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Signing WTO's IT treaty: a win-win situation for all?

The government is considering to sign the World Trade Organisation's Information Technology Agreement (ITA), and if this is materialised it will greatly impact the local manufacturing industry. The ITA is currently signed by 54 WTO members.

The ITA is a multilateral trade agreement that requires participants to eliminate their tariffs on a specific list of information technology and telecommunications products. The agreement covers approximately 97 per cent of world trade in defined IT products, which is currently estimated to exceed $1 trillion. Products covered under the ITA include computer hardware and peripherals, telecommunications equipment, computer software, semiconductor manufacturing equipment, analytical instruments, and semiconductors and other electronic components.

If ITA is materialised, the local manufacturing companies stand to benefit from the arrangement because complying with the agreement means abolishing or reducing the taxes and duties on import of IT related products from overseas.

According to a recent letter to the stakeholders, the ministry of industries and production's Engineering Development Board (EDB) is analysing the local IT manufacturing industry to assess the impact of the agreement on the local industry. There have also been meetings within the IT ministry about ITA in the recent past.

Signatories of the ITA are required to eliminate duties on a variety of IT products which include computers, telecommunication equipment, manufacturing and testing equipment, scientific instruments as well as parts of these products. There is also a commitment to tackle non-tariff barriers in the IT industry.

The purpose of ITA is to keep the IT industry developing globally and promote the proliferation of information technology.

While Pakistan does offer relaxation in taxes on IT exports, import duties exist and are relatively high. Some government bodies have raised concerns regarding the outcomes of signing ITA. The Federal Board of Revenue (FBR) has pointed out that Pakistan would lose a revenue of about Rs4.5 billion in the first year after signing the treaty. Others have expressed the fear that local manufacturers may not be able to compete with the cheaper products of foreign manufacturers.

However, proponents of the agreement (which includes the IT ministry) argue that signing the agreement will attract foreign investment from international IT giants, as large manufacturing and assembling plants would become more feasible due to zero duty on parts of IT products. It would also help in developing the value chain for local manufacturers. Furthermore, normal consumers would also benefit from the reduced prices, improving the penetration of information technology within the country.

It is pertinent to mention here that the government has already extended tax exemption on IT services and products till June 2019 in the budget 2016-17 as the IT sector of Pakistan is in its infancy and requires support. However, IT companies that are availing the tax exemption will have to remit 80 per cent of their revenues to Pakistan through banking channels while they can retain 20 per cent of the revenues outside of country for meeting their expenses. The previously imposed 8 per cent minimum tax on service provider companies remains the same, which was previously scheduled to be reduced to 2 per cent by the government. A couple of weeks ago, the FBR raised concerns over the commerce ministry's move to ratify the ITA under the World Trade Organisation (WTO).

Joining the ITA will lead to removal of duties on the import of over 200 hi-tech products such as desktops, laptops, mobile phones among WTO member countries. The FBR, in a letter to the commerce ministry, estimated that the country would lose Rs4.5 billion alone in customs duties after accession to the treaty in the first year.

Local taxation will also not benefit from this because of inelastic demand, the letter said. As a result of accession the low-tech indigenous manufacturing will be exposed to cheaper finished products by overseas large-scale manufacturers, it added. Both ITA-I and II include many items of general use and a whole range of medical equipment. Despite losing substantial revenue on such imports by acceding to the ITA, it can safely be predicted that there would be negligible impact on telecom sector and ultimate beneficiary would be commercial traders of consumer electronics.

There are 174 tariff lines, which cover ICT products. The break-up of these tariff lines shows that 1pc customs duty is chargeable on 38 tariff lines, 5pc on 86 tariff lines, 10pc on 17 tariff lines, 15pc on 3 tariff lines, 20pc on 20 tariff lines, 25pc on 9 tariff lines and Rs250 on mobile phones.

In terms of value, the highest import value is of mobile phones followed by 86 tariff lines, 20 tariff lines and 38 tariff lines.

Becoming signatory to the ITA would not necessarily open doors for Pakistani exports, which have to face sensitive items lists of various countries. For exporters of ICT equipment/software, it is not the cost but the non-tariff barriers and the developed countries are not willing to give any concession in exchange for signing the ITA.

The Ministry of Information Technology, however, is in favour of accession to ITA. It believes that the liberalisation will attract multinationals' investment and also help developing a value chain for local manufacturers.

Some experts say prevailing high tariffs and protectionist policies have made the ICT products costly. The Pakistan Software Houses Association (PASHA) and Pakistan Computers Association (PCA) have linked the joining of ITA with overall changes in tax regime and incentives for the IT industry.
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Date:Oct 31, 2016
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