High Taxation is Hurting Telecom Growth in Pakistan: GSMA

Sector-specific taxes, such as those on smartphones, SIM cards, and data usage in Pakistan, influence retail prices and may have a strong impact on the poorest consumers, lessening their ability to become Mobile broadband subscribers, says GSMA.

GSMA in its latest report “Pakistan: progressing towards a fully-fledged digital economy”, stated that in Pakistan, telecom services are perceived as a luxury and are taxed accordingly, which deters both usage and operator investment.

At a high-level event between the Government of Pakistan and mobile industry leaders, the GSMA on Monday launched the report. Among others, Syed Amin Ul Haque, Minister of Information Technology and Telecommunication attended the launching event.

The report stated that for the country’s bottom 20% and 40% income groups, the total cost of mobile ownership (TCMO) for both low and medium consumption baskets is above the UN’s “1 for 2” target (i.e. 1 GB of data costing less than 2% of monthly income). Moreover, the upfront cost of a handset represents an affordability challenge for those lower-income Pakistanis who do not have access to finance, which otherwise will enable them to pay by installment.

The government has acted to alleviate some of the tax pressure on mobile consumers, including cutting SIM card taxes by 75% in 2004/2005. It removed the 16% VAT rate on mobile handsets in 2016 – a move that resulted in year-on-year handset sales growth of 25%; however, this has since been reinstated.

Further, at 31%, tax as a percentage of TCMO is significantly above the global average (19%), while the mobile sector makes a disproportionately large tax contribution relevant to its own economic footprint.

It further stated that strict tax regimes that divert large proportions of revenue from operators to governments can negatively impact connectivity, distort the industry’s development, and harm end-users. In Pakistan, consumers face sector-specific taxes that apply to devices, SIM cards, and usage charges, which limit investment, affordability, and overall mobile internet usage. These taxes are particularly likely to affect poorer consumers as mobile broadband services become too expensive, which in turn can widen the digital divide and cause exclusion.

Despite having some of the lowest average revenue per user (ARPU) and price per MB figures in the Asia Pacific region, Pakistan’s telecoms sector is currently one of the most highly taxed: the telecoms general sales tax (GST) in India and Iran is 18% and 8%, respectively, compared with up to 19.5% in certain districts in Pakistan.

In May 2018, the Supreme Court made the unprecedented move to suspend the collection of service, withholding and sales taxes on prepaid top-up cards costing Rs. 100. However, after ordering a study into the application of the taxes from federal and provincial authorities, the court revoked its decision less than a year later. The prevailing tax regime stifles adoption and innovation, which fetters sustainable industry growth and the net economic benefits to the country.

A survey by the Asia Internet Coalition concluded that adopting the correct tax position acts as an important policy lever to becoming a digital nation. Respondents highlighted inconsistent or unpredictable treatment by the tax authority, special taxes that discriminate against the digital sector, and overcomplexity in the tax laws as top concerns that will lead to delayed or canceled investment.

Tax payments and Fees Among the Highest in Developing Asia

If internet access is to be made a fundamental right, the government in Pakistan must take urgent action to remedy the country’s regressive tax regime. The biggest supply-side impediment to data usage currently is high device taxation, including customs duties, mobile handset levies, and sales taxes. Together, these can put higher-end handsets out of reach for many citizens, which is reflected in the significant proportion of basic, voice-only devices in the market.

Getting affordable Smartphones into peoples’ hands prompts the first chapter in the internet adoption story for non-users. As their confidence and knowledge build, users will consume more data-intensive applications and access the platforms that will connect them to the wider digital economy.

By 2023, it has been estimated that harmonization and reduction in the GST to 16% could increase mobile broadband penetration by 1.0%, mobile data usage per connection by 1.7%, sector revenues by 1.4% per annum, and GDP by 0.06%. The elimination of the 8% minimum withholding tax on income from mobile services will ease the tax burden on operators, lowering prices and boosting investment – as well as again realizing macroeconomic uplifts. In addition, the reforms are shown to be self-financing over the medium term and should generate increased tax revenues by 2023.

