Morbid taxation of digital Pakistan

One hopes the regressive withholding taxes on the telecom sector will be withdrawn in the upcoming budgets

“Those who can afford to pay for the internet should be required to pay; those who cannot, can be offered targetted subsidy. In the initial period, access to provision will call for expenditure — but this would yield returns, in the near and distant future, in forms known and unknown as yet.” — Internet for all, Idrees Khawaja, Dawn, May 11, 2021.

“Governmental, federal and provincial, policies need to be set in place in order to provide our young generation with equal access to education. Adult education programmes can be introduced, which could help the uneducated in reshaping their lives. At the heart of all these endeavours, of course, is unfettered access to mobile networks; data and optic fibre lines must be put in place to transform these vital areas of our nation.” — Connecting rural Pakistan, Niaz Malik, The News, April 13, 2019.

According to the Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on March 31, was 183 million (84.68 percent tele-density), out of which 98 million are 3G/4G subscribers (43.51 percent penetration), 2 million basic telephony users (1.13 percent tele-density) and 101 million broadband subscribers (46.4 percent penetration).

Are we using this surge in tele-density due to the lockdowns under the Covid-19 endemic for growth and initiatives mentioned above? This answer is a big no. On the contrary, the telecom sector is a conduit for the fleecing of the poorest of the poor by the federal and provincial governments through exorbitant taxes.

Ironically, Prime Minister Imran Khan has an ambitious anti-poverty Ehsaas initiative, utilising telecom as a powerful tool in poverty alleviation but Pakistan is among the highest-taxed telecom markets in the world.

Over 100 million mobile phone users (many have more than one number) are paying advance/adjustable income tax of 12.5 percent but the nation is labelled as tax cheat. About 97 percent of mobile phone users do not file tax returns as FBR in its press release of May 1, confirmed receiving 2.9 million tax returns. The FBR should register all taxable persons to bridge the tax gap. The legislature must act to stop the collection of 12.5 percent income tax. Additionally, all mobile phone users pay 19.5 percent sales tax on services in their respective provinces (for users in Islamabad Capital Territory, 17 percent federal excise duty) plus 10 percent activation charges.

Noted economist, Dr Hafiz A Pasha, in Growth and Inequality in Pakistan: Agenda for Reforms, observed: “…the large quantum of investment, in particular, went into development of the telecom sector with the advent of the mobile phone during the Musharraf era”. This revolutionised the entire Pakistan but unfortunately morbid and irrationally high taxation stifled the telecommunication industry and Pakistan could not enter into the 5th generation (5G) era that is the need of the hour.

5G technologies are important to support applications like smart homes and buildings, smart cities, 3D video, work and play in the cloud, remote medical services, virtual and augmented reality, and massive machine-to-machine communications for industry automation. 3G and 4G networks currently face challenges in supporting these services.

This retarded growth due to excessive taxation as an impediment is a classic case study. It shows how an irrational tax policy not only stifles economic growth but also deprives the country of requisite technological advancement that has assumed renewed importance in the aftermath of Covid-19.

Having the fourth most heavily taxed telecom markets in the world, Pakistan managed to collect over Rs 2,000 billion from the sector in various taxes from 2002 to 2020. Had successive governments not overtaxed it, today we would have been among the most advanced countries in IT-enabled Services (ITeS).

During the Covid-19 pandemic, the telecom sector is playing a vital role by providing connectivity and digital services across the country.

In days of financial hardship, millions of mobile phone users, some of whom are even eligible for Ehsaas Emergency Cash Programme, are brazenly subjected to extortion by the federal government in the name of advance income tax. Those having enormous assets are being offered amnesties while those living below the poverty line are forced to pay oppressive taxes. They do not get even basic amenities of life in return.

According to the PTA annual report (2019-20), the telecom sector earned revenues of Rs 537 billion and paid Rs 125 billion to the national exchequer in terms of taxes, duties and levies. It attracted $636 million in investments. The sector also attracted $240 million in foreign direct investment (FDI) during the year.

Before the 2020 budget, there was a demand to address the following issues on an urgent basis if we were interested in reviving the economy and promoting the IT industry:

Telecoms must be exempted from paying withholding tax (WHT) and general sales tax (GST) on utilities etc at least till December 2021.

Telecoms should be exempted from paying the WHT on goods and services, in order to manage their cash flow and cost of services.

None of the above was accepted in the federal and provincial budgets for 2020-21.

It is time the government reconsiders its polices and renders “full facilitation in expanding 4G coverage through the latest technology to remote areas, promote broadband connectivity, ensure availability of an additional spectrum to mobile operators, affordable 4G handsets, addressing right of way (RoW) issues, expanding optic fibre connectivity, improved quality of service (QoS) parameters and better coverage and 5G technology testing and preparations should be its priority areas in the current year,” as highlighted by the PTA annual report.

It is deplorable that the poor and small businessmen, while immensely suffering due to lockdown, are still compelled to pay advance income tax and sales tax with commercial electricity connections and advance income tax of 12.5 percent on mobile phone/internet. These taxes should be waived for all those having an income below the taxable limit, using database of Ehsaas Emergency Cash Programme and those appearing in FBR’s Active Taxpayers List.

One hopes these regressive withholding taxes will be withdrawn in the federal and provincial budgets for fiscal year 2021-22.

The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE) 

Morbid taxation of digital Pakistan