Tuesday, November 04, 2008
By Jawwad Rizvi
LAHORE: A discriminating tax regime for different industries is said to have negatively affected the rapidly-growing telecom sector, which has been burdened with 21 per cent federal excise duty instead of 16 per cent for other industries.According to a study conducted by The News, the combined effect of tax on a consumer has increased to 33.1 per cent, causing a fall of at least 7 per cent in the industry’s revenue. Consumers are finding it hard to step up spending in this period of high food inflation and make lesser calls to keep their bills at the same level.This has directly affected around 90 million people and negated the economic theory of supporting industries which drive economic growth. In the past, consumer taxes were kept lower, leading to an increase in consumption and higher volumes of business. That also contributed to the government exchequer in the form of higher revenues.Currently, the telecom sector is paying duties and levies under various heads including licence fee, spectrum charges as well as significant levies ranging from duty on usage to purchase of handsets. Pakistan is one of the highly taxed countries in the world, where specific taxes are applied to telecommunications.Additionally, with the new tax regime, activation tax has been maintained at Rs500 on SIM’s sale contrary to the recommendation of the industry. Besides, a duty of Rs750 has been imposed on the import of handsets, increasing the cost of owning a cheap cellphone.This has made telecommunications more expensive for the least served areas and poor people who are the main drivers of growth. By taking such decisions, the government is trying to treat communications as a luxury and not business utility, which has created opportunities for millions to expand their business and generate employment opportunities.Among those who now use mobile phones, around 90 per cent don’t even fall within the taxable income range set by income tax laws. In a recent GSMA study titled ‘Regulation and the Digital Divide’, data from 28 African countries was analysed. The study concludes that the cost of capital, which is a major proportion of the cost base of a capital-intensive industry, goes up in the face of erratic regulation. On the other hand, if consistent and fair regulatory practices were in place, the cost of capital would be lower and an additional $5 billion would be invested in mobile capacity and infrastructure.In Pakistan, the growth of telecom sector has been phenomenal with a consumer base of almost 90 million. However, extending connectivity to all is still a big challenge for the government and the private sector alike. The industry must cope with a multitude of factors including the sharply rising electricity tariff and the energy crisis which has led to a significant increase in the use of generators. Increase in oil prices has accelerated operational costs by a considerable margin.On the investment side, with the rising cost of doing business and prevailing economic conditions, the return from expansion in rural areas by telecom operators is also on the downside. This is another factor hampering not only the growth of the sector but also restricting accessibility for those yet to benefit from the cellular revolution.According to figures, cellular subscriber growth in the second quarter (April to June) of 2008 was at 7 per cent, which is expected to decline to 4 per cent in the third quarter. Total subscribers grew by 5.5 million in the second quarter. Total revenue of the cellular industry grew by almost Rs5 billion in the second quarter, which is expected to witness a decline of almost Rs2.3 billion due to increase in different taxes.Total growth in revenue in the second quarter was almost 10 per cent, which is expected to witness a negative growth of four per cent in the third quarter. Total taxes collected were almost Rs19.2 billion in the form of GST, withholding tax and activation tax in the second quarter and it is expected to be not more than Rs19 billion in the third quarter. The industry is expected to incur an additional cost of almost Rs150 million per month due to the increase in utility and fuel costs.On the other hand, with the advent of broadband and WiMax already out by key players are precursors to the ensuing communications revolution which brings with it countless benefits and opportunities. Today, a simple facility such as SMS messaging allows rural populace to reach health workers and even conduct financial transactions.As the digital divide is being bridged, not only voice but affordable data communications will be a reality for millions of Pakistanis. However, to achieve this goal, the cost of both ownership and use of mobile services must fall.
The article published in The News on Tuesday, November 04, 2008.
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