Simplify the Forex Retention for the IT and ITes companies
Reform ID I167
Reform Description Streamlining Forex retention for IT and ITES companies.

Before: Companies were discouraged to bring money to Pakistan

After: IT companies are encouraged to bring exports and investments to Pakistan
Sector IT & ITeS sector
Beneficiaries IT Companies, Startups
Jurisdiction/ Location Federal
Department State Bank of Pakistan, Pakistan Software Export Board (PSEB), Ministry of Information Technology and Telecommunication (MOITT)
Date of Implementation 23-10-2023
Details Difficulty ● Due to difficulties faced in utilizing the 35% funds for international expenses, many companies prefer to keep that money outside the country. Since these funds cannot be reliably used for timely payments outside of Pakistan, companies open accounts abroad and keep a safety fund outside. Often these companies are required by their head offices to repatriate their profits/dividends or make payments against invoices to their head offices or relevant vendors within the stipulated time frame. Due to the restrictions, these are often unable to comply with their corporate rules which are highlighted as noncompliance by their head offices making Pakistan an unfeasible destination to set up such operations.

● Allowing 100% of the contract value to be retained in the foreign currency and allowing unrestricted movement of the same foreign currency amount will help companies set up offices in Pakistan.

● Moreover, software exporters are also forced to convert their proceeds at uncompetitive bank forex rates. With fluctuating dollar rates, exporters are being discouraged to bring their proceeds to Pakistan. The challenge is applicable to the startup ecosystem as well. Founders are being advised to raise less, as 100% of funds raised from abroad until USD 10 million (on an annual basis) needs to be remitted to Pakistan. The challenge also prohibits Gaming and Animation companies to utilize export revenue to spend on game advertising with Google, Facebook, Android and other vendors. Games earn money as a function of how much they spend in advertising. Not allowing the forex retention results in loss of tens of millions of dollars in export revenue. Up to 80% of the revenue is spent on marketing activities for some of the sectors.
Analysis ● During the stakeholder interaction, it was concluded to be one of the biggest bottlenecks for increasing investment and exports in Pakistan.

● 100% forex retention is a better approach than introducing RDA (Roshan Digital Account) where 6% returns need to be paid.

● It is also important to note that India is allowing 50% forex retention. In 2021, India reported having reached approx. 200 billion USD. It accounts for approximately 55% market share of the USD 200-250 billion global services sourcing business in 2019-20. Hence, in order to have a competitive advantage, Pakistan needs to offer a better ecosystem for forex retention.
Solution ● Allow 100% of the export remittances to be remitted out by IT & ITeS services registered with PSEB hassle-free and quickly directly through the authorized commercial banks for any legit business purpose with intimation to SBP but without any SBP approval.

● FE Manual should be amended to permit the retention of 100% of the receipts of exporters and startups in forex.

● Amendment in Chapter 12 Clause 36 to substitute the existing clause.
Evidence
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