A more conducive tax system for the investment and development of the mobile sector should further modernize tax administration and collection, bringing more people into the formal economy.

As Pakistan has only 3.6 million taxpayers (less than 2% of the population), mobile will help broaden the tax base and raise incremental revenue for the state. By equipping people with the tools that support digital and financial inclusion, and helping unlock network CAPEX, the government can fulfill the access and infrastructure needs of Digital Pakistan, as well as produce positive externalities from the wider proliferation of mobile services. One such knock-on effect is on the e-commerce market: tax reforms that promote Smartphone adoption and mobile internet usage will enable online transactions to surge beyond the $1 billion worth of sales expected in 2020.

At the same time, Pakistan must resist any urge to heighten taxes on telecoms to inject into slowing industries, including agriculture and manufacturing. This will be counterproductive: the government should instead discharge the shackles on the mobile sector to support the digital transformation and subsequent productivity gains necessary to revive strong economic growth.

If operators do not have affordable and predictable access to sufficient spectrum, it will not be possible to achieve ubiquitous delivery of mobile internet services, hampering the closure of the digital divide and presenting barriers to usage and the release of value into the economy.

To date, Pakistan has assigned significantly less spectrum to operators compared with many developed Asian markets and several neighboring countries. As mobile broadband adoption, smartphone take-up and data traffic continue to rise, and as a growing number of ‘things’ become connected, demand for more bandwidth, faster speeds, and improved coverage can only be met by increasing the volume of spectrum released to operators. Prevailing spectrum allocations and license fees in Pakistan risk the nation falling further behind peers in the transformation of its economy, hindering its potential to be a regional digital powerhouse.

An online population remains one of the greatest resources for innovation and growth. Yet, without the foundation of widespread mobile connectivity in place, Pakistan will not be regionally competitive. Spectrum policy reforms provide an opportunity to energize the digital economy and catch up with leading Asian markets. Effecting these now will back operator investment efforts, enabling Pakistan to utilize the power of mobile broadband as a vehicle for industrial digitization, societal progression, and national prosperity

Pakistan has Assigned Less Spectrum than Competitor Markets

With spectrum the lifeblood of the mobile sector, it is essential that the government and PTA make the right policy decisions individually and collectively. An effective spectrum licensing process is critical to support the long-term operator investments required to further expand mobile access, as well as to enhance the quality and range of services offered to citizens. Policymakers can maximize the societal gains from finite resources by developing a transparent and comprehensive spectrum roadmap.

Built on an inclusive dialogue between relevant stakeholders, this ensures a sufficient spectrum is available to meet the requirements driven by changing demand and technology, including future 5G services. With corporate planning intrinsically linked to the availability of spectrum and the conditions under which it is made available, a holistic, forward-looking roadmap can negate risks and encourage operators in Pakistan to develop business cases and make positive investment decisions.

In particular, the government’s spectrum strategy should guarantee the release of more 1800 MHz and 2.1 GHz spectrum given the existing handset ecosystem; and crucial sub-1 GHz bands, including 600 MHz and 700 MHz, in light of their suitability for cost-effective deployments of mobile broadband networks in rural areas with low population density.

It is vital that spectrum pricing and annual fees are appropriate and do not jeopardize operators’ ability to invest and to support affordable services. High spectrum prices have been linked to more expensive, slower services, with worse coverage.

Licenses must also continue to enshrine the best-practice principle of technology neutrality and have predictable durations and renewal terms that provide a first right of refusal to incumbents. Minimizing the cost and complexity of acquiring and using spectrum reduces uncertainty by allowing operators to determine the long-term value of their infrastructure investments and more accurately assess spectrum lots at auction. Hence, Pakistan’s proposed approach to license renewal and general acquisition fees must be subject to immediate reconsideration in order to avoid negative outcomes for capex and consumers.

