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Morbid taxation: stifling growth of private sector

Case study of telecom industry

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[1], Pakistan Telecommunication Authority [PTA]

The Musharraf Government focused its growth strategy on industry, finance and telecom servicesGrowth and inequality in Pakistan: Agenda for reforms[2], 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).5 This contribution to GDP is relatively low compared to international benchmarks, suggesting considerable scope for expansion—Reforming mobile sector taxation in Pakistan[3]

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”[4]. The result was obvious, as he narrated: “private investment “plummeted to an all-time low of below 6 percent of the GDP”[5]. 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”[6]. 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[7] [5G] era that is the need of the hour.

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[8] not only stifles economic growth of a private sector[9] but also deprives the country of requisite technological advances[10] that have assumed renewed importance and relevance in the aftermath of Covid-19 epidemic. Had the successive governments allowed 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[11]. In an article[12], it was 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 December 31, 2020 is 176 million (82.34% teledensity), out of which 91 million are 3G/4G subscribers (42.43% penetration), 2 million basic telephony users (1.3 teledensity) and 93 million broadband subscribers (43.5 penetration). All these are subjected to withholding tax and according to FBR Year Book 2018-19[13], total collection during fiscal year 2018-19 was only Rs. 17.19 billion [for 10 months, collection was suspended by an order of Supreme Court of Pakistan in a suo muto case] whereas in fiscal year 2017-18 it was Rs. 47.38 billion. According to Table 10, Page 15 of Year Book for 2019-20[14], issued by Federal Board of Revenue (FBR) collection was Rs 54.6 billion[15]

On the one hand, we want to promote the IT sector and on the other it is most heavily taxed. After vacation of stay by Supreme Court on April 24, 2019 in Human Rights Case (HRC No. 18877/2018, 95 million unique mobile users [total subscribers are over 165 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 17% federal excise duty [FED], plus 10% service/maintenance charges[16].  No relief is given in the federal budget for FY 2020-21, announced on June 12, 2020 from advance tax of 12.5% on mobile and internet users or 17% FED in ICT. In the Punjab and Sindh Budget for FY 2020-21, announced on June 16 & 17, 2020, respectively, no relief given to 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 urged the government to rethink 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[17].

According to a research published by the 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.

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 that telecom industry has been pleading to be rationalized. 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 and FED on telecom services is 19.5% and 17% respectively, however, majority of the population resides outside the federal territory hence it pays 2.5% more than it would pay on.  On a recharge of Rs100, consumers pay withholding tax of Rs11.11 and sales tax of Rs14.51.

Source: Pakistan Telecommunication Authority[18]

According to a report[19] of PTA, According to the Annual Report 2019-20, 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.

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 levelling playing field and excessive taxes create distortion in free market operations. 

It is highly deplorable that the poor and small businessmen, while immensely suffering due to lockdown, are still compelled to pay 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 Ehsaas Emergency Cash Programme.

Before the budget 2020, there was demand that it would be necessary 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 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.

None of the above is accepted in budget 2020-21[20]. 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”[21]. It is vital for promoting growth of private sector to increase productivity and exports, we urgently need.


The writers, lawyers and members of Huzaima, Ikram & Ijaz, are well-known authors and Adjunct Faculty at Lahore University of Management Sciences (LUMS)    

[1] https://www.pta.gov.pk/media/final_vision_2020_booklet.pdf

[2] http://library.fes.de/pdf-files/bueros/pakistan/15252-20190411.pdf

[3] https://www.gsma.com/publicpolicy/wp-content/uploads/2019/04/GSMA_Pakistan-Report_WEBv3.pdf

[4] Ibid

[5] Ibid

[6] Ibid

[7] 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—source: 5th  Generation of mobile technologies by of International Telecommunication Union (ITU)

[8] Having the fourth most heavily taxed telecom markets in the world, Pakistan managed to collect Rs 1,499.81 billion from the sector in various taxes in 15-years— https://dailytimes.com.pk/237252/telecom-sector-generated-rs-1500bn-in-taxes-in-15-yrs/

[9] Five leading telecom companies collectively approached the Ministry of Finance for massive rationalization of duties and taxes on telecom industry at import as well as domestic stages in the coming budget (2018-19)– https://fp.brecorder.com/2018/03/20180322353620/

[10] Pakistan’s telecom sector is the second highest taxed in the world [19.5 per cent GST, 14 per cent advance income tax, corporate tax of 32 per cent etc] which discourages investors, resulting in lower third generation and fourth generation penetration, not to mention a dramatic drop in foreign direct investment—study by World Bank quoted in Expropriatory taxation, The News, February 28, 2016.

[11] The pre-Covid-19 position of country’s IT and ITeS exports, according to a report, surged to “$901.486 million at growth rate of 23.94 percent during the first nine months (July-March) of fiscal year 2019-20 compared to $727.353 million during the same period of last year”—for further detail visit https://www.pasha.org.pk/knowledge-center/industry-reports/reporting-of-it-exports/. This appeared very encouraging, but is it the real potential of a country of 220 million, where 65% population is that of youth and we need annually two million jobs for them? The complete IT industry profile is available at: https://invest.gov.pk/sites/default/files/inline-files/IT.pdf

[12] IT for economic growth, Dr. Atta ur Rehman, The News, February 19, 2020

[13] http://download1.fbr.gov.pk/Docs/20191115911472992FBRREVENUEDIVISIONYEARBOOK2018-19.pdf

[14] Ibid

[15] Ibid

[16] According to submission of PTA, during the period of stay [June 11, 2018 to April 23, 2019] by Supreme Court, Rs. 90 billion tax was not collected by mobile companies

[17] https://tribune.com.pk/story/2212714/2-high-telecom-taxes-hindering-digitalisation/

[18] https://www.pta.gov.pk/en/telecom-indicators/5

[19] https://www.pta.gov.pk/en/telecom-indicators/5

[20] However, for enhancing the capabilities of researchers and research institutes and focus on e-governance, IT enabled services and start ups and launching of 5G cellular services, allocation of Rs 20 billion is made.

[21] https://www.pta.gov.pk/en/telecom-indicators/5

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