Telecom Industry Proposes Rationalization of Advance Income Tax in FY23 Budget

Telecom Industry has proposed the government for rationalization of Advance Income Tax (AIT) on Telecom Services, the harmonization of federal and provincial tax laws and requested the State Bank to remove the Telecommunication related HS Codes in the upcoming budget 2022-23.

All the telecom operators have jointly submitted the budget proposals to the government and urged making them part of the Finance Bill to resolve the industry’ issues.

The industry stated that AIT on telephone and Internet services has been a contentious tax revenue measure. It hampers the affordability of mobile ownership and Internet services – critical for the entire population in this age, as well as the economic growth of the Country. It equally – and unjustifiably – applies to more than 70 percent population of Pakistan living below the poverty line, which is essentially exempt from Income Tax.

This economic segment of the population is neither return filers, with the option to adjust/recoup the said AIT. Therefore, implementation of such tax collection measures to the entire telecom subscriber base only disproportionately adds to the cost of mobile ownership.

Pakistan has the widest gender gap in mobile ownership (34 percent) and mobile internet use (43 percent) as compared to its regional peers. Sector-specific taxes increase the cost of mobile services which lays a strong impact on the poorest consumers especially women, lessening their ability to become mobile broadband subscribers.

The above submissions had been previously considered by the federal government, which understanding the importance of affordability of mobile ownership and Internet – vide Finance Act 2021 reduced the AIT from 12.5 percent to 10 percent for FY 2021 and to 8 percent onwards. That was a forward-thinking move geared to push for development in the digitization of all aspects of the economy – education, health, commerce and all. Unfortunately, that move was taken back merely 6 months later, without due consideration to its long-term ramifications.

Through Finance (supplementary) Act, 2022, the AIT rate has increased from 10 percent to 15 percent, the highest since 2014. Such exuberant taxation is also cutting into the profitability of the Industry, and hampering business case for network expansions, service improvements and eventually further DFI.

The industry has recommended that as a start, the AIT Rate increase brought in through Finance (Supplementary) Act, 2022 should be taken back and the Division V, Part IV of the First Schedule to the ITO restored as was up to the Finance Act, 2021. As a policy, AIT under Section 236 of the Income Tax Ordinance, 2001 (ITO) should be abolished gradually given that it adversely affects the subscriber base falling below the taxable limit, and efforts should be focused on more direct taxation measures aimed at Income, rather than expenditure on an essential service.

Margin Restriction on Import of Telecom Equipment

Margin Restriction on Import of Telecom Equipment Imposed by the State Bank Vide BPRD Circular Letter 09 of 2022 dated 7 April 2022, the State Bank has added the following essential telecom equipment to the list of imports, for which the importer will have to provide 100 percent cash margin

  • Power Equipment (8504.4090)
  • Lithium Battery (8507.6000)
  • Routers (8517.6270)
  • Cellular Mobile Phones (8517.1211)
  • Main Telecom Equipment (8517.6290)
  • Telecom Parts (8517.7000)
  • 5220 (Hard Disks)
  • 5000 (Servers)

Telecom Industry is totally import dependent for its equipment to fulfill its quality of service and network coverage expansion obligations, as mandated by our respective licenses. Telecom equipment is not a luxury item. The above includes nearly 85 to 90 percent of telecom imported equipment, and the new requirement will have a severe adverse impact on the liquidity situation as well as the funding requirements for the telecom operators.

Telecom companies are not cash-rich and funding plans are based on the overall cash cycles where vendor payments are assumed as per the contract credit terms. With the sudden and immediate change in regulatory requirements, the cash outflow which was supposed to happen on a future date has to be made immediately (upfront to banks as cash margin) which has a direct impact on the liquidity and financial health of the companies.

Compliance to the new rule would compel the operators to either reduce their network expansion plans or obtain new financing affecting our business cases and requests for DFIs. This would have a direct impact on the Telecom Capex Rollout Plans for the year, either focusing on the increase in teledensity, or service modernization – resulting in a fall back from service obligations as mandated by the regulator (PTA) under the related license terms.

The State Bank is requested to consider the issues to be faced by the telecom companies and remove the Telecommunication related HS Codes from the subject circular, so that this potential crisis may be averted.

Overlapping Provincial Taxes

It further stated that since 2011, the four provinces have introduced their own sales tax laws in their respective jurisdictions, applicable to telecom services. These laws are inconsistent with each other and the Federal Excise Act (applicable in Islamabad), have overlapping implications (like FED on top of provincial sales taxes, more than one demand for tax withholding on the same transaction, reverse charge rule), and are geared towards short-term revenue targets rather than promoting an equitable taxation system for all economic segments.

Some of the clauses are in clear conflict with each other resulting in undue hardships coupled with harassment by the federal and provincial revenue collectors demanding tax on the same transactions, tantamount to double taxation. Other issues include multiple tax rates, different input admission rules and inter-provincial adjustments.

This situation is highly undesirable and creates complexities for taxpayers leading to challenging compliance and unnecessary litigation. Another thorny issue remains the high tax rate adopted by the provinces for telecom services – 19.5 percent – as compared to their general tax rates (Punjab 16 percent, KPK/Balochistan 15 percent, Sindh 13 percent). That along with the Federal AIT collection make telecom services one of the highest-taxed industry.