Pakistan’s Operators Invested $5.3 Billion Between 2010 and 2018

Around $67 billion will be spent on mobile networks in South Asia between 2019 and 2025, with $3.5 billion of this from Pakistani operators. Some 30% of the region’s capex will be devoted to 5G networks – a figure that rises to 40% in India and Sri Lanka, but falls to just 10% in Pakistan given the ongoing 3G/4G lifecycle. However, as competitive and regulatory pressures threaten to restrain investment in neighboring markets, Pakistan has a narrow window in which to forge ahead and build digital momentum.

Though Jazz and Zong have tested noncommercial 5G services, appropriate policy decisions will be needed (especially with regard to a spectrum pricing reset) to embolden operator investment and ensure the country does not fall behind regional leaders in rolling out next-generation networks.

The Pakistan economy grew at an average rate of over 5% between 2014 and 201821 on robust private consumption, improving agricultural productivity and rising investment (especially in energy and infrastructure projects around the China-Pakistan Economic Corridor).

The same period also witnessed a fall in foreign direct investment (FDI) in the country’s telecoms sector, including a deficit of more than $90 million in FY 2016/2017. Nevertheless, aggregate inflows have grown in recent years, with Airlift, Bykea, Careem, Daraz, Rozee and Zameen all securing multi-million dollar investments. Access to venture-capital funding, alongside reliable and affordable connectivity, digital payments, talent and consumer trust, is consistently cited as a prerequisite to a thriving internet economy.

Highlighting the industry’s vital contribution to the health and development of the economy, the report showed how the mobile industry is redefining the way individuals, businesses and state bodies function and interact. The event, held at the Ministry of Information Technology and Telecommunication, discussed how Pakistan could advance digital and economic inclusion through mobile.

“The GSMA congratulates the digital leadership and foresight of the Ministry of Information Technology and Telecommunication, for the successful collaboration with our industry during the COVID19 pandemic,” said Julian Gorman, Head of Asia Pacific, GSMA. “This demonstrates mobile’s potential, to unlock digital transformation for millions of Pakistanis, as well as drive social and economic growth for the country. Additionally, it is critical to achieving Pakistan’s Digital Vision, of a prosperous and innovative digital economy, that the fundamentals of inclusive mobile broadband and a sustainable mobile sector are established.

During the event, Syed Amin Ul Haque, Minister of Information Technology and Telecommunication launched the GSMA report and emphasized, “The government, in tandem with the private sector and the wider mobile ecosystem, must work together collaboratively to deliver the promise of a Digital Pakistan. The mobile industry is an important partner to deliver transformational change in the digital era and ensure that we bridge the digital divide.”

Report Findings

  • Mobile at the Heart of Pakistan’s Digitisation Journey – With decelerating GDP growth, compounded by a rising population, the jobs, taxes and productivity gains generated by the digital ecosystem will be pivotal to supporting the health of Pakistan’s economy and society moving forward.
  • A Market of potential but an Imperative for Change – Having dedicated efforts to economic stability, Prime Minister Imran Khan has now committed the government’s full attention to the 2017 Digital Pakistan policy which provides the spark and mandate for change. Still, the structural transformation will not be instantaneous.

Policy Key to Fulfilling Digital Objectives – To achieve digital ambitions and unleash the potential of the mobile economy, the leading role of the government must be to broaden access to high-quality mobile broadband networks, affordable services and smartphones. Fair and predictable regimes for spectrum licensing and tax are central to this, to unlock the huge growth potential, investment and societal benefits associated with a better connected, modern Pakistan that ensures no one is left behind.

The roundtable participants agreed that mobile technology presents a significant opportunity to achieve Pakistan’s national development plans. Discussion at the event affirmed the need for the public and private sectors to work hand in hand, as well as across many different government agencies to achieve the Digital Pakistan vision.