Telecom Taxing – Spurring a Recession or Asserting Authority?

The recent Federal Budget of Pakistan for the fiscal year 2009-2010 has imposed a set of new rules and fixes for the Pakistani Telecom Industry. Where it makes a flexible opportunity to increase usage of mobile services, it also imposes a threat to the consumption of telecom services.

The regulators have applied a 20 Paisa Federal Excise Duty on outgoing Short Message Service (SMS) while also taxing cellular advertising. Where such regulation has been applied, flexibility in General Sales Taxing has also been offered. For all new mobile connection SIM activations, the tax has been halved from Rs. 500 to Rs. 250. The General Sales Tax has been reduced from 21% to 19%. The mobile phone equipment segment has also received some benefit in terms of custom duties with reduction of Rs. 250 on all handset procurements.

There are mixed feelings in the Telecom Industry segments especially in the consumer corner. The previous Federal Budget for the fiscal year 2008-2009 was already an axe on the telecommunication sector. A possible belief that provoked authorities to impose such heavy taxing may have been due to the revenue generation and advertisement spending by the Telecom Operators. Interestingly the Telecom Sector passes the Taxing on to the consumer because the consumer ends up paying heavy taxes on prepaid as well as post paid packages where activations charges, GST and central Excise Duty are charged with every phone call, SMS, MMS, GPRS and Internet Packet Data usage.

Experts from the Telecom Industry have occasionally shared that the 20 Paisa SMS Taxing is not the first blow on the industry as it has been facing many other crisis. Where the authorities feel that they are offering incentives to the Telecommunication Sector, service providers feel that these are not ideal incentives as the country is undergoing a severe Economic Recession and the crisis environment is not improving and is being further burdened by imposing taxes instead of expecting more tax cuts to relax the industry business. Interestingly, the importation of telecom equipment rollout segment continues to benefit from tax reliefs. But it is interesting to note that the Telecommunication sector does not merely rely on SMS income and the packages in the market have been relatively lower than other countries nearby.

Despite the prevailing concerns, the Telecommunication Sector has enjoyed amazing privileges in the past. With the deregularization of the Telecom Sector and Foreign Direct Investments into the Telecom Industry and Operators, the Ministry of IT&T has supported the expansion of Telecommunication across the country and took steps in the past 8 years that many governments may not have attempted. The same industry that today faces a huge impact of economic recession still continues to sustain itself and enjoy huge consumer bases. With millions of cellular service users as well as the Business and Industry relying heavily on communications to carry out their daily activities, the Telecom Sector continues to witness increased usage and service consumption.

The industry will possibly welcome the new changes since it directly or indirectly benefits their business apart from SMS consumption. The impact of taxing on SMS is to be borne by the customer since the consumer determines the use of SMS. Apart from usual SMS usage patterns, there had been a continuous growth in advertising, obnoxious jokes sharing and messaging that would not qualify as a basic need of anyc user. In various segments of society, the advertising and ‘spamming’ of irrelevant SMS was being felt as a headache. The new taxing on SMS may also be related to the Interior Minister’s notifications about illegal use of SMS services that have been occasionally announced in the recent past. Such taxing may help the authorities reduce such ‘offensive’ messaging that was prevailing throughout the country.

The SMS Packages being offered by all Telecom operators have been amazingly low already with the taxing issue almost negligible for users that use SMS as a medium to carry-out their daily life activities and commercial dealings. The SMS rates being offered by the operators had reached the lowest level of charging at Rs.0.01 that is actually amongst the lowest in all of South Asia. Even if the taxing was applied, consumers will not reduce their need for messaging and critical communication. However, the quantity of SMS messaging creates an enormous opportunity for revenue collection by the authorities and if Rs.0.20 was applied to every message of the millions of SMS being exchanged and forwarded everyday, the regulators are bound to be happy.

Amidst the fact that Taxing has been a winning for some and loss for others, some innovative segments of the ICT industry will be badly affected. Citizens trying out new ventures and services for business and revenue generation will be the losers in the current taxing regime where business models evolved around taxing will take the severe beating. Possibly, various online Internet based SMS portals such as www.chopaal.pk, www.seenreport.com, www.iSMS.pk may see the end of their good days providing a free facility to consumers to send SMS to Pakistani cellular users.

The authorities have however made sure of one thing, that, the SMS taxing will reduce the exchange of obnoxious messaging mocking various eminent leaders and personalities. The Pakistani Telecom Industry has yet to go a very long way before the citizens actively participate in evolving innovative uses of mobile technology, convergence and social networking, before that such adjustments in taxing and tariffs by the authorities may be the only way to adjust the industry to be mutually beneficial for all including the private sectors and the consumers. It will definitely be amusing to see how the Telecom Industry and Consumers respond in the long run in the current taxing regime.