Demand for Industry Status for Telecom Increases

The Overseas Investors Chamber of Commerce and Industry (OICCI) has proposed Federal Board of Revenue (FBR) to give industrial status to the telecom sector with abolition of SIM taxes, sales tax on import of handsets and IMEI tax, reduction in advance tax rate to 5% and FED rate be aligned with other services @ 16% in budget (2016-17).

OICCI has submitted several proposals to FBR regarding telecom sector, a copy of which is available here with this correspondent. It states:

Status of Industrial Undertaking to Telecom Industry:

[Income tax Ordinance, 2001: Section 148]: Telecom companies have not been declared industrial undertaking under income tax law.

The tax paid at the time of import of telecom equipment @ 5.5% is considered as final tax rendering it un-adjustable against final tax liability. This issue has arisen because telecom companies have not been declared as industrial undertaking as per income tax law. The telecom companies are industrial undertaking under telecom policy but not under income tax law.

Federal Finance Minister has verbally agreed with all the mobile operators regarding grant of industry status in his various meetings during 3G auction.

Ministry of IT and Ministry of Industries both have granted the status of industry to mobile operators still FBR has not granted the status of industrial undertaking to Cellular Mobile operators.

Recommendation

Telecom companies should be declared as industrial as they are not commercial importers and telecom equipment imported is used in the network to provide telecom services rather than for further sale. Therefore tax paid under section 148 should be considered as advance income tax rather than final tax.

Rationale or benefit

Fixed tax on import of telecom equipment increases the cost of network, an additional barrier to mobile network coverage in Pakistan. The roll out of 3G network is still very much at the early stages and it is the key to development of the market that operators are able to sustain the necessary investment.

Sales Tax Act, 1990: Ninth Schedule

There are multiple taxes on SIMs and handsets in the form of sales tax on import of local supply, sales tax on supply of SIMs and IMEI tax.

In Finance Act, 2014 FBR has imposed sales tax @ PKR 250 per SIM card on supply of SIM cards. Also FBR has imposed sales tax on import of local supply and IMEI tax on handsets ranging from PKR 300-1000 per mobile.

Recommendation

The imposition of multiple taxes on SIMS and handsets directly restrict the investment in telecom sector. Especially after auction of 3G license heavy taxation is restricting the investment in infrastructure.

Therefore it is recommended that taxes like SIM taxes, sales tax on import of handsets and IMEI tax should be abolished.

Rationale or Benefit

The Ministry of Finance has already seen some of the benefits of rebalancing mobile specific taxes. The SIM activation tax was reduced from PKR 2,000 to PKR 1,000 in 2004, then again to PKR 500 in 2005 and to PKR 250 in 2009. Finally it was abolished in 2005. During the same period, mobile penetration increased notably since 2004, together with government tax revenues from mobile.

By reducing taxes on mobile sector, the MoF cannot only increase digital and financial inclusion and economic growth, hut also recover higher tax revenue through more efficient and broad-based taxation in coming years

Customer taxes:

Telecom industry is one of the highest taxed industries in Pakistan and is 4th worldwide. In Pakistan taxes on telecom industry account for over 30% of the total cost of mobile ownership, significantly above the regional average. This additional cost is a barrier to affordability of mobile services and limiting access to the mobile services for many Pakistani.

Following taxes are currently applied on telecom subscribers:

• 18.5% FED on telecom customers
• 14% advance tax on consumption of telecom services

Recommendation

• FED rate should be aligned with other services @ 16%
• Advance tax rate should be reduced to 5%

Rationale or benefit

By reducing taxes on mobile sector, the Pakistani government cannot only increase digital and financial inclusion and economic growth, but also recover higher tax revenue through more efficient and broad-based taxation.

Eliminate Custom Duties and Sales Tax on Network Equipment SRO 575:

SRO 575 has been rescinded in finance act 2014-15 consequently customs duties on network equipment have been increased from 5% to 15-20% and 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.

Recommendation

SRO 575 should be reinforced and exemptions of reduced Custom duty zero sales tax and should be provided.

Rationale or benefit

Restoring the previous SRO 575 would make investment in essential network rollout and quality improvements more affordable.

As 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 Govt. in fact it will reduce administrative complexity for the government and operators.