t undo that damage.

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