Dec 08 - 21, 2008

The Telecom Industry of Pakistan which was showing a fantastic growth of about 50% annually for the last 5 years has taken a reverse turn during the current (2008-2009) financial year. This decline is attributed mainly to heavy taxation introduced on mobile phone in July last. The Government is now charging Rs.31 in the shape of taxes on Rs.100 prepaid card from cellular subscribers. This move has resulted into zero growth of this sector in the first four months (July-Oct) of the current fiscal year.

Chief Executive of Ufone while talking to newsmen on the launching of a new call center in Industrial sector Islamabad last week revealed that the increased taxation has virtually stalled growth of the rapidly growing cellular sector in the country. The GST has been increased to 21%, duty on a hand set has increased to Rs.750, and continuation of pre-activation charges of Rs.500 as well as service charges have all increased the burden of users manifold.

This would also result in shrinking of government revenue from this sector, he said adding, "Our sector contributed Rs.100billion to the national kitty (with low rate of taxation) during the financial year 2007-08. We have suggested to the government to reduce the tax on cheap mobile sets and keep it as low as Rs100 and on the other side it can increase the tax on expensive mobile sets by up to Rs750 and above according to their prices. But this was not done". The new tax is badly affecting the sales of legally imported handsets in the organized sector where 80 per cent sales are of cheap handsets.

Mobile and telecom industry has emerged as a great cash generator for national treasury in last few years. In the year 2006-07 the telecom sector contributed two percent of the GDP. Almost reaching the saturation point in cities the mobile companies are now planning to expand their networks to villages and suburban areas which offer a high potential for inexpensive mobile sets. Had the government used some brain it should not have ordered a uniform tax of Rs500 on all types of sets.

Sliding slabs should have been introduced starting from Rs100 on a set' costing up to Rs3000 and Rs3000 per set costing Rs50,000 and above. In this way the government would have been able to have the desired increase in its revenue without hurting the growth momentum of the industry, a source confided to this correspondent. Increase in taxes and duties on telecommunication services in the budget for the current fiscal year 2008-09 would have negative impact in attracting fresh foreign direct investment in telecommunication sector and on overall economic growth of the economy, he said

Mobile phone companies have invested $6billion during the last 4 years in their infrastructure to provide reliable services to their consumers and created around 1 million job opportunities across the country. According to the industry experts, the mobile phone industry, which has already tapped the market in the urban areas of the country, is planning to invest heavily in infrastructure to expand services in remote and far flung areas.

At present mobile phone companies have already sold 80 million connections to the consumers but the actual numbers of live consumers stand at 50 million. The companies were aiming at increasing their customers' base to at least 100 million by expanding their services in remote and far-flung areas of the country. But the sudden shift in fiscal policy for the telecommunication services has threatened the expansion plans of the mobile phone companies, especially in the rural areas of the country where income level is comparatively lower, they lamented.

According to them the result of additional taxes, contrary to the aim of government, will result in reduced usage and expansion of the services resulting in lesser revenues. During budget making exercise the representatives from the mobile phone industry proposed the government to eliminate Rs500 per connection activation charges, which are borne by the companies and not by the consumers.

Both local and foreign investments in the telecom sector declined by almost 25 % during the last few months as authorities believe that major players are reluctant to move with expansion plans in rural areas. The main reason behind loss of interest in the sector, which emerged as the single largest area of investment during last three years, was higher ratio of taxes.

The Pakistan Telecommunication Authority (PTA) in its annual report, released recently, stated that for the first time since 2002-03 the sector received lesser chunk in foreign direct investment in 2007-08. The report attributes the decline to low investments by the operators in rural areas which they feel are less lucrative as compared to urban areas. "Moreover substantial taxes could be another reason to stop investors from further expansion," it notes. The telecom sector attracted a total investment of $3.1 billion in 2007-08 as against $4billion the previous year. Of this $1.4billion were received in foreign direct investment, which amounted to 28 % of the total FDI the country received during the year under review.

However, last year the sector had attracted 35% of the total FDI. "Of the total FDI in telecom, $133.2million was the privatization proceeds, 50% lower than the previous year. The highest contribution in FDI was $486million by Telenor, a Norwegian company. The telecom regulator showed serious concerns over higher ratio of taxes mainly on cellular mobile sector imposed in last year's budget and warned that increased slabs could lead to further cut in the FDI.

A delegation comprising senior executives of telecom industry called on the relevant government authorities in Islamabad last week. They informed them that because of new measures of taxations introduced by the Government in the current year budget, the total cost of mobile ownership in Pakistan has become one of the highest in the world.

The representatives were of the view that government should take such steps which allow the consumer base to grow as it would result in increased investment in the infrastructure and hence more revenues for the government as witnessed in the last four years. But the government has not only increased the federal excise duty rate from 15% to 21%, but also slapped custom duty on mobile phone set.

Growth in mobile phone sector has also provided good basis to the economy to grow in the last 4 to 5 years and this sector is required to continue with the growth pattern to serve the rural population. "Other options like taxing stock market or direct taxation of rich should have been looked into as compared to burdening the existing taxpayers or consumers," they added. Urging the government to revise the uniform levy on mobile sets, the industry sources have reminded the government that Pakistan has been emerging as a location of choice for the outsourced software development and IT enabled services such as call centers and medical transcription.