If giving out mixed signals was an art, the Pakistani government would have been the Majnu bhai of it. The latest display of this artistry came on Friday when the finance ministry’s budget document and speech proposed new taxes on voice, messaging and data. Unsurprisingly, the backlash began against the stupidity of charging Rs5 fee for every gigabyte of data usage and how regressive the move is.
Quickly gauging the reaction, the Minister for Industries and Production — who the world of economics owes heavily for his groundbreaking research methodology on averaging out inflation over 13-month periods — tweeted that the prime minister and cabinet did not approve the federal excise duty levy on data internet usage. Great way to distance yourself from the official documents of your own government! By the same night, Jazz Pakistan’s CEO posted on Twitter that Ishrat Hussain confirmed to him that this would not be included in the final Finance Act. Good riddance, but I wonder how this needless drama could have been avoided in the first place?
Anyway, let’s leave the politics of that for now and turn to economics. While the initially proposed FED is history now, informed industry sources confirmed that it would have been applicable to only Islamabad Capital Territory, and not the provinces.
For the country at large, the key change regarding telcos is the reduction in withholding taxes by 2.5 percentage points
For the country at large, the key change regarding telcos is the reduction in withholding taxes by 2.5 percentage points. Plus, the fixed fee (of Rs250) on the issuance of new SIM cards has been proposed to be deleted, which was being borne by telecom operators since the price wars began. Based on the number of subscribers added from July to March FY21 in the country, this measure would have offered a relief of Rs3.47 billion to the overall industry.
But all of this is telecom, which is relevant from largely the access and connectivity point of view. For the technology industry specifically, main developments in the budget can be seen in the arena of digital payments where a couple of forward-looking measures have been included. For starters, “payment on account of Merchant Discount Rate is proposed to be excluded from the purview of federal excise duty.”
To explain in English, whenever you pay through a digital channel — be it an e-commerce transaction or swiping a card at a supermarket’s point of sale machine — the merchant is charged a discount rate, usually around 1.5-2 per cent. Say the amount was Rs100 for a chocolate bar, the seller would in essence receive Rs98-98.5. The remaining chunk is paid out to the intermediaries who helped process the payment and can include a number of players, such as the card issuer, settlement bank or gateway.
However, this merchant discount rate wasn’t it. There was actually a federal excise duty of 16pc on top of this cut, so someone paying out Rs2 was in essence being charged Rs2.32. It’s this percentage that’s being removed, thus making digital payments slightly cheaper and hopefully more attractive to the seller.
But...there’s always a but. There is still a lack of clarity on how this will be applied since this FED was applicable to only the Islamabad Capital Territory and other federal areas. Provinces have their own sales tax similar to this levy, which at least for now continues to be. The confusing bit is how the transactions will be treated between these different tax jurisdictions and who will lay claim to the proceeds: would it be the authority from the place where the sale has occurred or where it is processed from? Maybe a third or fourth option? That will eventually come down to the consensus (or the lack of) between Interprovincial Revenue Coordination.
On point-of-sale specifically, the budget has proposed a tax credit scheme on the import of terminals. According to Ali Islam, Business Development Head at Keenu, around 30pc of the machinery cost is taxes. It remains to be seen if the move would help increase the number of PoS stations in the market, which have grown at a compounded annual growth rate of around 8pc since 2013 to stand at 62,480 by 2020 end.
Published in Dawn, The Business and Finance Weekly, June 14th, 2021