A tax breather – not a digital leap

Budget FY27 is broadly positive for Pakistan’s IT exporters but calling it a technology budget would be an overstatement. Its biggest contribution is not a bold new digital growth programme, but the continuation of an existing tax concession that gives export-oriented companies some much-needed certainty. The key measure is the extension of the 0. 25 percent Final Tax Regime on the export proceeds of registered IT and IT-enabled services companies until June 2029. The concession was due to expire in June 2026. Its extension removes an immediate source of uncertainty and gives companies another three years to plan contracts, set prices and expand overseas without worrying about a sudden increase in their tax burden. For Pakistani technology companies competing globally on multi-year foreign-currency contracts, tax certainty protects margins, pricing, and competitiveness, making the extended concession more valuable than a short-lived subsidy. Larger technology companies may also benefit from the reduction in super tax. The government has abolished super tax for companies earning up to Rs500 million and reduced the maximum rate from 10 percent to 8 percent for companies above that level. Banks, exploration and production companies and fertiliser manufacturers have been excluded from the relief, but technology companies have not. The broader exporter package is also supportive. The government has removed the 1 percent advance tax on export proceeds while increasing withholding tax from 1 percent to 1. 25 percent. Since the advance tax was adjustable, exporters often had to wait for settlement or refunds, tying up their cash in the process. Its removal should improve cash flows. The exact impact on IT exporters will depend on how this measure is applied alongside their separate 0. 25 percent final tax regime. Still, the broader message is encouraging. The picture becomes less clear once one moves beyond established software exporters. For larger e-commerce sellers with annual revenues above Rs200 million, tax deducted on online marketplace transactions will now be adjustable. This should reduce the risk of the deduction becoming an extra cost, but smaller online businesses will benefit less as many still face problems with registration, bookkeeping, and access to finance. Banks will also deduct 5 percent withholding tax on income received by digital creators and social-media influencers from platforms such as YouTube, Facebook, Instagram, and TikTok. Bringing online income into the tax net is reasonable, but without a simple refund or adjustment process, the deduction could hurt the cash flow of smaller creators and freelancers with irregular earnings. Advance tax on mobile-phone distributors has also been increased from 0. 25 percent to 0. 5 percent. Although the tax is adjustable and may have little long-term impact on large distributors, it could still raise working-capital costs for smaller businesses operating on thin margins. The federal development programme allocates Rs20 billion (although modest within a federal PSDP of Rs1 trillion) to the Information Technology and Telecom Division. This provides some room for public-sector technology, connectivity, and digitalisation projects. The budget offers little direct response to other constraints of the sector like no relief for broadband expansion, spectrum investment, data centres, cloud infrastructure, cybersecurity etc. Extending a concessionary tax rate can preserve momentum, but it cannot by itself move the industry from outsourcing and freelancing towards higher-value software products, intellectual property, artificial intelligence, cloud services, and regional technology platforms. The government expects total services exports to rise from $10. 9 billion in FY26 to $11. 3 billion in FY27, supported mostly by continued IT-sector growth. Its progress, but it is hardly a major leap. The modest increase (3. 7%) suggests that the budget is designed to protect the existing trend rather than trigger a new phase of expansion. Overall, Budget FY27 is positive for listed and export-oriented IT companies, mixed for e-commerce and digital creators, and largely neutral for telecom and communications. The sector has received tax certainty and some breathing space. What it has not received is a credible roadmap for turning Pakistan from a low-cost technology-services provider into a deeper, investment-led, and product-oriented digital economy.

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