Budget proposal: CMOs highlight issues of taxation plaguing telecom growth

Ask FBR to treat sector as industry, rationalise FED and withholding tax.

Farooq Baloch April 23, 2015
The industry pays up to Rs500 in sales tax on the import of a mobile phone. STOCK IMAGE

KARACHI: With the federal budget for 2015-16 just around the corner, cellular mobile operators (CMOs) have recommended the elimination of subscriber identity module (SIM) card activation tax and customs duties on the import of mobile phones and telecom equipment.

In a five-point taxation proposal released to the media on Thursday, the CMOs have also urged the Federal Board of Revenue to treat the telecom sector as an industry – a status already recognised by the Ministry of IT and Telecom and the Ministry of Industries.

The five operators also proposed a centralised system of tax returns to avoid double taxation and rationalisation of the federal excise duty (FED) and withholding tax, which will benefit ordinary consumers.

The telecom sector argues that growing taxation on telecom services hinders the growth of mobile broadband and hurts affordability of services, thus lowering revenues for both the government and the industry.

Pakistan is at number four among the highly taxed countries globally and at the highest level in comparison with similar markets, they said. In FY14, the telecom sector’s contribution to the national exchequer amounted to Rs130 billion.

According to the details provided in the document, the telecom sector pays 5.5% tax on the import of telecom equipment – the imports in FY14 were Rs123 billion.

Removing income tax on imports can reduce the cost of electronic network, said the CMOs, thus increase economic viability of infrastructure investment in remote areas and impact coverage of the third-generation (3G) mobile network.

The exchequer charges Rs250 in sales tax and another Rs250 in activation tax for each new SIM card. The industry pays up to Rs500 in sales tax on the import of a mobile phone and as much amount under the head of the International Mobile Equipment Identity (IMEI) tax for every imported mobile phone.

These taxes restrict investment in the telecom sector, the statement said. The foreign direct investment (FDI) in the telecom sector stood at Rs90 billion in FY14, which was 34% of the total FDI the country attracted during that period.

The CMOs have proposed the elimination of aforesaid taxes and suggested that the SIM activation tax be reduced to Rs150. “When the SIM activation tax was reduced in the past, mobile penetration increased, causing an upsurge in government’s tax revenues.”

Among other recommendations, the CMOs proposed harmonisation between federal and provincial sales tax laws.

Under the current regime, the CMOs have to deal with double taxation. They pay 18.5% FED to the FBR while an equal amount of GST is charged by the provincial governments.

The CMOs argue that the GST and FED rate should be rationalised in line with other sectors of the economy – the FED on telecom sector is applied at the rate of 18.5% compared with 16% applied to other sectors.

Though it will reduce the tax revenue, the benefits passed on to the consumers can support additional two million subscriptions by 2020, they say. This will result in $1.1 billion worth of GDP growth and 0.3% increase in the country’s productivity.

More than 80% of the country’s 137 million cellular subscribers (as of June 2014) are below the threshold of taxable income. The advance income tax or withholding tax should, therefore, be reduced from the current 15% to 5%, the CMOs recommended.

In the end, the CMOs proposed that SRO 575 should be restored, which will exempt the industry from sales tax and customs duty on the import of telecom equipment.

There is also availability of 20MHz spectrum which the government wants to sell, but the operators cannot afford it due to high taxes. If these taxes are lowered, the initial loss of revenue in the year 2015-16 can be offset through the $500-million sale of the spectrum.

Published in The Express Tribune, April 24th,  2015.

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