Analysis of New Taxes on Telecom Industry in Pakistan Budget 2009-10

Pakistan telecommunication industry is one of the major source of revenues for the government of Pakistan. The annual contribution by the industry in the form of taxes is approx Rs. 65 billion (in USD $812 million).  The industry also contributed Rs. 120 billion (in USD $1.5 billion)  in the form of Foreign Direct Investment (FDI) in the last calendar year. Not only this, the industry directly and indirectly employs around 2.5 lakh people. It is such industries, which are the considered very important by the governments and the governments protect them all around the globe. Alas things are not same in Pakistan where such fast growing industries are highly taxed to milk them to the maximum and bring them to a stand still just like majority of the other industries of Pakistan.

The budgeted presented by the government of Pakistan for 2009-10 is not very encouraging for the telecommunication sector. The government introduced some good measures like the reduction of GST from 21% to 19%, the reduction of Rs. 250 in the import of mobile handsets as well as the reduction of activation tax by Rs. 250. These are good measures but we should keep it in mind that that the GST for the whole country stands at 16% while it is only the telecommunication sector which is facing the discriminatory taxation in the form of GST. Generally, industries providing basic services to the people are taxed lower then the the general public but things are totally opposite in Pakistan. The reduction in activation tax will not benefit the industry since the industry has already reached its maturity and hence the addition of new subscribers has greatly reduced. It is evident from the subscribers addition numbers shown on the website of Pakistan Telecommunication Authority (PTA). The total subscriber stands at 92 million i.e around approx 60% penetration ratio. It is not expected to go much higher then this and hence the reduction in activation tax will not be a major benefit to the industry.  The reduction in taxes on the import of handsets will also not make any big difference since 90% of the cell phones are imported in the country through illegal channels. The illegal import witnessed a major increase last year when the government introduced a straight tax of Rs. 750 on all the handsets imported in the country. Therefore, the reduction in the handset tax will only result in decreasing the illegal import of handsets and will not contribute much to the exchequer.

Now lets move to the new taxes imposed on cellular industry in the Budget of Pakistan 2009-2010. The government introduced a very innovative tax of Rs. 0.2 per sms. Generally 40 billion sms are sent in Pakistan every year by the subscriber of cellular phones. With a tax of Rs 0.2 per sms, the government expects to earn Rs 8 billion per annum (in USD $100 million). The imposition of this new tax will discourage the users from using such an important mode of communication. Since bulk sms deals will become very difficult to operate, the telecom industry is expected to curtail them from the current levels. This will further result in decrease in the sms usage and hence reduce the revenue generation for the government. Imposition of a further turnover tax of 0.5% is another move beyond the understanding of common sense.

The increase in fuel prices will also be a major source of concern for all the cellular companies who rely on diesel powered generators to run their cellular towers since electricity is a rare commodity in Pakistan.  If that was not enough, even a new tax has been imposed on the advertising sector which will pass it on to the customers. Since telecom industry is one major customer of all big advertising companies of Pakistan, it will also have a serious negative impact on the advertisement spend of the cellular industry.

After analysing the above mentioned points, i wonder if the government is really sincere in supporting the industry or it want to close it down? We will leave it to the discretion of our readers to reach the conclusion. Do give us your feedback as to what you think on this serious situation?

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