BUDGET AND THE IT INDUSTRY
The software exporters are anxiously awaiting the IT policy expected to be announced by next month
By Syed M. Aslam
Jun 26 - Jul 02, 2000
The incentives announced by the government in the Budget 2000-2001 may be friendly to the IT industry in general but they fall short of encouraging the use of personal computer in the country. Measures such as the withdrawal of duty on the import of computer hardware and accessories many of which were already allowed duty-free; Income Tax exemption to IT institutes till June 30, 2005; and abolishment of 0.5 per cent income tax on software exports is seen to help a handful of top software exporters instead of encouraging PC penetration in the country as it would not result in reduction in the prices of computer hardware for the benefit of basic users.
This is primarily so as most of computer hardware and accessories were already enjoying the duty-free with the exception of servers, storage devises and midrange computers which are used mainly by the big public companies, private companies and a handful of top software exporters. The small and medium software exporters as well as individual PC users would hardly derive any benefit from the withdrawal of duty of these accessories.
Talking to PAGE, the General Secretary of Pakistan Software Houses Association, Khurram P. Rafiq said that while the local IT industry may get some benefit from the withdrawal of import duty on the computer hardware and accessories the import of many of which were already allowed duty-free it would offer no benefit to the basic PC users.
Announcing the withdrawal of duty on PC and accessories the majority of which were already enjoying duty-free status would benefit only a handful of top software exporters, Khurram said. The withdrawal will have no impact on hundreds of small-to-medium software houses, which collectively contribute 60 per cent to the total IT exports, as it offers no relief to them to expand their existing business. Less than 2 per cent of some 350 software houses of all sizes in the country would be able to derive any benefit from the withdrawal of the duty, particularly the big ones and not even all of them, Khurram added.
He said that though the withdrawal may offer some benefit to the top software exporters individually it does not offer any incentive for the local IT industry as a whole. Neglecting the small-to-medium software houses which contribute a huge share to the total IT exports by withdrawing duty which does not benefit them in the least is counterproductive as it puts pressure on the handful of big software exporters who could only do so much. It also restricts the growth of small-to-medium software houses which are playing a significant role to put the country on the international IT map.
Khurram said that small-to-medium software houses are playing a pivotal role in boosting the IT exports of various countries of the world and the same strategy should be adopted in Pakistan. For instance, there are some 5,000 software houses in India including about 100 big ones which collectively contribute 45 per cent to the total IT exports while the rest of the 55 per cent comes from the small-to-medium size houses. In the near future some 60-70 per cent of software exports from India will come from medium-sized software houses. Similarly, small-to-medium enterprises contribute 80 per cent to the overall exports of Japan while big industries' share in overall exports is 20 per cent, Khurram added.
Putting the IT exports from Pakistan between $ 10-12 million annually he said that about half or $ 6 million of it is contributed by hundreds of small-to-medium software houses who will not benefit from the withdrawal of duty on the imports of hardware and accessories including the items where it would really make a difference.
However, Khurram said that despite its drawbacks the budgetary measures has resulted in increasing the level of expectations in the local IT industry which "primarily means software exports in Pakistan and nothing else."
He expressed concerns that the government has not allocated any money for venture capital for the IT industry. While the banks are eager to provide loans the small and medium software houses, many of them owned and operated by a single individual with a handful of IT professionals, can not benefit from it as banks need collateral while the only collateral they got is the Intellectual Property Right which has no cash value. While the government has allocated Rs 2 billion for the IT industry in the Budget 2000-2001, Khurram said that it should have used the money for the venture funding for the industry as the bulk of it would be spent on the creation of the IT division instead of benefiting the service-oriented industry itself. Even the big software exporters can avail export financing, which the central bank asked the banks to provide against LCs or confirm orders as collateral earlier this month, Khurram claimed.
A welcome gesture to the IT industry came vide a State Bank of Pakistan, the central bank, which allowed the software exporters to retain 25 per cent of their export earnings in special foreign currency account a few days after the Budget. Software exporters would be allowed to use the funds for payment of commission to overseas buyers, promotion and publicity, import of hard or software, and fee to consultants.
The software exporters are anxiously awaiting the IT policy expected to be announced by the government next month to 'clear a situation which still remains fluid in the absence of post-budget details and to clarify many remaining puzzles and simplifying others.'