HIGHER TAXES DISCOURAGING INVESTORS IN TELECOM SECTOR

SYED FAZL-E-HAIDER
Dec 08 - 21, 2008

The investors are loosing interest in the telecom sector, which emerged as the single largest area of investment during last three years. Higher ratio of taxes is the key reason behind declining local and foreign investment in the telecom sector that witnessed 25 per cent fall in investment during 2007-08. The substantial taxes are preventing the investors from their expansion plans in rural areas, which are considered less lucrative as compared to urban areas. The higher taxes mainly on cellular mobile sector imposed in last year's budget may further discourage investors, curtail mobile phone usage and cause a drop in GST collection from the sector.

According to the annual report of Pakistan Telecommunication Authority (PTA), the fixed-line sector has shown negative growth in revenues mainly due to drop in PTCL revenues. Cellular mobile revenues increased by 37 per cent in 2007-08 and reached Rs182 billion. The share of cellphone sector in total telecom revenues increased from 56 per cent in 2007-08. The government has increased the rate of GST on cellphone sector significantly in the current year's budget. Activation tax is charged at Rs500 per new connection. There has been the major demand of the industry to remove activation tax, which is charged at Rs500 per new connection, as the operators are unable to pass on this tax to consumers due to the tough competition.

Cellphone is the fast growing sector, which has enormous potential for investors. The country has made exceptional development and progress in the field of mobile telecommunications. Telecom sector has maintained the trend of largest FDI recipient in Pakistan during the last few years following its liberalisation, which made it attractive for many global telecom giants to invest in the country. Visualizing the market potential, both the cellular and WLL operators have been investing to expand their networks. The total numbers of cellular users crossed 76 million in December 2007, from half a million in 2004, which is 48 per cent of the total population. The wireless phones have also shown a phenomenal growth in recent years with all the telecom companies investing to expand their networks and attracting more and more subscribers. The total users of wireless phones increased to 2,123,179 last December from 265,028 in 2005. Analysts believe that upward trend of investment may continue in the next five years because of large market potential, particularly the rural areas but the ratio of higher taxes discourage the operators to expand their network.

Pakistan's telecom sector is growing at a faster pace with new exciting opportunities coming up for big players like China Mobile. The Chinese firm has been focusing on aggressively expanding its network coverage amid growing demand from people living across the vast and diverse geography of Pakistan. The first international venture of China Mobile ZONG has further expanded its network coverage along Karakoram Highway. The expansion includes launching of services in Daggar (Bunair District), Chilas, Dassu, Bunji, Sikandrabad on Karakoram Highway and Astore on the tertiary route within Northern Areas. Presently, the ZONG has its network in several major cities of the Northern Areas including Gilgit, Hunza, Skardu, Besham and Sust.

The sudden and unprecedented increase of 421 percent in the charges of universal access numbers (UAN) by PTCL has disturbed the business community, who consider the tariff increase an unethical and unlawful business practice. The PTCL move will result in an increase in outstanding bills providing the PTCL a chance to earn a hefty amount from the subscribers. The company has increased the UAN charges to meet the rising cost of its service. PTCL claims that UAN service is still cheaper than regional countries like India, Bangladesh, Nepal and Sri Lanka.

Pakistan has a better regulatory environment for mobile telecommunications than India, Indonesia, Sri Lanka and the Philippines, according to the first Telecom Regulatory Environment (TRE) survey conducted by Sri Lanka-based independent telecom research organization LIRNEasia. The results of the 2006 TRE survey, carried out in five Asian countries- India, Indonesia, Pakistan, the Philippines and Sri Lanka, provide a useful diagnostic tool for assessing regulatory efficacy. Overall, Pakistan scored particularly well on market entry and on the management of scarce resources (spectrum) in mobile sector. In the last three years, Pakistan's telecom sector has attracted $9 billion investment and is expecting another $4 billion during the next four years.

Today Pakistan's cell phone sector, with more than 80 million cellphone subscribers, still has a lot of untapped potential. As the market grows, issues such as quality of service and the provision of value-added services are bound to define the nature of competition.

Pakistan's highly competitive market is already dominated by six cellular operators with over 70 million subscribers. Since Pakistan has deregulated the telecom sector, scores of new private entrants are gearing up to provide service making the country one of the fastest-growing cellular markets. The number of subscribers of fixed and mobile telephone increased from 8 million in 2003 to over 50 million in 2006 and the market has the potential to reach 80 million mobile in 2 to 3 years. It has also the presence of leading China's telecom giants, ZTE Corporation and China Mobile. It is the success of these investors that has caused the avalanche of growth.

The market has witnessed remarkable year-on-year growth in subscribers' number of over 145 percent. PTA is gearing to introduce state-of-the-art third generation mobile phone services, offering users a wider range of advanced services like high speed internet, video call facility and other value added data services. Similarly, the 3G services are expected to be available in the country before 2010. By the end of last year, five mobile companies were awarded licences for AJK and the Northern Areas connecting 1.2 million people. Former government had planned to increase fixed-line teledensity to 7% (around 10 million fixed lines) by 2010. The target can be achieved by installing up to 1 million additional lines annually. Total share of telecom industry in GDP needs to be increased to 3 per cent from 2 per cent in the coming years.

Present government should formulate a well thought out telecom policy to make the country a hub of activity for international and local telecom companies in order to attract unprecedented amount of foreign investment into the sector. The new telecom policy should be prepared after intensive discussions and debates with all stakeholders. Tremendous consumer demand, high levels of competition and a government ready to welcome inward investment, should be the salient feature of such a policy. Higher ratio of taxes is a contested area, which needs to be settled in consultation with the cellular operators and business community. Taxes need to be reduced to maintain the telecom sector as the largest recipient of foreign investment.