Serious challenges faced by the telecommunication sector which is hampering the growth of telecom services.


There are some serious challenges faced by the telecommunication sector which is hampering the growth of telecom services in the country and demand immediate attention by the Government of Pakistan. Telcos again appealed Muslim League government to address issues regarding Taxes and duties in letter to  Mr. Haroon Akhtar Khan Special Assistant to the PM, Revenue Division.

Here is text of letter,

Subject:           Telecom Industry Taxation Issues

Respected Sir,

Kindly refer to our earlier joint letter on the subject matter dated December 28, 2015 addressed to your good self (followed up by our meetings with yourself and Member IR Policy FBR), the joint industry letters sent to the Federal Minister for Finance & Economic Affairs dated 2nd and 5th June as well as 4th July, 2014 and the joint letter of our Shareholders addressed to the Honorable Prime Minister of Pakistan dated 30th April, 2015 (copies enclosed along with for ready reference); we hereby yet again solicit your support for the resolution of subject mentioned issues being faced by the Telecom Industry (“Telcos”).

The telecom sector continues to offer unprecedented growth opportunities in both developing and developed countries and communication services have become an important part of how economies work and function. A recent Deloitte Study suggests that a 10% increase in mobile penetration increases the total factor productivity in the long run by 4.2 percentage points, a doubling of mobile data use leads to an increase in GDP per capita growth of 0.5 percentage points, for a given level of mobile penetration, a 10 percent substitution from 2G to 3G services increases the GDP per capita growth by 0.15 percentage points.

Telecom sector in Pakistan is a significant source of revenue generation for the national exchequer. Telecom Industry revenues as reported in PTA Annual Report for the FY2014 were around PKR 465 billion while the industry made an all-time high contribution of PKR 243.84 billion to the National Exchequer in terms of taxes, regulatory fees, initial and annual license fees, activation tax, and other charges. At the same time the sector contributed with PTA PKR. 105 billion as fees from all licensees. Telecom investment reached US$ 1.8 billion during FY2014 out of which telecom FDI was US$ 903 million as a result of auction of NGMS licenses and network up gradation by the operators.

In the last two decades the mobile sector in Pakistan has enabled more than 60 million Pakistanis to gain access to transformative technologies, including mobile broadband. This increase in access is bringing wide-ranging benefits to the Pakistani economy and society, is boosting productivity and is supporting increased economic growth. Despite substantial growth recently, 120 million Pakistanis remain without access to mobile services, particularly in rural areas. This places Pakistan behind its neighboring countries in terms of subscriber penetration, which remains below global and regional averages.

There are some serious challenges faced by the telecommunication sector which is hampering the growth of telecom services in the country and demand immediate attention by the Government of Pakistan. A short brief is as under please;

Industrial Undertaking for Cellular Mobile Industry:

Consequent to the approval by the Federal Cabinet in year 2004; the Ministry of Industries & Production vide its SRO number 1(II)/2004-InvIII dated April 20, 2004 had already classified the Telecom sector, including “Cellular Operators” as “Industry”. In addition the Mobile Cellular Policy issued by the Ministry of Information Technology (“MoIT”) dated January 28, 2004 also referred to CMOs as “Industry” (please refer to clauses 1 and 3.2 of the said Policy). Ministry of IT (“MoIT”) not only clearly admitted CMOs status as an “Industry” but also endorsed the request of CMOs to declare industry under clause (b) of section 2(29C) of the Income Tax Ordinance 2001 through MoIT letter addressed to the Chairman FBR dated June 18, 2014. However till date the CMOs have not been declared industry by the FBR under section 2(29C) of the Income Tax Ordinance 2001.

