According to the combined budget proposals of five leading telecom companies for 2018-19 submitted to the Finance Ministry, telecom sector in Pakistan is a significant source of revenue generation for the national exchequer. Telecom industry revenues stood at Rs 369 billion for the 2016-17 as per Pakistan Telecom Authority (PTA) annual report for the year 2016-17 while the industry made a significant contribution of Rs 161.4 billion to the national exchequer in terms of advance income tax, sales tax, import duties and PTA levies. Telecom investment remained US $635 million during 2016-17, embarked to total investment at US $15 billion from 2004 to 2017.
The collective budget proposals/representation of these companies revealed that a recent country report by GSMA (based on study of Pakistan telecom market by M/s Deloitte) suggests that a 10% increase in mobile penetration increases the total factor productivity in the long run by 4.2 percentage points, a doubling of mobile broadband data use leads to an increase in GDP per capita growth of 0.5 percentage points, for a given level of mobile penetration, a 10 percent substitution from 2G to 3G services increases the GDP per capita growth by 0.15 percentage points. In the last two decades the mobile sector in Pakistan has enabled more than 85% population to gain access to transformative technologies with 140 million plus subscribers, including 48 million plus mobile broadband subscribers. This increase in access is bringing wide-ranging benefits to the Pakistani economy and society, is boosting productivity and supporting increased economic growth. Despite substantial growth, still majority of the population living in rural areas is not having the access to mobile services. Pakistan is still behind its neighboring countries in terms of subscriber penetration, which is below global and regional averages.
Apart from the technological advancement brought in Pakistan by telecom sector in terms of NGMS (3G/4G technology), it has also contributed significantly towards socio-economic development in terms of creating more than 14,000 direct employment opportunities along with considerable indirect employment opportunities and helping in Government Vision 2025 in terms of m-commerce, m-education, m-health, m-agriculture, m-women etc, they said.
Telecom sector is facing lot of tax challenges in Pakistan; World Economic Forum has highlighted taxation as the second most problematic area for ease of doing business and World Bank Group has also pointed out that tax is the only indicator contributing towards three place decline in ease of doing business. Telecom sector is facing very serious taxation challenges which are hampering its growth in the country and demand immediate attention of the government of Pakistan.
Reduction/Exemption of Withholding Tax: Currently telecommunication services in Pakistan are subject to withholding tax at the rate 12.5%. The rate of withholding tax is on much higher side than for most other sectors, for which it varies between 1% and 12%. Since more than 70% population lives below poverty line and the percentage of return filers is also nominal so the implementation of withholding tax to entire subscribers base mostly living below the poverty line is not logical as the majority of them are either falls below taxable limit or do not claim the tax in their annual returns. Further, the reduction in withholding tax will also promote the affordability of internet/data services to the low income group people. Hence it could be abolished or at least the rate of withholding tax should be reduced to 8% or below.
Industrial Undertaking for the Telecom Industry: Consequent to the approval by the federal cabinet in year 2004; the Ministry of Industries & Production vide its SRO number 1(II)/2004-InvIII dated April 20, 2004 had already classified the telecom sector, including "cellular operators" as "industry". In addition the Mobile Cellular Policy issued by the Ministry of Information Technology ("MoIT") dated January 28, 2004 also referred to CMOs as "industry" (clauses 1 and 3.2 of the said policy). Ministry of IT not only clearly admitted CMOs status as an "industry" but also endorsed the request of CMOs to declare industry under clause (b) of section 2(29C) of the Income Tax Ordinance 2001 through MoIT letter addressed to the chairman FBR dated June 18, 2014. However, till date the CMOs have not been declared industry by the FBR under section 2(29C) of the Income Tax Ordinance 2001.
One way to address the problem is to amend section 148 (imports) so that the tax withholding at import stage is made adjustable for the telecom operators. With respect to section 148(7), the existing section and proposed changes are suggested as under please (underlined text represents the suggested addition);
Existing provision of section 148(7):
148 imports (1)........
