Huzaima Bukhari & Dr Ikramul Haq
Those who can afford to pay for the internet should be required to pay; those who cannot can be offered targeted 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
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 fibre must be put in place to transform these vital areas of our nation—Connecting rural Pakistan, The News, April 23, 2019
According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on March 31, 2021 was 183 million (84.68% teledensity), out of which 98 million are 3G/4G subscribers (43.51% penetration), 2 million basic telephony users (1.13 teledensity) and 101 million broadband subscribers (46.4% penetration). Are we using this surge in teledensity due to complete and partial lockdowns under Covid-19 endemic for growth and initiatives mentioned above? This answer is a big NO. On the contrary, telecom sector is a conduit to fleece the poorest of the poor by the federal and provincial governments through exorbitant taxes! Ironically, Prime Minister, Imran Khan, has ambitious anti-poverty Ehsaas initiative(s) utilising telecom as a powerful tool in poverty alleviation but Pakistan is among the highest taxed telecom markets in the world. The cost of ownership of a basic handset and connection in Pakistan is above 30 percent.
Over 100 million mobile users (many have more than one number) are paying advance/adjustable income tax of 12.5% but the nation is labelled as “tax cheat—a highly deplorable act of Federal Board of Revenue (FBR) and many so-called tax experts working on the agenda of lenders and donors. About 97% mobile users do not file returns as FBR in its Press release of May 1, 2021 confirmed receiving total tax returns of 2.9 million. FBR should register all taxable persons to bridge the tax gap. Legislature must stop taking 12.5% income tax. Additionally, all mobile users pay 19.5% sales tax on services in their respective provinces (for users in Islamabad Capital Territory, 17% federal excise duty) plus 10% 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 revolutionized the entire Pakistan, 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—see detail in 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 over Rs 2000 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 Information Technology (IT) and IT enabled Services (ITeS), having exports in this sector and earning at least 20 times more than what we are today.
During the Covid-19 pandemic, telecom sector is playing a vital role by providing connectivity and digital services across the country as people have moved 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. The impact of these taxes is highly negative for growth of IT sector exports.
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, waste management and affordable public transport.
According to the Annual Report 2019-20 of PTA, the telecom sector earned revenues of Rs. 537 billion and paid taxes of 125 billion to the national exchequer in terms of taxes, duties and levies, attracted investment of $636 million. The sector also attracted $240 million in foreign direct investment (FDI) during the year.
Before the budget 2020, there was demand to address the following issues on urgent basis, if we were interested in reviving the economy and promoting IT industry:
- Telecoms must be exempted from paying withholding tax (WHT) & General Sales Tax (GST) on utilities etc. at least till December 2021.
- 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.
The federal and provincial governments showed extreme apathy, and none of above was accepted in their budget for 2020-21.
It is time that the Government reconsiders 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 highlighted by PTA in its Annual Report 2019-20. It is vital for promoting growth and increase productivity and exports, we urgently need.
It is highly 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% on mobile/internet. These taxes should be waived for all those having income below 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 coming federal and provincial budget for fiscal year 2021-22 with concrete steps taken as highlighted in PIDE Reform Agenda for Accelerated and Sustained Growth [pages 66 to 69].
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)