Recently, the federal government has brokered the initiative of “Single Sales Tax” return, aimed at simplifying the compliance process. However, in the current state, it is merely a merger of tax filing portals and does not solve the underlying issues being faced by trans-provincial service providers like the telecom industry. The initiative has neither been condoned nor adopted by any of the provinces to date.

In line with International and Regional practices and to provide much-needed ease of doing business, telecom services should be subject to a uniform set of tax rules – drafted and agreed upon by the Federal and provincial governments, with a single rate, and same input adjustment rules and compliance requirements. Further, the tax rate should be at par with standard rate – 16 percent – to discourage discriminatory taxation of the telecom industry.

AIT on Auction/Renewal of licenses

Since 2014, field formations of the Federal Board of Revenue (FBR) have been demanding AIT under Section 236A of the ITO, on issuance and renewal of telecom licenses, including grant of radio spectrum blocks. Such collection is only applicable to “public auction of goods or property”.

As radio spectrum is not a saleable property, the Industry does not agree with the position taken by the FBR. The radio spectrum does not have any physical form, incapable of being in physical possession. Further, there is no sale transaction, only the right to use the spectrum, and related licenses granted for a specified term. This is further evident from the fact that a licensee, allowing an operator to use a specific spectrum is not owned by it and cannot be transferred to another person.

FBR has tried to circumvent this legal lacuna in their position by having an explanation included in the relevant section to bring renewal of licenses under the ambit of the AIT.

Telecom operators are being asked to pay the AIT as a prerequisite to obtaining and renewing their licenses and to apply for radio spectrum. Given the quantum of the AIT, on top of all other taxes paid in advance, it only adds to the tax refundable for the year – putting a major strain on the operators’ cashflows and negatively impacting business/network expansion plans. The AIT does not result in any tax revenue for the government.

The industry recommended that grants of telecom licenses and grants of radio spectrum and related renewals should be expressly excluded from the ambit of Section 236A of ITO, being irrational, burdensome, and of no revenue consequence for the government exchequer.

Telecom operators are large utility service providers, transacting with millions of tax withholding and collection agents. In one particular case; electricity bills for an operator run into tens of thousands in number. All such transactions are subject to advance tax collection, increasing the cost and complexity of tax compliance and an additional administrative burden for the telecom sector which negatively impacts the overall business environment.

The above also adds to the compliance cost of the withholding agents. Most importantly, it puts strain on the function and capacity of the tax authorities, who need to verify a large number of advance/withholding tax transactions.

Precedent is available in the case of the banking and oil sector, which have been completely exempted from collection or deduction of AIT under different provisions of the ITO. Those industries pay taxes through a simplified process under Section 147 of the ITO. There is no loss or delay of tax revenue collection, while the undue tax compliance burden and complexity is avoided.

The industry has recommended that exemption should be given to the telecom sector from deduction or collection of all types of withholding taxes, in-line with exemptions granted to the banking and oil sectors. There will be no loss of revenue to the exchequer as the tax collection mechanism will be simplified in terms of real-time payment of advance tax Under Section 147 of the ITO on a quarterly basis.

Furthermore, this measure will also make the tax claims and its verification mechanism more transparent with minimum operational hassles as maintaining thousands of records, especially for advance tax on utility bills and imports is itself a very cumbersome procedure.

Rationalization of Import Duties on Batteries

Batteries (HS Code 8507.6000 & 8507.2000) are a critical part of telecom network deployment and are also used in conjunction with solar energy generation. They are currently subject to very high import duties:

  • Custom Duty: 11 percent and 20 percent
  • Additional Custom Duty: 2 percent & 6 percent, and
  • Regulatory Duty: 5 percent.

The higher taxation of battery imports makes network maintenance costly and negatively impacts the business cases for network expansion in small population areas with less commercial potential.

It recommended to Reduce Custom Duty on batteries to 5 percent and abolish Additional Custom Duty and Regulatory Duty, as these batteries are used with solar and power systems and are core assets for telecom infrastructure service providers. Reduction in duties will further encourage alternate energy resources for the Telecom sector e.g. Solar.

The Finance Act, 2018 inserted a new clause in sub-section (3) of section 101 of the ITO’2001, under which Pakistan source income from business derived by a non-resident person, would include income on account of import of goods, whether or not the title to the goods passes outside Pakistan if the import is part of an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the associates of the person supplying the goods or its permanent establishment, whether or not the goods are imported in the name of the person, associate of the person or any other person.

Keeping in view the amendment in section 101(3), corresponding amendments have also been made in sub-section (7) of section 152, whereby a taxpayer would invariably now be required to obtain an order of the Commissioner Inland Revenue u/s 152(5A) of the ITO’2001 for making payment on account of such transaction without deduction of tax or at lower rate.

Since the title of goods passes outside Pakistan, hence deduction of withholding tax at a much higher rate i.e. 20 percent will increase the cost of the equipment as the supplier will jack up the prices by including the withholding tax factor, resultantly, telecom operators will have to bear the extra cost which will halt the expansion of the telecom services, especially in far-flung areas where the cost of doing business is already on the much higher side.

  • Say no to WHT aka “Bhata Tax” on Telecom sector.
    More then 90% Telecom users are either under taxable income or without any clear procedure to reclaim this tax.
    This tax on Telecom is totally unethical and should be abolished at once.

    Also Telecom sector should also be barred from charging (looting) its users from illegally cutting 10 to 11% in the name of service/maintenance charges.

    And finally Sales tax rate should be not more then 15% all across the country.

    Hope these recommendation will be in considerations in upcoming Budget.

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