According to the budget proposals of the telecom sector submitted to the FBR for 2017-18, telecom sector has proposed massive changes in the tax regime including reduction in sales tax/FED to 17%. This cut in sales tax/FED would result in additional 1.8 million connections by 2021, besides increasing GDP by $ 600 million and total economy by $ 480 million by 2021.
The removal of sales tax on SIM card would generate additional connections of 1 million by 2021, increase GDP by $1.2 billion and estimated employment increase will be 2,000 by 2021.
Telecom sector has also proposed rationalisation of federal excise duty (FED)/sales tax rate, bringing it at par with other sectors. About reduction in withholding tax rate on mobile services, the telecom sector has proposed that as mobile consumers are unable to reclaim the withholding tax paid on mobile services because most of the subscribers' income falls below the taxable limit, so this tax effectively acts as an excise duty. As with the sales tax, the withholding tax rate for mobile services is markedly higher than the rate for other sectors. The tax rate is also higher for mobile telephony and internet services than for fixed-line equivalents. Reducing the withholding tax rate will produce very positive results for the sector.
It proposed abolishment of FED/GST on data services and harmonisation of taxes across all provinces. Currently there are different GST rates for voice and data in different provinces. Presently, the import taxes on mobile phones constitute 37% of device value. Therefore, reduction in custom duties and sales tax on imported mobile phones has been proposed.
Telecom taxation comparison revealed that GST on telecom in Sindh is 19% while it is 19.5% in other provinces, while the level of GST on other services and sectors is 13-16%. Similarly FED on telecom services is 18.5% while it is 16% for other services. Sales tax rate of 19% on telecom is one the highest in Pakistan, second only to Uzbekistan among Asian countries. In Myanmar it is as low as 5%. The sales tax rates on telecom sector in the neighbouring countries India and Iran are 14% and 8% respectively.
Withholding tax on telecom at the rate of 14% is one of the highest among all sectors with most sectors paying WHT in the range of 1-5%. Together GST/FED and WHT make up a staggering 69% of total payments by mobile operators excluding the corporate tax.
On Global Paying Taxing Index, Pakistan ranks 156th, which is primarily due to inefficiency, inequity and complexity of tax structure prevalent in the country. Minor adjustments to taxation on telecom will not only benefit the economy and society, but will also offset reduced fiscal income by additional revenues generated from increased penetration.
As an example, bringing GST/FED to 17% alone can create 1.8 million additional connections, increase GDP by $ 1.2 billion and total economy by $ 480 million and generate 4,200 jobs by 2021. Similarly removing SIM sales tax and eliminating annual licence fees has the potential to add 1.2 million connections, increase GDP by $ 800 million and generate 4,500 jobs.
Pakistan government acknowledges that sharing the tax burden among sectors could add another 3-4% to the tax-to-GDP ratio in the short run and up to 6% in the medium term. In Pakistan, telecom is one of the highly unpredictable sectors in terms of tax regime. Every year the GoP introduces finance bill that comprises major changes in tax laws. These changes affect the business plan for further investment in telecom sector, both in infrastructure and spectrum.
In the financial year 2013-14, the government of Pakistan increased the rate of advance WHT on telecom services from 10% to 15%. This change resulted in decrease in average revenue per subscribers, affecting long-term business plans of the telecom companies. Later from 2014-15, this rate has been reduced to 14%.
Another instance is when the government in May 2015 levied sales tax @ 19.5% on data. This new tax directly affected the growth and penetration of digital inclusion in Punjab. Soon after the introduction of this tax, telecom and other related industries held a meeting with Punjab tax authority and finance minister Punjab for abolishment of sales tax in Punjab. After a lot of debates and discussions, finally in November 2015 the government of Punjab abolished data tax in Punjab. Out of 6 months, Telenor collected sales tax from consumers for 3 months only and paid it to Punjab Tax Authority.
Telecom consumers in Pakistan contribute significant tax revenue to the government. These contributions include the GST/FED on voice, data and banking services, advance tax, devices taxes, and SIM issuance tax. While the telecom consumers falling in tax net should be subjected to taxes, a balance is needed between short-term revenue schemes and long-term strategies to support overall economy and growth, the telecom sector added.
Copyright Business Recorder, 2017