(7) The tax required to be collected under this section shall be a final tax except as provided under sub-section (8) on the income of the importer arising from the imports subject to subsection (1) and this sub-section shall not apply in the case of import of-
(a) raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use;
(c) Proposed provision of section 148(7):
148 imports (1)
(7)The tax required to be collected under this section shall be a final tax except as provided under sub-section (8) on the income of the importer arising from the imports subject to sub-section (1) and this sub-section shall not apply in the case of import of-
(a) raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use;
(aa) "raw material, plant, machinery, equipment and parts by telecommunication service provider, telecommunication equipment and infrastructure service provider. for their own use."
This would reduce the cost of importing essential network equipment thereby improving the business case for infrastructure investment especially in remote areas and could have a particularly strong impact on increasing 3G/4G mobile broadband coverage. By granting telcos equivalent tax treatment that is enjoyed by industrial undertakings, telcos could benefit from the exemption to the income tax paid on imported network equipment that is already enjoyed by other industries that use imported goods for their core operations, they proposed.
Reduction of FED/GST: Telecom sector is being taxed heavily in Pakistan with 19.5%/17% sales tax/FED which is on higher side as compared to the general rate of sales tax applicable to other services in the country ie around 15-16%. Due to higher rate of sales tax on telecom services, the majority of the population is still not in a position to avail the benefits in full. In 2015 GSMA had also highlighted the same issue and as per their country report (based on study conducted by M/s Deloitte) higher taxes are the main hurdle towards the achievement of digital inclusion in Pakistan and overall growth of telecom industry.
Reduction in Customs duties/Sales tax exemption on import: Telecom being very investment intensive sector should be given concessions in terms of reduced rates of customs duties and exemption of sales tax against import of telecom equipment to promote the teledensity throughout the country especially in far-flung areas so that the benefits of next generation mobile services can be reached to the masses living in backward areas.
Previously, telecom sector was importing telecom equipment at 5% customs duty and 0% sales tax under SRO No 575, however, through Finance Act, 2015, this SRO was rescinded and consequently, the customs duties on network equipment have been increased from 5% to 20% and sales tax exemption has been removed. The increase in custom duty and levy of sales tax has badly affected the pace of growth and digital inclusion as the cost of doing business has been significantly increased which is an additional barrier to network coverage in Pakistan. The rollout of 3G/4G network is still very much at the early stages and reduction in customs duties and restoration of sales tax exemption will help the operators sustain the necessary investments.
Adjustability of 8% Withholding Tax: Through Finance Act, 2016, an amendment was made in Section 153(I)(b) of the Income Tax Ordinance, 2001 whereby the 8% withholding tax deducted against the services provided by telecom companies, along with other service providers, have been subjected to a charge of minimum tax instead of adjustable regardless their actual income or loss. This tax has, thus, changed the character of income tax from a direct tax to an indirect tax as the amount of charge would no longer be applicable on the quantum of income actually earned even under the standard income tax rules. Furthermore, the exorbitant rate of 8% will seriously erode the profitability, or further increase the losses, of the telecommunication industry which according to independent reports is in shackles and is already the victim of discriminatory taxation.
Consequent to the above amendment in the law, non-issuance of exemption certificates under Section 153(1)(b) of the Income Tax Ordinance, 2001 in view of the imposition of the minimum tax has also increased the administrative burden of both the telecommunication companies and the withholding tax monitoring units of FBR as the tax that was previously deposited lump-sum as advance tax is now being collected by thousands of corporate customers across Pakistan. In view of the above submissions it is requested that the 8% minimum tax regime may be withdrawn.
They added that it is, therefore, very important to realize that the telecommunication industry is at crossroads at the moment and it demands immediate attention by the government of Pakistan. With one of the lowest calling rates (due to extremely competitive market) and the one of the highest taxation rates in the world, the industry margins have been eroding continuously. An amicable resolution of the abovementioned issues will certainly help in the expansion and growth of 3G/40 services in the country; resultantly in the long-run this will certainly help in the increase of FDI, overall economic growth of the country and the growth of tax revenues for the government of Pakistan, they added.