Thursday, May 14, 2009

LCCI budget proposals: Telecom sector demands withdrawal of SIM card sale activation tax, cut in FED.…

Pin It MUHAMMAD RIAZ LAHORE (May 14 2009): The withdrawal of activation tax of Rs 500, being charged at the time of sale of SIM card, and reduction in taxes like federal excise duty will help in further growth of telecom services to the under-served people of Pakistan, besides giving a boost to government revenue.

At present, the government is charging 21 percent taxes in the shape of federal excise duty, which should be decreased to 16 percent, so as to bring down them at par with other industrial/service sector. All previous trends favour reduction in the mobile activation tax, and past experience of lowering this tax not only shows an increase in cellular penetration level but also in the overall taxation revenues to the government.

The Lahore Chamber of Commerce and Industry has claimed this in its 2009-10 budget proposals, submitted to the government, in consultation with representatives of the telecom sector. It is because of the fact that the saving caused by lowering activation charges were ploughed backed into network expansions and provision of more affordable services to the consumers, resulting in increased coverage, penetration and usage.

The combined effect was a consistent increase in tax revenues for the national exchequer. The cellular mobile industry is of the view that taxes are inequitable and hinder the mobile penetration in the country. The mobile companies in many regions of the world have not enjoyed the phenomenal subscriber growth that was witnessed in Pakistan, propelling the telecom sector to the stature of a powerhouse in a short span of time.

After subsequent deregulation and investor-friendly policies of the government, the country is now witnessing a highly competitive market, where telecom services are accessible to all. Despite mobile penetration of 55 percent, there is still great potential to be capitalised upon in this market.

It must be noted that the overall environment has changed significantly during the last five years where aggressive competition within the industry has translated into benefits for the overall consumers and economy of Pakistan. Coupled with the positive financial contributions that the industry is making towards the economy as a whole, no doubt, have come a long way in connecting the unconnected people of Pakistan.

With 89 million people connected to date and tele-density at 60 percent Pakistan stands well above other regional markets. Total of Rs 278,459 million in revenue was generated by the telecom industry in 2007-08, which had a major impact on the economy of Pakistan.

The sector is also currently contributing 2 percent out of the 7 percent of GDP in 2006-07 and more than $6 billion were invested in Pakistan in last few years in telecom industry through foreign direct investment, making it a major driver of economic growth. This remains the sole sector within the economy to have received such a substantial investment, making it 27.92 percent of the overall FDI in 2007-08.

The industry has urged the government to keep up its investor-friendly policies to sustain this tremendous rate of progress. It is worth mentioning that the rapid increase in penetration and tax revenues has been made possible to a large extent by the subsidisation of activation charges by the cellular operators.

The industry believes that further reduction in activation charges will drive tax revenues higher in part due to greater mobile penetration and use, but more significantly due to the multiplier effect on the GDP. The Deloitte survey of a significant sample of the international markets suggests that 10 percent increase in mobile penetration can increase GDP by 1.2 percent.

This is attributed to supply side impact, productivity increases and intangible benefits to the economy. Taking necessary steps that would increase mobile penetration should, therefore, be a cornerstone of the government economic policy.

The analysis based on projections suggests that elimination of activation tax will keep tax revenues on a growing path. It will also align telecom taxation in Pakistan with the best international practices. In its study, Deloitte states that proportion of tax in the Total Cost of Mobile Ownership (TCMO) in Pakistan is higher in comparison with the regional benchmarks.

In case the activation charges are not subsidised by the operators, the cellular consumer in Pakistan would pay the highest in taxes as a percentage of TCMO in comparisons with others in the Asia Pacific region. This becomes particularly vivid, given that Pakistan is among only 16 countries out of 102 surveyed that impose mobile-specific taxation as at the time of new subscription.

The general sales tax and federal excise duty levied on various cellular services were also enhanced from 15 percent to 21 percent, instead of 16 percent for other sectors. These taxes are applied on all services--phone calls, Short Massaging Services (SMS), Multi Media Message (MMS), Internet, and mobile TV.

It is also pertinent to mention that the government is also thinking to impose additional FED from 3 to 5 percent on import of mobiles which would also impact the growth of the cellular industry in Pakistan. Pakistan is among the countries where the mobile phone users are paying the highest taxes on the use of telecommunication services in the region.

According to a recently published report covering the Saarc countries, Pakistani consumers are paying 33 percent taxes, whereas Indian consumers are paying 12.40 percent. The report says that tax ratio is 15 percent in Bangladesh, 17.50 percent in Sri Lanka and 23 percent in Nepal.

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