The issue was discussed in the meetings held during May 2014 with Honorable Federal Minister for Finance Senator Muhammad Ishaq Dar during the negotiations for finalizing the way forward for the payment of 10% Withholding Tax (levied under section 236-A of the IT Ordinance 2001) on the proceeds of the NGMS auction by the CMOs. The CMOs were assured by the Federal Minister for Finance on behalf of the Government of Pakistan (“GoP”) about the grant of Industrial Undertaking for them by FBR through the next Finance Bill (Federal Budget for 2014-15). Based on the assurances by the GoP, NGMS licensees have paid more than Rs. 11 billion as Advance Income Tax (Withholding Tax) on the amount paid for the acquisition of 3G and 4G licenses, which is much more than their current or even next few years’ liability under the ITO. However much to the despair of us all the status of Industrial Undertaking was not granted to the Telecom  industry through the Finance Bill 2014-15 despite our reminders sent to Ministry of Finance based on the assurance of GoP conveyed to us through Federal Minister for Finance.

Therefore it is imperative that the GoP stands by its commitments regarding the grant of industrial undertaking for the telecommunication sector. This would reduce the cost of importing essential network equipment thereby improving the business case for infrastructure investment especially in remote areas and could have a particularly strong impact on increasing 3G/4G mobile broadband coverage. By granting  Telcos equivalent tax treatment to that enjoyed by industrial undertakings, Telcos could benefit from the exemption to the income tax paid on imported network equipment that is already enjoyed by other industries that use imported goods for their core operations.

Analysis by GSMA/Deloitte suggests that this has the potential to generate the following impacts:

·       Investment could potentially increase by up to US$102 million and mobile revenues by US$28 million in 2020.

·       By 2020, increased demand for mobile broadband could add an extra 900,000 connections, including 300,000 3G connections.

·       This uptake in broadband penetration has the potential to increase the productivity of Pakistani workers and businesses, leading to the Pakistani economy being up to 0.14% more productive.

·       Through the direct impacts of the mobile operators and the indirect impacts generated by the activities enabled by mobile operators, increased mobile usage could lead to additional GDP growth, potentially delivering up to an additional US$480 million in 2020 and providing employment for up to an additional 7,000 Pakistanis.

·       Moreover, despite an initial fall in tax revenues after the reduction in tax, the government could potentially achieve tax neutrality within three years, and by 2020 the increase in GDP growth could enable up to an additional US$38 million in tax revenues to be collected through more broad-based taxation.


Elimination of Reduced Rate Benefit of Custom Duty:

Through the Finance Act 2014 applicable from June 26 and July 1, 2014 as the case may be; SRO 575 (I)/ 2006 dated 5th June 2006 has been rescinded and entries relating thereto have been made part of Fifth Schedule of the Customs Act 1969. However to our surprise, while incorporating SRO 575 in the Customs Act certain entries at serial no 16 related to the “telecommunication sector” had been deleted. The purpose of this SRO was to promote foreign investment in the country by allowing import of machinery and equipment at reduced rate of customs duty. Under this SRO, the benefit in case of telecom sector was through sales tax exemption and maximum of 5% custom duty on import of equipment. After the withdrawal of this benefit of reduced rate of custom duty, we have been constrained to import whole of our machinery and equipment at higher rate of custom duty ranging from 10% to 25% depending upon the nature of items being imported (average coming around 20% i.e. an increase of almost 400%). Moreover in addition to that, huge amount of sales tax will be rotated every month to and fro from Telcos to the Government treasury and back to Telcos being output and input without any financial benefit to the Government.

The accumulated projected investment figure of all Telcos for the import of telecom equipment in the next 5 years is almost USD 1,300 Million. Due to increased rate of custom duty, Telcos will not be able to import USD 200 Million (1,300M x 15%) worth of telecom equipment; as this delta will now be paid in shape of additional customs duty. Hence, it will badly hamper the growth and penetration of 3G/4G services for the masses of Pakistan and almost 15-20% of its population will be deprived of the benefits of the latest technologies resulting in lesser mobile broadband proliferation in the country. Moreover in the long run, the Government exchequer will actually face a huge loss in terms of yields from Income tax under section 236 of ITO 2001 and Sales Tax/FED as the case may be, due to non-availability of services to the un-addressed population to whom we will be unable to provide services as almost 15% of the budget will be plagued in the shape of this additional spend on payment of customs duty. We thus request that in a bid to promote investment in telecommunication network infrastructure we seek your support to reinstate the import duty concessions on telecommunication equipment setting the rate at 5%.