High telecom taxes hindering digitalisation

Research reveals Pakistan is among highest taxed telecom markets in the world

Usman Hanif May 03, 2020

KARACHI: Mobile phone services sector has 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.

Recently, Adviser to the Prime Minister on Finance Dr Abdul Hafeez Shaikh chaired a meeting to discuss the issues faced by the telecom sector following which, the government constituted a 14 member committee to address the issues and present recommendations to the prime minister.  One of the main issues discussed and deliberated during the meeting was taxation on the telecom sector.

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 while it ranks second highest in telecom taxation in South Asia.

The cost of ownership of a basic handset and connection in Pakistan is above 30%.

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Mobile phone services play a critical role in supporting economic growth and social inclusion.

During the Covid-19 pandemic, telecom sector of Pakistan is playing a vital role by providing connectivity and digital services across the country as people have moved to work remotely and adopting e-health and e-education while other online services are becoming rampant.

Despite this, there are a number of consumer taxes levied on mobile services, which the telecom industry has recommended to be rationalised and abolished.

Before analysing the impact of these taxes, it is important to understand what they are and how they impact the consumer. The first is 12.5% withholding tax or advance income, which is deducted at the time of recharge. Consumers are expected to pay this tax and claim it when they file tax returns.

The problem is that majority of Pakistanis who fall under the tax net do not pay taxes and hence cannot claim it. 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.

Considering this tax unfair, the Supreme Court of Pakistan suspended all taxes on mobile recharge in 2018 because the Federal Board of Revenue (FBR) was unable to address the issue.

For comparison purposes, air tickets are taxed at 5%, sale of property 1%, functions and gathering 5% and banking transaction 0.4%.

On the other hand, the general sales tax and federal excise duty on telecom services stand at 19.5% and 17% respectively, however, majority of the population resides outside the federal territory hence it pays 3.5% more than it would pay on other services ie a fixed 16% tax.  On a recharge of Rs100, consumers pay to withhold tax of Rs11.11 and sales tax of Rs14.51.

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The latter can be reduced by Rs2.6 if sales tax is brought down to 16% and if data tax is removed.

According to the latest available statistics, the government collected Rs48 billion in withholding taxes from telecom companies in 2015 out of which only 4 billion was claimed by tax filers. The rest of the Rs44 billion was consumed by the government.

A source in the telecom sector told The Express Tribune that if the data tax is abolished, it will encourage the uptake of data services, increase smartphone penetration, form a digital ecosystem and create a knowledge-based economy. He was of the view that the ambition of a true ‘Digital Pakistan’ will remain a wish if people are unable to afford digital services and solutions.

At a time when lockdowns are in place and the average consumer’s disposable income is decreasing, their need to stay connected is increasing further hence there is a dire need to provide relief to 165 million mobile consumers, he argued.

The country has seen a surge in data usage during the past few months and a reduction in sales will alleviate burden on consumers and they will be able to enjoy cost-effective services. 

Published in The Express Tribune, May 3rd, 2020.

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