Thursday, April 23, 2009

No enhanced revenue from cellphone companies despite FED, ST increase: PTA

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ISLAMABAD (April 23 2009): The increase in Federal Excise Duty (FED) from 15 to 21 percent and sales tax from 15 to 16 percent on cellular sector has failed to achieve enhanced revenue collection from mobile phone companies. An analysis conducted by the Pakistan Telecommunication Authority (PTA) revealed that 15 percent sales tax rate would generate around Rs 45,496 million in 2008-2009.

However, enhanced sales tax rate of 16 percent would result in collection of Rs 44,789 million during 2008-2009. The sales tax projections made by the PTA showed that 15 percent sales tax would generate more revenue as compared to 16 percent sales tax. The PTA has worked out these projections in tax collection based on growth rates calculated through regressing GST collection on time for different tax rates.
In case 16 percent sales tax and 21 percent FED continues in the remaining months of 2008-2009, it would further decrease collection from telecom sector due to higher tax rates, the PTA opined. According to the PTA report issued on Wednesday, it is estimated that the FBR would face about Rs 4.2 billion shortfall in sales tax collection from cellular mobile sector during 2008-2009 as compared to the previous year.
It is further estimated that if the tax rate had been increased to 16 percent instead, the loss in GST collections would have been Rs 0.707 billion instead of Rs 4.2 billion during current fiscal year. The PTA data clearly indicated that the imposition of Rs 500 as custom duty per mobile set and regulatory duty (RD) of Rs 250 has encouraged smuggling of the mobile phones, causing revenue loss to the government.
This tariff regime of mobile handsets has encouraged the smuggling of the mobile phones, hampering growth of cellular mobile industry in Pakistan. The regulator and the FBR need to chalk out a combined strategy to discourage this trend and a technical solution through mobile identification number may be sought. Further, it is required to encourage the cellular mobile manufacturers to install this facility in Pakistan.
According to the PTA, the government enhanced over 40 percent FED/GST rate on telecom sector while this raise was only 7 percent for the rest of the sectors. The motive behind this raise was revenue generation, which needs to be analysed by tax authorities. Generally, the increase in tax rate has negative impact on telecom usage and consequently, the decline in tax revenues.
Since the levy of extra GST, the FBR revenue declined consecutively in subsequent two quarters. During April-June 2008, the FBR received over Rs 12.4 billion in GST revenue from telecom sector while it received about Rs 11.4 billion during (July-Sep, 2008) which is about 8 percent less than the previous quarter.
Again in the quarter ending December 2008 the FBR received Rs 11.7 billion in GST, which is about 6 percent less than the quarter ending June. The PTA made a comprehensive analysis of increase in FED/GST rate on cellular sector from 15 percent to 21 percent in the budget of 2008-09 and found that taxation measures is unable to achieve the desired results.
Analysis was based on tax elasticity. Elasticity of GST revenues with respect to tax rates turned out to be 0.21 percent by using the actual collection of GST by the FBR. This raise resulted in decline of GST collections to the tune of Rs 882 million in one month (8.53 percent) in subsequent quarter (quarter ending September 2008). Projections for such collections for next three quarters have been made, based on growth rates calculated through regressing log of GST with respect to time.
It shows that with the given increase of tax rate from 15 percent to 21 percent the FED collections declined by 8.53 percent which resulted in loss to the government revenue to the tune of Rs 882.8 million in first quarter of the fiscal year 2008-09. The same loss will continue in next quarters if the tax rates remain constant, which has been summarised.
During the budget 2008-09, the government had imposed custom duty at Rs 500 per mobile subsequently further regulatory duty at Rs 250 was imposed by the FBR on the import of mobile handsets in Pakistan in August 2008. It was an effort to discourage the import of mobile handsets, which has been considered an extra burden on foreign exchange reserves.
Policymakers have succeeded in curtailing the import of mobile handsets significantly during the first half of 2008-2009. During first 6 months of 2008-09, cellular mobile handsets worth US $88.7 million have been imported while during previous 6 months (January-June, 2008) mobile handsets worth US $425.6 million were imported in Pakistan.
It is evident that during July-December 2008, the growth in import of mobile handsets declined by 79 percent. During July-Sept, 2008, mobile handsets worth US $70.7 million were imported while in subsequent quarter (October-December, 2008) mobile handsets worth US $17.95 million were imported, the report added.

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