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Huzaima Bukhari & Dr. Ikramul Haq
The Pakistan telecom sector contributes steady inflow of heavy tax collections under major heads like Activation Tax, GST/FED, the PTA fee & charges and others. The PTA has been advocating to the government to reduce the tax burden on the sector, which it considers as an impediment for its growth—Vision 2020, Pakistan Telecommunication Authority [PTA]
The Musharraf Government focused its growth strategy on industry, finance and telecom services—Growth and inequality in Pakistan: Agenda for reforms, Dr. Hafiz A Pasha
Total mobile sector revenues were $3.4 billion in 2017,4 equivalent to 1.1% of Pakistani gross domestic product (GDP), while the sector contributed approximately $1.8 billion of direct economic value to Pakistan in 2017 (0.6% of GDP). This contribution to GDP is relatively low compared to international benchmarks, suggesting considerable scope for expansion—Reforming mobile sector taxation in Pakistan
According to renowned economist and former federal finance minister, Dr. Hafiz A. Pasha, the nationalization of industry and banking sector by the Bhutto Government “scared away private investors in a big way”. The result was obvious, as he narrated: “private investment “plummeted to an all-time low of below 6 percent of the GDP”. Later, recovery surfaced as private investment “reached a peak in the first decade of the new Millennium”. According to Dr. Pasha, the large quantum of investment, in particular, “went into development of the telecom sector with the advent of the mobile phone”. This revolutionized the entire Pakistan as the figures below confirm, but unfortunately, morbid and irrational high taxation stifled the telecommunication industry and Pakistan could not enter into 5th generation (5G era) that is the need of the hour. 5G technologies are important to support applications such as 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—5th Generation of mobile technologies by International Telecommunication Union (ITU)
This retarded growth due to excessive taxation as an impediment is a classic case study. It confirms how an irrational tax policy and inefficient system not only stifles economic growth of a private sector but also deprives the country of requisite technological advances that have assumed renewed importance and relevance in the aftermath of Covid-19 epidemic. Having the fourth most heavily taxed telecom markets in the world, Pakistan managed to collect Rs 1499.81 billion from the sector in various taxes in the last 15 years. Had successive governments not overtaxed it, today we would have been among the most advanced countries in Information Technology (IT) and IT enabled Services (ITeS), having exports in this sector and earning at least 20 times more than what we are getting today.
In an article [IT for economic growth], Dr. Atta ur Rehman, very aptly observed that “Pakistan’s IT exports have underperformed by a factor of at least 20, standing at only $1 billion whereas Indian IT exports are over $130 billion while in the Philippines they are at $26 billion. Artificial Intelligence alone has been predicted by McKinsey Global to have a market of $14 trillion by 2025”.
According to data available on the website of Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on July 31, 2020 is 167 million (78.4% teledensity), out of which 81 million are 3G/4G subscribers (39.2% penetration), 3 million basic telephony users (1.1 teledensity) and 83 million broadband subscribers (36.9 penetration). All these are subjected to withholding tax and according to FBR Year Book 2018-19, total collection during fiscal year 2018-19 was only Rs. 17.19 billion because for 10 months, collection was suspended by an order of Supreme Court of Pakistan in a suo muto case. According to PTA, during the period of stay [June 11, 2018 to April 23, 2019], Rs. 90 billion tax was not collected by mobile companies. In fiscal year 2017-18, withholding of income tax from mobile users was Rs. 47.38 billion. The data for the fiscal year 2019-20 is not available on the website of Federal Board of Revenue (FBR).
On the one hand, we want to promote the IT sector and on the other, it is the most heavily taxed sector. After vacation of stay by Supreme Court on April 24, 2019 in Human Rights Case (HRC No. 18877/2018, at least 95 million unique mobile users [total subscribers are 167 million but many have multiple and/or dormant SIMs] are paying 12.5% advance income tax. The detail of indirect taxes paid by them is 19.5% sales tax on services to all the four provinces, for users in Islamabad Capital Territory (ICT) 17% federal excise duty [FED], plus 10% service/maintenance charges. No relief is given in the Finance Act, 2020 from advance tax of 12.5% on mobile and internet users or 17% FED in ICT. In the provincial budgets for fiscal year 2020-21 of Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan as well, the high rate of tax is maintained for telecom sector.
