Experts Express Reservations Over Proposed Hike in Taxes on Telecom Services

The proposed increase of five percent in the withholding tax (WHT) on telecommunication services and the standard rate of 17 percent sales tax on import of computers and accessories in the forthcoming mini-budget will severely impact the growth of the IT sector, besides compromising the envisaged ICT exports target of $5 billion.

This was the crux of discussions of ProPakistani with senior government officials and telecom sector experts that took place on Monday. 

The federal government will present the amended Finance Bill 2021 and the State Bank of Pakistan (SBP) (Amendment) Bill 2021 in the Parliament after getting approval from the cabinet.

Officials from the Ministry of Information Technology and Telecommunication said that the increase in taxes on the telecom sector would negatively impact the sector’s growth as well as the investment prospects.
According to official sources, the government is likely to raise WHT by 50 percent, taking it from 10 to 15 percent on telecom customers in the upcoming mini-budget 2021-22.

The government had brought down the WHT rate from 12.5 percent to 10 percent in the budget for 2021-22 and made a commitment that it would be further brought down to eight percent in the 2022-23 budget. However now, the government considers backing out from its decision to raise revenue, with a five percent hike in advance tax on the telecom sector. If the draft proposition is implemented, the cellular advance tax will be raised to a historic high of 15 percent.

WHT is currently collected at a rate of 10 percent from all telecom users, regardless of their taxable obligations. The majority of the country’s population has non-taxable incomes, these individuals are required to pay WHT, which they will never be able to recover.

The IT Ministry has opposed any move to impose 17 percent GST on the import of computers and accessories arguing that the move would severely impact the growth of the IT sector.

“If the government moves ahead with the imposition of GST at the standard rate of 17 percent on import of computers, laptops, and its other accessories it would negatively impact freelancing, IT exports and Prime Minister’s vision to make Digital Pakistan,” official sources from the Ministry said.

They added that the policy move would increase the input cost of necessary tools making it difficult for freelancers and individuals to purchase laptops, computers, and accessories.

The IT and IT-enabled Services (ITeS) export remittances comprising computer services and call center services surged to $2.123 billion at a growth rate of 47.43 percent in the fiscal year 2020-21, compared to $1.44 billion during 2019-2020.

The ICT export remittances for the period July-November fiscal year 2021-22 surged to $1.051 billion at a growth rate of 37.57 percent compared to $764 million during July-November fiscal year 2020-21. In November 2021, the ICT export remittances are $221 million at a growth rate of 31.55 percent when compared to $168 million reported for the month of November 2020. Further, $26 million higher than export remittances during the previous month October 2021.

The net exports for the period July-November 2021-22 are $797 million, which is 75.83 percent of $1.051 billion in exports. Last year, for the same period, the net exports were $554 million, which was 72.51 percent of $764 million in exports.

The government has envisaged increasing ICT exports to $5 billion by June 2023. However, the estimated target may be hit negatively if the government imposes 17 percent GST on computers, laptops, and other accessories said the official.

The Cellular Mobile Operators also oppose the government’s move of jacking up the WHT by 50 percent. As the government is making a reversal from its commitment of decreasing taxes on the sector, how investment can be lured in such circumstances when there is no certainty in policies, said the officials working in the telecom sector. They added that it would be disastrous if the internet services or SMS would be brought under the tax net.

Experts urged the government to support the Prime Minister’s vision of Digital Pakistan by lowering taxes. They opined that high taxes might jeopardize the Digital Pakistan agenda as millions of Pakistanis were already unable to afford most mobile phone services.

Telecom expert Pervez Iftikhar said that it would have disastrous effects on the overall growth and ICT exports. He lamented that the government was moving toward imposing GST on the import of smartphones causing losses to start-ups and overall growth of the ICT sector.