KARACHI: Tax practitioners in Karachi have brought to light a concerning issue where banks are deducting withholding tax on proceeds from the exports of computer software and IT-enabled services, despite these being granted a 100% tax credit.
Muhammad Zeeshan Merchant, President of the Karachi Tax Bar Association (KTBA), highlighted this anomaly in a letter addressed to Asim Ahmed, Chairman of the Federal Board of Revenue (FBR), sent on Wednesday.
Merchant outlined that the confusion stems from an anomalous interpretation of Section 154A of the Income Tax Ordinance, 2001 by banks regarding the collection of one percent income tax on export proceeds from IT and IT-enabled services. He emphasized that the exemption is clearly available for the export of computer software and other IT-enabled services under the Second Schedule of the Income Tax Ordinance, 2001, allowing for a 100% tax credit under Section 65 of the Ordinance. This provision was introduced through an amendment brought about by the Finance Act, 2021, facilitating taxpayers to claim tax credit without requiring specific exemptions from tax authorities.
Contrary to the intended purpose of the amendment, some banks have initiated the deduction of tax under the newly introduced Section 154A of the Ordinance on the export proceeds of computer software and other IT-enabled services. Merchants stressed that these exporters are entitled to a full 100% tax credit.
He pointed out that Section 154A primarily applies to export proceeds from services other than IT exports. Despite this, some banks have introduced a requirement for a withholding exemption certificate from the Commissioner Inland Revenue, a condition that goes against the factual position outlined in the Ordinance.
The KTBA urged the FBR chairman to issue clear directives to banks, instructing them not to withhold tax under Section 154A of the Ordinance from taxpayers of software and IT-enabled services, provided that these taxpayers meet the required conditions. The issue raised by tax practitioners underscores the importance of aligning banking practices with the legal provisions, ensuring that exporters in the IT sector can avail themselves of the intended tax credits without unnecessary complications or misinterpretations by financial institutions.
