Tax on internet pulls down economy

ISLAMABAD:

In the present age, internet is perhaps the single most important driver of innovation, competitiveness and growth.

Digital economy is rapidly growing everywhere. Pakistan has been rather slow on the uptake but the PML-N government must be credited for giving it a boost by auctioning the long-awaited 3G and 4G telecom spectrum. Not only has the government earned about $1 billion from this auction, but this also helped internet penetration achieve a phenomenal growth of over 300% within a year.

The number of internet subscriptions increased from a meagre 3.8 million in June 2014 to 16.9 million by June 2015.

While the government deserves kudos for what it achieved in 2014, its appetite for gouging more taxes from the telecom sector is a matter of great concern. With the exception of the Punjab government, all other provinces and the federal government are competing to tax the internet.

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While the federal government imposed 14% withholding income tax, the governments of Sindh, Khyber-Pakhtunkhwa and Balochistan have levied 19.5% GST. There is still no certainty if the tax should be applied to mobile data usage, but the service providers have been collecting it since the beginning of the current financial year.

Steps backward

Levying taxes on internet data usage is a retrogressive step. Internet penetration in Pakistan is one of the lowest in the world, despite its steep climb during the last one year.

An important factor responsible for this is the high taxation rate on IT-related hardware. In fact, Pakistan is included amongst the five countries of the world that levy the highest taxes on IT-related goods and services.

According to a recent study by Deloitte (UK), during 2011, taxes in Pakistan were found to represent 30.44% of the cost of mobile ownership, which was the third highest level of taxation found in a sample of 111 countries.

The study further noted “the mobile sector accounted for 7% of the $31.5 billion in tax revenue collected in 2013. By reducing and rationalising taxes on the mobile sector, the Pakistani government can not only increase digital and financial inclusion and economic growth, but it can also generate higher tax revenues through more efficient and broad-based taxation. Furthermore, reforming mobile taxation has the potential to increase and enable the investment required to further expand mobile broadband network infrastructure.”

In India, Modi government’s high priority is digitisation. Their target is that every second Indian should be an internet user by 2018. Their goal is achieving an economy worth $200 billion through internet-related activities in three years.

It is a pity that while India is already ahead and is making every effort to promote the use of internet technology in every field, in Pakistan the federal as well as some of the provincial governments are levying new taxes and imposing regulatory restrictions to limit its use.

YouTube is already banned. The Pakistan Telecommunication Authority has issued instructions for imposing restriction on Blackberry services for security reasons from December 2015.

Relation with economic growth

Studies by the World Bank show that a 10% increase in broadband penetration could accelerate economic growth by 1.38%.

Punjab is already far ahead of other provinces in terms of literacy and use of technology. By giving free laptops, it has enabled many poor students to compete with those from more privileged backgrounds. Growing use of internet in Punjab for e-governance, in healthcare, education, financial and agricultural information services is already yielding outstanding results.

Obstructing the use of internet will seclude other provinces from the digital revolution. If the present trend continues, a serious inter-provincial digital divide will result. As it is, K-P and Balochistan already lack industrial base and also do not have any serious services enterprises.

Small and medium enterprises will be major losers in those provinces. A recent EU study showed that SMEs that have actively engaged with consumers on the internet have experienced sales growth rates that are up to 22 percentage points higher over three years than those companies in countries with low or no internet presence.

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What should be done?

Our priority should be to digitise Pakistan and ensure that all government departments make use of this technology. Some departments of the federal government such as NADRA and passport office have made life easier for ordinary Pakistanis through adoption of digital technology. If other government departments were to adopt this technology, delivery of government services will become far more efficient.

Every year a large number of new Pakistanis enter the job market but only a limited number can be absorbed. Our government should train and encourage youngsters to tap the international IT markets where millions of jobs are posted annually.

There are several global online work platforms where businesses and independent professionals connect and collaborate remotely. For example, there are over 200,000 Pakistani freelancers working with oDesk. The Women’s Digital League is a successful example of a Pakistani internet business where women provide digital services to clients from around the world.

What is the way forward? The most important step will be for the federal as well as provincial governments to encourage the growth of information technology rather than create impediments. Like most other countries, we should join the Information Technology Agreement and agree to eliminate tariffs on information technology products.

The government needs to move towards a knowledge-based economy, which relies on application of technology. It needs to encourage knowledge-based industries and make maximum use of the IT revolution. This is a great opportunity to integrate our economy into the world economy and enhance our economic growth to reduce poverty.

The writer served as Pakistan’s Ambassador to WTO from 2002-08

Published in The Express Tribune, August 17^th,  2015.

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