The Pakistan Telecommunication Authority hopes to reap huge gains when it offers the 1,800MHz range 4G spectrum for auction next week, but no excitement is visible in the market for the bid.
It is not that investors find the sector is not promising. It is the unpredictability of tax policies for the telecom business that makes them hesitant.
Industry sources say every year the government finance bill introduces major changes in tax laws, which impact the business investment plans of telecom companies in both the infrastructure and network spectrum.
In the year 2015-16, FDI inflows into the sector dipped to $378 million.
It is the unpredictability of tax policies for the telecom business that makes investors hesitant
Before sudden heavier taxation became the order of the day in 2014, telecom companies competed keenly in government auctions of the 3G/4G spectrum to tap into the visibly expanding domestic cellular market.
But their enthusiasm for expansion is now waning. While four operators participated in the 2014 auction, just one did in the 2016 auction.
“We don’t see existing players having any appetite for the forthcoming bidding,” a senior official of a leading telecom company said. “Interest of shareholders as well as operators for investment in Pakistan is faltering.”
Three telecom operators will apply for renewal of their licences in 2019, though. “What the fee structure will be for renewal is not clear so far”, the official said, adding that is another problem for making investment decisions.
The heavy consumer taxation only serves the government’s short-term objectives and hurts its long-term plan of bridging the digital divide, according to an official of Telenor. Owing to this, he said, Middle Eastern telecom players had pulled out of Pakistan. Oman Tel, Qtel and Warid have left the market in recent months.
The telecom industry has been complaining about heavy taxation for some time. In 2015-16, it paid Rs158 billion in taxes to federal and provincial governments, which constituted 34.7pc of the sector’s total revenues of Rs455bn.
The withholding tax on telecom at 14pc is one of the highest. Official data shows the Federal Board of Revenue (FBR) collected Rs48bn as withholding tax in 2015-16 from 140m mobile phone users.
Of these, only Rs4bn was claimed by taxpayers, while bulk of the Rs44bn remained unclaimed as most subscribers were either below the tax threshold or did not submit a claim return.
Consumers are unable to reclaim the withholding tax paid on mobile services due to most subscribers’ incomes falling below the taxable limit.
As with sales tax, the withholding tax rate for mobile services is markedly higher than the rate for other sectors. The tax rate is also higher for mobile telephony and internet services than for fixed-line equivalents. Reducing the withholding tax rate could produce a very similar impact to the reduction in sales tax/FED on mobile services, the official of the telecom sector said.
On Global Paying Taxing Index, Pakistan ranks 156, primarily due to prevalent inefficiency, inequality and tax structure complexity. Minor adjustments to taxation on telecom will not only benefit the economy, but will also offset reduced income by additional revenue generated from increased penetration, the official elaborated.
GST on telecom in Sindh is 19pc and 19.5pc in other provinces, while the level of GST on other services and sectors is 13pc-16pc. Similarly FED on telecom services is 18.5pc while it is 16pc for other services.
For the upcoming budget, the telecom sector is seeking reduction in withholding and sales tax rates in a bid to provide relief to subscribers. It is seeking to reduce the FED/GST rates and bring them at par with other sectors.
The industry has sought abolition of FED/GST on Data Services and harmonisation of taxes across all provinces. Currently, there are different GST rates for voice and data in different provinces.
It was also proposed that custom duties and sales tax on imported mobile phones be reduced. Currently the import duties taxes constitute 37pc of device value.
Other proposals include abolishing SIM Issuance and Supply Tax of Rs250 and IMEI tax of Rs300-Rs1,500 which is currently on hold.
In 2004, the government assured the telecom sector it would grant it industry status. However, the government has yet to fulfil its promise.
Instead of considering the sector a useful tool for economic revival, the government is squeezing more in taxes from the millions of cell phone users.
Published in Dawn, The Business and Finance Weekly, May 15th, 2017