GSM Association (commonly referred to as ‘the GSMA’ or Global System for Mobile Communications) has identified three options for tax reforms in Pakistan which could simplify the tax system, make it more equitable and realize positive externalities from the wider proliferation of mobile services.
GSMA, in its latest report “Reforming mobile sector taxation in Pakistan: Unlocking economic and social benefits through tax reform in the mobile sector”, states that the tax burden on the mobile sector is high; this could limit the growth potential of the mobile sector in Pakistan.
In 2017, the total tax contribution was estimated at $638 million. This represents 19% of the total market revenue. The mobile sector makes a large contribution in taxes and fees relative to its economic footprint, while the mobile market revenue accounted for 1.1% of Pakistan’s GDP, and the sector’s tax and fee payments accounted for around 1.7% of government total tax revenue.
This means that the mobile tax contribution is 1.5 times its size in the economy. In a sample of South Asian countries, Pakistan (40%) has the second highest proportion of sales or value added taxes as a percentage of overall tax revenues (only below India at 47%). Pakistan has the highest proportion of corporate income tax (32%) as well.
In addition to the high tax burden, the large number of different taxes that apply to the mobile sector increase the complexity and costs of tax administration and compliance. Through policy reforms, the government of Pakistan has the opportunity to simplify and rebalance the taxation of the mobile sector, supporting job creation and a better business climate. The Pakistani economy has performed well in recent years, growing at 5.5% in 2016, and 5.7% in 2017.
However, a widening of external and fiscal imbalances threatens to put the medium-term economic outlook at risk. This challenging macroeconomic environment is weighing on the Pakistani economy and the growth is forecast to slow down to 4.1% in 2019 and 3.6% in 2020.
The new government recognizes the need for key economic and structural reforms to meet its goals of driving inclusive growth, creating nearly 10 million new jobs, and transforming Pakistan into a knowledge economy. Promoting greater investment in the mobile industry, and improving the affordability of mobile services align with this strategy and, due to the links between the telecoms sector and the wider economy, can be used as a vehicle to achieve the underlying objectives of modernizing key economic sectors, increasing investment in the mobile sector and improving Pakistan’s telecommunications infrastructure.
Tax reforms in the sector would unlock investment in Pakistan’s mobile networks and improve affordability, promoting greater adoption of mobile services. The growth in the sector would also generate higher GDP and taxation revenue for the Government in the medium term.
Three options for tax reform in Pakistan have been identified, in line with the best practice principles of taxation. These reforms aim to improve the affordability of mobile services for consumers; this is particularly important in the current tax and regulatory context.
The following reforms are forecast to lead to increased penetration, and accelerate the rate of technology migration to smartphones and 3G/4G connections, as well as support GDP growth and taxation revenue more widely in the medium-term:
Harmonization of sales tax on mobile services to 17%
The rate of sales tax differs across provinces in Pakistan, and between different goods and services. For example, the sales tax on mobile services is levied at a 17% rate in Islamabad but 19.5% in the other provinces, and is also higher than the rate applied to most other services (charged at rates ranging from 13% to 16%). This scenario models the harmonization of the rate of sales tax on mobile services at 17%. This would lower the tax burden on mobile subscribers, and hence increase demand and incentivize network investments.
The expected impacts of this tax reform on the mobile sector and wider economy have been predicted.
Unique subscriber penetration would increase by 0.5% (1.1 million unique subscribers) by 2023, while mobile broadband (MBB) penetration would grow by 0.7% (1.5 million unique MBB subscribers), driving growth in mobile data usage per connection of 1.3%. Mobile sector revenues would be $34 million higher per annum (1.0%) by 2023; and GDP would grow by $360 million (0.12%), and annual tax receipts would be $55 million higher per annum by 2023, a cumulative fiscal gain of $144 million over five years.
Harmonization and reduction in sales tax on mobile services to 16%
This scenario combines harmonization of sales tax on mobile services with a reduction of the harmonized rate to 16%.
Compared to scenario 1, this reform would generate higher benefits in the form of additional increases in penetration and investment, generating further gains in the wider economy. This reform is forecast to have the following impacts:
Unique subscriber penetration would increase by 0.7% (1.5 million unique subscribers) by 2023, while mobile broadband penetration would grow by 1.0% (2.1 million unique MBB subscribers), driving growth in mobile data usage per connection of 1.7%. Mobile sector revenues would be $46 million higher per annum (1.4%) by 2023; and GDP would grow by $497 million (0.16%), and annual tax receipts would be $76 million higher per annum by 2023, a cumulative fiscal gain of $198 million over five years.
Elimination of the 8% minimum withholding tax on income from mobile services
A minimum tax of 8% is payable in Pakistan on service income from corporate subscribers. Elimination of the minimum tax would reduce the tax burden on operators, leading to lower prices of mobile services and greater investment into mobile networks. This reform is forecast to have the following impacts:
Unique subscriber penetration would increase by 0.3% (0.7 million unique subscribers) by 2023, while mobile broadband penetration would grow by 0.4% (0.9 million unique MBB subscribers), driving growth in mobile data usage per connection of 0.8%. Mobile sector revenues would be $21 million higher per annum (0.6%) by 2023; and GDP would grow by $225 million (0.07%), and annual tax receipts would be $36 million higher per annum by 2023, a cumulative fiscal gain of $100 million over five years. The growth in the sector should also lead to wider societal benefits, through increased mobile ownership and access to mobile data and broadband services, particularly among low-income communities, as over 60% of new subscribers would come from low-income groups.
The boost to mobile penetration should lead to growth in productivity and hence an increase in GDP, household incomes, employment and investment across the economy. All scenarios should aid the Government of Pakistan in meeting its development goals, due to the positive impact that the mobile sector has on the wider economy. Moreover, the reforms are shown to be self-financing in terms of their impact on government revenues in the medium-term, and should generate increased tax revenues by 2023.
In addition, a more conducive tax system for the investment and development of the mobile sector should enable further modernization of tax administration and make tax collection more efficient. This would help to broaden the tax base and raise additional revenue for the government due to innovative solutions such as mobile money person-to-government (P2G) payments and e-government initiatives.