In the background of challenges faced by international community due to shrinking of global economy in the wake of Covid-19, Pakistan needs to provide support to private sector for various IT related services to fill in the vacuum created after closure of many enterprises globally. It is only possible by reducing cost of doing business. Our electricity and other utilities are too costly as compared to nearby countries, our main competitors. Take the case of United Arab Emirates, where infrastructure is much advanced and cost of doing business is much lower. Our policy makers failed to undertake much-needed and long-overdue structural reforms in the energy sector and taxation system—the two main areas retarding the growth.
Before the budget 2020-21 mobile phone services sector have urged the government to reconsider mobile taxation during Covid-19 as importance of telecom services has risen in this difficult situation and the plethora of taxes imposed on them are impacting those at the bottom of the social pyramid.
According to a research published by Sustainable Development Policy Institute (SDPI), Pakistan is considered to be among the highest taxed telecom markets in the world. The cost of ownership of a basic handset and connection in Pakistan is above 30%. Mobile phone services play a critical role in supporting economic growth and social inclusion.
Since Covid-19 pandemic, telecom sector has been playing a vital role by providing connectivity and digital services across the country as people are moving to work remotely and e-health and e-education and other online services are becoming a necessity. Despite this, exorbitant taxes are levied on mobile/internet services that telecom industry has been pleading to be rationalised. The impact of these taxes is highly negative for growth of IT sector exports. The 12.5% advance income tax paid by mobile/internet users can be claimed if they file tax returns. The vast majority of them having below taxable income are not required to file returns. In other words, those who are at the bottom of the pyramid and require assistance from the government turn out to be the ones that end up paying taxes to the government.
The sales tax levied by provinces on telecom services is 19.5% and by FBR is 17% FED with ICT. However, majority of the population resides outside the federal territory and pays 2.5% more tax than those in ICT. On a recharge of Rs100, consumers pay withholding tax of Rs11.11 and sales tax of Rs14.51.There are many other levies mentioned above.
According to a report available on the website of PTA, in 2018-19, the telecom sector contributed over Rs. 96 billion to the national exchequer in terms of taxes, duties and levies, attracted investment of $636 million and its revenues crossed Rs. 552 billion in the financial year. The sector also attracted $236 million in foreign direct investment (FDI) during the year. The figures for 2019-20 have yet not been released.
In extreme days of financial hardships, millions of mobile users, some of whom are even declared eligible for Ehsaas Emergency Cash Programme, are brazenly subjected to extortion by the Federal Government in the name of advance income tax. This is the real dilemma of Pakistan—those having enormous incomes and assets are being offered frequent and generous amnesties/immunities but the vast majority of population, even those living below poverty line, is forced to pay oppressive taxes. Adding insult to injury, they do not get in return even basic amenities of life (clean drinking water etc.), what to speak of free education/health care, decent living, and affordable public transport. The private sector cannot grow in these circumstances as there is no level playing field and excessive taxes create distortion in free market operations.
It is highly deplorable that the medium and small businesses, immensely suffering in the aftermath of Covid-19 endemic, are compelled to pay high advance income tax on mobile and commercial electricity use under sections 235 and 236 of the Income Tax Ordinance, 2001. These taxes should be waived for all those having income below taxable limit using database of FBR and various departments, including Ehsaas Emergency Cash Programme. In case of others, having taxable income, the rate should be reduced to minimum possible, not more than 5% and tax should be adjustable and not minimum as in the case of tax on electricity consumption up to Rs. 360,000 per annum.
It is also imperative to address the following issues on urgent basis if we want to revive the economy and promote IT industry that is heavily dependent on the telecom sector:
- Telecoms must be exempted from paying withholding tax (WHT) & General Sales Tax (GST) on utilities etc. at least up to December 31, 2020.
- Telecoms should be exempted from paying WHT on goods and services, in order to manage their cash flow and cost of services. Companies are facing a tough decision to either pay taxes to the government or salary to employees.
It is time that the Government reconsider its polices and renders “full facilitation in expanding 4G coverage through latest technology to remote areas, promote broadband connectivity, ensure availability of additional spectrum to mobile operators, affordable 4G handsets, addressing Right of Way (RoW) issues, expanding 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 advocated by PTA in a recent report. It is vital for promoting growth of private sector to increase productivity and exports, we urgently need.
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The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)