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With CPEC, climate favourable for growth of IT start-ups
With CPEC, climate favourable for growth of IT start-ups

With CPEC, climate favourable for growth of IT start-ups

KARACHI: While Pakistan’s information technology (IT) ecosystem is evolving rapidly, experts suggest the government and private sector should lay a strong foundation for fast, healthy and balanced growth of product and service-based companies.

Easypaisa can be expressed as a product-based company while TRG is a service-focused concern. In 2016, Pakistan had over 2,000 software houses and now it is the fourth largest base for freelance IT professionals. Of these, only around 10% are believed to be running product-based companies.

“I would be surprised if there were any more,” said Syed Ali, vice chairman of the Pakistan Software Houses Association (P@SHA).

Pakistan’s IT landscape is changing drastically. The IT industry’s size doubles every year and its private sector is expanding. It is the best time for domestic start-ups to cash in on the favourable situation as both private and public sectors need software to run their systems.

“The market is witnessing historical changes; private firms in the country never allocated around Rs50 million for IT services, now it is becoming a trend,” remarked Sajjad Syed, CEO of Excellence Delivered and former managing director of Germany-based software firm Systems, Applications and Products (SAP) Pakistan.

However, Pakistan has been placed at 110th position on the World Economic Forum (WEF)’s Networked Readiness Index, which measures tendency of countries to exploit the opportunities offered by information and communication technology.

India is ranked 91st, Sri Lanka 63rd and China 59th on the index that is also called the Technology Readiness Index.

The China-Pakistan Economic Corridor (CPEC) provides a massive opportunity to Pakistan’s software developers, which may also help improve the country’s ranking in the WEF index.

Scores of software would be needed to run projects developed as part of CPEC since Chinese were focusing on mass employment sectors, but before that Pakistan should start developing software-based companies, suggested Sajjad Syed.

“We can quadruple our IT industry by offering software products to CPEC projects,” he emphasised.

Most software houses in Pakistan come under tier-III category with less than 100 employees. Very few would have more employees.

“The share of service-based companies in the IT industry is nine times bigger. Pakistan needs large service-based companies while there should also be more product-focused firms,” he said.

Service-based companies would hire people in large numbers in accordance with project requirements as mostly foreign companies asked for more than 2,000 sources (engineers) that no Pakistani company could provide at a time, said the P@SHA vice chairman, who is also 7Vals CEO.

“So, the best thing is to focus on product-based companies that need relatively smaller staff and cater to a large number of customers,” he said.

7Vals has recently entered Pakistan’s market with a deal with Habib Bank Limited (HBL). Earlier, it provided maintenance software to 20% of Fortune 500 companies.

Its software will help HBL in work order management, recurring maintenance and asset custodianship in its northern, central and southern branches.

Despite hiring people in large numbers, the service-focused companies offer a considerably lower pay for long-hour jobs to the dismay of employees. These companies also lay off workers on a large scale.

India, which has a $160-billion IT industry, laid off more than 56,000 employees in 2017 alone, therefore, Pakistan needs to create balance.

Pakistan’s IT industry showed a 41% growth in 2014-15 and it is going to be a $10-billion industry by 2025, according to the Pakistan Software Export Board.

To the contrary, product-based companies demand high skills and pay handsome remuneration packages. Facebook and WhatsApp are popular examples that pay hundreds of thousands of dollars to their employees. These companies look for creative individuals that could understand needs of the market and come up with innovative ideas to meet them.

“Pakistan needs business-to-business (B2B) products a lot since domestic companies are realising the importance of new technology in increasing their efficiency,” said Syed Ali.

Heavily taxed

“The tax system of Pakistan needs to be fixed to promote IT companies, particularly those that are focused on product development,” said Sajjad Syed while pointing out that an IT exporter could at least make $25,000 worth of exports.

IT is a heavily taxed industry in Pakistan as it is forced to pay tax on revenues. In contrast, the industry around the world is taxed on profits and not on revenues.

If a company makes revenues of Rs100 million a year, it has to pay up to 8% in income tax which virtually wipes out all the profit and takes away the incentive of opening an IT company.

Services tax in Punjab stands at 16% whereas Sindh has imposed 13% services tax. “Dubai seems to be a good option to start a company and Pakistani entrepreneurs are going there,” said Sajjad Syed.

According to him, when an entrepreneur comes up with a new IT product, the initial two to three years are spent on making experiences, but the tax system is hindering product-based companies from developing their businesses.

Public sector’s role is very important in the growth of IT companies which is reflected in the US where the government is the biggest customer of Spacex.

“Whenever Pakistan’s government needs something, it sets strange conditions like experience of 5 to 10 years for a company which, of course, is impossible for most of the Pakistani IT start-ups,” said Sajjad Syed.

“It is easier for Pakistani companies to win big business deals in the US than in Pakistan due to these kinds of conditions.”

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