High taxes a hurdle to rapid progress of telecom services

Though the sector has made giant strides, there is still room for improvement

Usman Hanif April 25, 2018
A telecommunications tower. PHOTO: REUTERS

KARACHI: Pakistan has taken remarkable steps over the past five years that will be helpful in accelerating digitisation which is the modern and faster way of socio-economic development, but that does not mean there is no room for improvement.

The country needs a road map to run the society on modern lines and create its space in the fast changing world which is getting more digitised.

In a major stride, the government in its first year held the 3G/4G spectrum auction in April 2014, which over the next four years pushed broadband subscribers to over 54 million in early 2018 from just three million at the time of the auction.

An industry expert revealed that Pakistan Telecommunication Authority (PTA) had made all preparations for the auction during the tenure of previous Pakistan Peoples Party (PPP) government, but the credit went to the current Pakistan Muslim League-Nawaz (PML-N) administration.

Though the auction was called a paradigm shift on the digital landscape, it was criticised because of a higher base price that did not allow smaller companies to win the licence.

The base price was so high that the government could not get more than that in the spectrum auction. “It was not an auction actually,” commented Parvez Iftikhar, an information and communications technology (ICT) consultant that advises governments in Asia and Africa on ICT policy and regulations.

He elaborated that the spectrum offer at the high price may have helped the government in the short-term, but in the long run it was not a favourable move for the state itself as well as the bidders. It left many spectrum slots unsold that could have been picked by either smaller companies or the same big cellular companies that got the licence.

Higher prices also meant that cellular companies would provide services for the subscribers at inflated prices – a hindrance to improving the socio-economic condition of people, especially in rural areas.

Reaching far-off areas

In an effort to spread telecom services to remote areas of the country, a fund collection pool called the Universal Services Fund (USF) was created.

In the fund, every cellular company contributes 1.5% of its revenue to spread cellular infrastructure in far flung areas of Balochistan, Federally Administered Tribal Areas (Fata) and rural Khyber-Pakhtunkhwa. These are the areas where one company alone could not reach the customers.

“Developing countries like Pakistan usually face lack of funding, but there was a time when USF was piling up and no project was in place for spending the money,” said Iftikhar, who was also the founding CEO of the USF.

However, in initial years the fund had helped a lot in improving connectivity in the remote areas. Since 2007, the USF has disbursed grants worth Rs50 billion to the operators for projects in different regions and it still has Rs60 billion in books for further spending.

In the 2014-15 budget speech, then finance minister Ishaq Dar said, “in order to improve public access to ICT services such as NADRA facilities, biometric verification devices for the issuance of SIMs, e-facilitation in health, agriculture, commerce, governance, learning, etc and to generate local employment and entrepreneurial opportunities, the Universal Services Fund shall fund a mega programme for establishing the Universal Telecentres.”

However, according to the industry expert, the government failed to extend most of these benefits even though Pakistan was the first country to issue SIMs after biometric verification.

In the FY15 budget, the government also earmarked Rs3.6 billion out of the USF for the rural telecommunications programme.

Apart from this, Rs125 million was earmarked from the National ICT Research and Development Fund to provide 500 scholarships in a transparent manner. The ICT fund, now called Ignite, is helping to create an ecosystem for the start-ups that come up with new ideas to meet needs of the marketplace with the help of technological advancement.

In the first three years of the PML-N government – from 2013-16, the fund’s focus was on scholarship programmes with allocations of Rs1.5 billion and Rs450 million. In the next two years, with the emergence of 4th Industrial Wave and the rollout of 3G/4G infrastructure, the focus switched to incubators with allocation of Rs3 billion for five years.

In addition to this, DigiSkills training was initiated with allocation of Rs800 million for two years and for funding the start-ups and innovative projects up to Rs600 million was earmarked annually, said Yusuf Hussain, CEO of Ignite.

High taxes

While the industry and consumers got a slight tax relief last year, overall the high tax level is undermining the progress the sector is making through digitisation.

Among tax measures, the government in 2014 reduced the advance income tax on telecom services from 15% to 14% and cut federal excise duty from 19.5% to 18.5%. In 2017, it further slashed the advance income tax to 12.5% and reduced excise duty to 17%.

Apart from these, the corporate tax on profits came down from 35% to 30% over five budgets with one-percentage-point relief every year.

Earlier, a relief from customs duty and sales tax was provided for the telecom companies on the import of telecom equipment. However, in 2014 it was withdrawn with increase in the duty from 5% to 15-20% according to the nature of the equipment.

Even after the reduction in taxes in many cases, telecom remains one of the highly taxed industries in Pakistan compared to global and regional benchmarks.

“High taxes are adversely impacting affordability of the common man,” remarked Ali Naseer, Chief Corporate and Regulatory Affairs Officer of Jazz.

In their proposals, the cellular service providers have asked the government to reduce the advance income tax to 10%, bring the discriminatory 19.5% sales tax on a par with other services industries and restore the customs duty and sales tax relief.

“As Pakistan prepares to put itself on the global digital highway, there is a dire need to optimise the tax ecosystem for the industry and convert our digital divide into digital dividend,” he said.

“This can only happen if the cellular mobile operators are encouraged to bring further foreign direct investment as they have done more than any other sector in recent years.”

Branchless banking

With the introduction of 3G/4G services in the country, the financial technology (fintech) companies floated the idea of branchless banking in April 2014 that got strong support from the State Bank Pakistan.

Domestic transactions worth Rs726.5 billion were carried out only in one quarter from July to September 2017.

“Banking in rural areas is very difficult, therefore, phone banking is a great solution. SIMs are verified biometrically, making it easy for farmers sitting in far-off areas to open bank accounts,” said Iftikhar.

Digital payments

The government also framed regulations for payment system operators and payment system providers.

Resultantly, this year China’s third-party mobile and online payment platform Alipay, which has over 800 million users across multiple markets, entered Pakistan.

Alipay acquired 45% stake in Telenor Microfinance Bank, formerly Tameer Bank, for $184.5 million to broaden access to financial services through digital payment solutions in Pakistan.

However, Pakistan will be transferred in June from the white to grey list of the Financial Action Task Force (FATF) that watches the countries that lack appropriate measures to track terrorist financing.

Earlier, the Ministry of Information Technology and Telecommunication blocked the video-sharing website YouTube and it took it three years to unblock it.

“The government could not sign the Information Technology Agreement (ITA) of the World Trade Organisation (WTO) which led many countries to increase their productivity and economic growth since ITA deepens the participation of enterprises in global value chains,” said Iftikhar.

The government is collecting up to 35% taxes on hardware which is a big hurdle to the goal of doubling IT exports to $6 billion by 2020.

The Cyber Crime Bill 2016, framed by the government, has been criticised, but experts still consider it a big step towards cyber safety of masses.

“It has been five months since the PTA chairman had completed his tenure and the regulator is working without the head,” said Iftikhar. “What impression the headless regulator will give to foreign investors who want to invest in this country,” he asked.


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