Pakistan ranks fourth among the most heavily taxed telecom markets in the world. Taxes on telecom consumers account to over 30% of the total cost of mobile ownership and this is exactly why ARPUs of Pakistani telecom market are lowest in the world.
This was stated by Aslam Hayat Khan, Chief Corporate Affairs and Security Officer, Telenor Pakistan, during a pre-budget seminar organized by ICAP.
Mr. Aslam Hayat Khan, on behalf of telecom industry, explained why and how the government of Pakistan could have much to gain from the telecom industry through rationalization of taxes.
Key Telecom Indicators
According to Mr. Hayat, here are some key indicators of Pakistani telecom market:
- Telecom Subscriptions and Users: 137 Million Connections / 60 Million Users
- Revenues of Telecom industry in 2014: PKR 466 Billion
- Foreign Direct Investment in 2014: PKR 90.3 Billion (34.1% of total FDI)
- Contribution to National Exchequer (through taxes) in 2014: PKR 130 Billion (excluding PTA’s deposits, which stood at PKR 104 Billion)
- Telecom Imports in 2014: PKR 123 Billion
Current Taxation on Telecom Industry
Mr. Hayat went on to explain the types and magnitude of taxes imposed on Telecom industry
- Consumer Taxes:
- Sales Tax on Mobile Phone: Rs. 150-500
- IMEI Tax: Rs. 150-500
- SIM Issuance Tax: Rs. 250 (usually paid by telcos)
- SIM Activation Tax: Rs. 250 (usually paid by telcos)
- FED / Sales Tax (on calls, SMS): 18.5% and 19.5%
- Advance Tax (WHT): 14%
- FED on banking services (branch-less banking transfer charges): 16%
- Corporate Taxes:
- 33% of Taxable Profit or 17% of Accounting Profit or 1% Annual Turnover – Whichever is Highest
- Advance Tax at Import Stage: 5.5% of value of goods which is considered as final tax
The plethora of taxes on telecom industry only lower the consumption abilities of telecom consumers, which not only hurt the overall tax collections by the government but the overall economic growth of the country.
This is evident from the fact that growth in tax collections from telecom industry has remained flat during past few years.
Tax collections, as an example, from telecom industry during 2007/07 were Rs. 111 billion, which reached just Rs. 130 billion during 2014, despite the fact that subscriptions and coverage grew multiple-folds during this duration.
Industry Proposals for Rationalization of Taxes
Eliminate taxes on SIM activation /supply and IMEI registration
Aslam Hayat Khan, on behalf of telecom companies, said that the multitude of taxes on SIM sales and handsets restrict the investment in telecom sector.
He proposed that SIM activation Tax should be reduced from PKR 250 to PKR 150; similarly, sales Tax on SIM Issuance should be removed.
Mr. Hayat said that IMEI Tax should be eliminated as handsets are already taxed and IMEI tax is simply a double tax on devices.
Mr. Hayat opined that removing above mentioned taxes will increase telecom subscriptions and hence the usage, which would translate into more revenues for the operators and the government.
Telenor VP explained that SIM activation tax was once reduced in the past which resulted into better mobile penetration and increased tax revenues for the government.
Rationalize rate of subscriber related taxes both FED and WHT
As mentioned above, a telecom consumer pays more than 30% taxes on telecom services, which is fourth highest in the world.
Interestingly, all other industries in Pakistan are taxed at 16% while its only Telecom industry that is charged at 18.5% or even 19.5% taxes in form of FED.
Telecom operators urged the government to align FED with other sectors at 16% while advance tax (WHT) should be lowered to 5%.
Government, at the time of imposition of WTH (advance tax) on telecom sector, had argued that consumers can get advance tax back at the time of filing of their annual taxes. However, as per cellular mobile operators, more than 80% of their customers are non-taxable and hence this 14% advance tax is never returned, instead it adds up to the cost of those 80% plus consumers who are living below the threshold of taxable income.
Aslam Hayat explained that this reduction in taxes will definitely hamper tax revenues of government during next two years, however, potential increment in service usage and corresponding impact on economy will surpass projected tax-revenues during 2018.
Eliminate custom duties and sales tax on network equipment
Mr. Aslam Hayat said that SRO 575 has been rescinded in finance act 2014-15 and consequently customs duties on network equipment have been increased from 5% to 15-20%. He said that exemption of imported equipment from sales tax has been removed.
The increase in custom duty has affected the telecom industry negatively in term of slow investment.
Mr. Hayat proposed the government to reinforce SRO 575 which, as per telecom industry, will make investment in essential network rollout and quality improvements more affordable.
Mr. Hayat explained that reducing the custom duty increases investment and access to mobile services, promoting digital inclusion with wider economic impact.
He said that since sales tax is charged in VAT mode which is recoverable as input tax adjustment so restoring the SRO 575 will not reduce sales tax revenue of Government. In fact, it will reduce administrative complexity for the government and operators, he added.
Harmonization of provincial sales tax laws, single return, single audit etc
Currently both Federal and Provincial revenue collectors peruse the taxpayers with regard to deposit of tax/ duty within their respective jurisdiction. This gives rise to undue hardship and double taxation claims for taxpayers.
Mr. Hayat, on behalf of telecom industry, proposed the government to centralize revenue boards so that the issues of ‘origin’ and ‘consumption’ on services and claim of input taxes should be clarified in a simple and understandable manner.
Mr. Hayat urged that resolution should be facilitating for the taxpayer, rather than creating hardship in compliance.
Telecom industry thinks that duplicate taxation has given rise to unnecessary litigations, which adds up in more operating cost for both the taxpayers and the government.
Status of Industrial undertaking to Cellular mobile operators for Tax Purposes
The tax paid at the time of import of telecom equipment @ 5.5% is considered as final tax rendering it non-adjustable against final tax liability.
This is just because of the fact that Cellular Mobile Operators are not recognized as an industry, instead the imported items are marked as imports from an importer.
Mr. Hayat urged the government to recognize Mobile operators as a industry so that import taxes are adjusted against final tax liability.
Mr. Hayat further explained that telecom companies are not commercial importers and equipment imported is used in the network to provide telecom services rather than for further selling of this equipment.