Taxing telecom

January 23,2016

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Muhammad Aslam Hayat

If the decade of the 1960s is called the golden era of industrialisation, the post-telecom sector deregulation era can be termed the age of revolution in the ICT sector. In this phase, Pakistan saw unprecedented interest among local and foreign players willing to invest in this sector and exploit the untapped potential. A country with over 180 million population and very low telephony penetration showed tremendous opportunity for investment in the telecommunication sector.

Back in 2003-04, with very clear sector policies, predictable regulatory regime and stable taxation, it was a safe bet for new entrants to make long-term investment commitments. Cell phone coverage increased very fast, benefitting both consumers and companies, and giving a boost to other sectors by introducing advanced telecommunication channels. As a result, call rates that were as high as Rs15 per minute plummeted.

It is quite interesting to note that the telecom sector in Pakistan prospered during one of the most challenging times of its history. It was the time when the security situation, energy crisis and a global recession were taking a toll on businesses. This sector braved all these storms and maintained an upward trajectory for more than a decade.

Unfortunately, the good times are now over for the telecom sector. The sector is under immense pressure and struggling to survive, let alone aiming for growth. It is quite natural for one to look out for the reason behind this phenomenon, especially when a further boost was expected after the roll out of 3G and 4G services.

The answer is simple and clear. The current tax regime and unpredictable tax policy of the government for the telecom sector is killing the telecom sector. The sector, which provides one of the lowest retail tariffs, is bearing one of the highest tax burdens in the world. The mobile telecom industry taxes and levies are approaching 40 percent, which in fact makes it the second highest taxed telecom sector in the world.

There is an advance withholding tax to the tune of 14 percent, much higher than the 10 percent on luxury items, GST at the rate of 19.5 percent as compared to the 17 percent on other sectors, the uncollectible IMEI tax, exorbitant import tax and customs duties, supply of SIM tax and what not. For a top up of Rs100, what the customer actually gets is Rs66 – meaning his usage capacity is reduced by 34 percent right away.

This is not all; the worse is yet to follow. The unpredictability about imposition of new taxes any time is even more harmful for the sector. For example, the government increased advance income tax from 10 percent in 2012-2013 to 15 percent in 2013-2014. The tax on mobile phone sets was doubled overnight in 2015-16 and the IMEI tax was imposed in 2014-15 despite reservations expressed by the industry repeatedly. The tax on internet data was another stumbling block that the industry and the consumers had to face.

The successful bidders of the 3G/4G auction were slapped with a demand of 10 percent of the bid value as advance income tax based on a strange interpretation of FBR. This came as a shock because there was no advance notice and the demand only came after the auction was concluded. When it became clear that a lot of new equipment would be imported before the launch of 3G/4G services, the rate of import and customs duties was increased from 0-5 percent to 20-25 percent. This cost was not built into the budgets of the mobile operators for their 3G/4G roll-out. The sudden escalation in the input cost has left them stranded and this is one of the major reasons why the roll out of 3G/4G is confined to only a few big cities of the country.

The investments in the telecom sector are made for longer terms and the returns flow after some time requiring stability of the business environment and consistent tax policies. But unfortunately in Pakistan it seems that the short-term goal of collecting revenues is given more importance than allowing an important sector of the economy to grow over a longer period of time. While the Ministry of IT and Telecom and the Pakistan Telecommunication Authority seem concerned for the telecom sector, the priorities of the Ministry of Finance are a bit different.

In order to survive, the telecom sector is going towards consolidation and if the situation does not improve there will be job losses in the short term and reduction in choices for consumers in the medium term.

On top of the unpredictability of tax policies, the government has also given a wrong message to investors. The example of Telenor, that has so far invested around US$3.1 billion in Pakistan, is quite relevant here. Against this investment, the company has earned a dividend of $332 million in 11 years at an average of one percent per year. On the other hand, if someone buys eurobonds offered by the government, they are offered a guaranteed rate of return of 8.5 percent. This shows that the government is more interested in borrowing money than seeking investment to improve the economy and create jobs.

According to the World Bank, every 10 percent penetration of broadband contributes 1.38 percent to GDP. The mobile broadband era in Pakistan is about to take off. Currently with 15 percent penetration, broadband internet has the potential to create efficiency in every sector. Against this backdrop, the government of Pakistan needs to reduce sector-specific and consumer taxes to save this sector which has a big role to play in the overall development of the country.

The writer is chief corporate affairs and strategy officer at Telenor Pakistan.


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