Taxes taking their toll on telecom sector’s growth

Pakistan’s industry taxed at three times the regional average . DESIGN: ESSA MALIK

According to two industry insiders, four out of five operators may be running in losses because of the stifled growth. They say it is very difficult for the operators to penetrate the low-end markets with attractive packages.

“The irony of the situation is that in a country where not more than 3.2 million pay taxes, almost 100 million – half of the population – who use mobile phones are subjected to a withholding tax imposed by the government,” an analyst who did not wish to be named said.

Highest in the region

The cellular industry which is experiencing a slowdown in its growth used to be a role model for the region, especially after its deregulation in 2004. The current tax rate of 33.2 percent applied to the country’s cellular enterprises is the highest in the region compared with the regional average of 10 to 12 percent.

Analysts also pointed out that this rate was the highest in the country as well, as all sectors are taxed the uniform rate of 17 per cent while telecom operators are forced an estimated additional rate of 19.5 per cent. It is also unlikely that the government plans to change the status quo anytime soon.

Withholding tax

The previous withholding tax of 10 per cent has also further been raised to 11.5 percent.

An observer pointed out that a large chunk of the 100 million subscribers that the government was taxing were not even above 18 years of age. An analyst pointed out that a significant percentage of the telecom users that were paying withholding taxes did not meet the income criterion to pay the tax.

A few analysts suggested that the government should do away with withholding tax for the sector or lower it gradually. Withholding tax was applied in 2009 in the aftermath of the floods on all post paid and scratch card users.

Government charges Rs250 for each activation

People working inside the telecom industry also point out another anomaly. They say the sector is subjected to discriminatory treatment on yet another account.

“Mobile subscribers are subject to Rs250 per activation, which is paid by the cellular operator,” they said.

Apparently, this tax was applied in lieu of custom duty on import of handsets but the telecom sector said that the government needed to do away with government activation charges in order to enable the telecom operator to hit the low end market and further increase penetration. However, the government did provide some relief on this subject, as it recently decreased the charge to Rs250 from Rs500.

Turnover tax on revenue

He explained that the previously imposed turnover tax was also increased from 0.5 per cent to 1 per cent on the revenues of cellular operators. Experts fear that unless the cellular industry is exempted from this tax no future growth will be possible in the sector.

A turnover tax is similar to a sales tax or a VAT, with the difference that it taxes intermediate and possibly capital goods. It is an indirect tax, typically on an ad valorem, but in case of cellular operators; they end up with losses due to higher initial depreciation losses, said an analyst. However since cellular operators do not make public their annual reports, it is hard to say just how bad these taxation measures are hitting them.

Published in The Express Tribune, May 20^th, 2011.