TELECOM SECTOR IN PAKISTAN

S.M.ABBAS ZAIDI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Aug 16 - 22, 2010

The telecom sector in Pakistan contributes 1-2 per cent in the total GDP and has six to seven per cent share in the total tax revenue per annum.

During FY2010, the telecom sector appeared to be on the path of recovery after the slow growth in the year 2008-09. The total teledensity of the country reached 63.5 per cent in December 2009, which was 62.1 per cent in June 2009. During the first two quarters of FY10, the overall teledensity increased by about 1.8 per cent. The rise has been mainly witnessed in WLL density, which grew six per cent, while the cellular mobile teledensity grew 2.2 per cent in the first two quarters of FY10. However, the fixed line teledensity remained unchanged during the first two quarters of FY10. The main reason for the slowdown in the pace of teledensity could be attributed to the maturity of the market where operators' efforts are now on retention policy, instead of expansion of subscribers.

TELEDENSITY IN PAKISTAN (%)

2004-05 11.9
2005-06 26.2
2006-07 45
2007-08 58.8
2008-09 61.99
2009-10 (Jun-Dec) 63.5

FINANCIAL PERFORMANCE

Soaring inflation, cut-throat competition, expenditure on advertisements, rising utilities expenditures and power shortage have squeezed down the margins of the telecom companies in general. However, despite all these difficulties the revenue of the industry registered a positive growth during the last few quarters. The main reason for this positive growth is attributed to a tax relief provided to the industry in the budget 2009-10, where the tax rate was reduced from 21 per cent to 19.5 per cent.

During July-September 2009, the total industry revenue was reported at Rs81.3 billion while in the second quarter of 2009-10 (Oct-Dec 2009) the industry revenue reached Rs85.88 billion.

During the first half of FY10 (July-Dec 2009), the telecom industry earned Rs167.2 billion revenue as compared to Rs161.8 billion in the corresponding period last year. The cellular mobile sector's share in the total revenue comes to about 68 per cent which has shown a positive growth in revenue generation in the first six months of FY10, where it registered a growth of about five per cent.

The fixed line sector grew about 0.5 per cent during the first half of FY10.

During the first six months of FY10, the telecom sector contributed about Rs48.6 billion to the national kitty through these taxes, of which a major share comes from GST revenues, where the sector deposited over Rs 21.44 billion. A major decline in tax revenues has been observed in activation tax, which is imposed at Rs250 per new connection. Under this head, companies deposited over Rs3.8 billion as compared to Rs14.2 billion.

TELECOM CONTRIBUTION TO EXCHEQUER (RS IN BN)

PERIOD GST ACTIVATION TAX PTA DEPOSITS OTHERS TOTAL
2006-07 36.28 17.60 9.72 36.95 100.55
2007-08 44.61 19.20 10.86 36.96 111.63
2008-09 49.35 14.20 9.15 39.30 112.00
Jul-Dec 09 21.44 3.80 4.91 18.45 48.60

TELECOM INVESTMENTS

Telecom sector has failed to attract handsome inflow of foreign direct investment (FDI) so far in the current fiscal year despite the announcement of multiple new projects and expansion of business.

Investment in telecom sector has recorded steep decline of 72 per cent in the first eight months of FY10 as majority of the foreign-based companies have been avoiding investing capital despite recovery in financial status from the global credit crunch.

The FDI in telecom sector has declined to $205.4 million in Jul-Feb as compared to the landed investment recorded at $736.9 million in the same period of last financial year.

In the last eight years, the FDI in telecom sector has witnessed tremendous growth with the rapid expansion of telephony services and business in the country. The sector has attracted Rs6.768 billion in this period which was the biggest amount comparing with the contribution of other sectors in FDI.

TELECOM IMPORTS

In the year 2008-09, GoP imposed custom duty and regulatory duty at the rate of Rs750 per mobile handset to discourage the mobile imports and save foreign exchange. Consequently, the import of mobile handsets declined sharply and very next quarter of the fiscal year 2008-09 (July-Sep 2008), the cellular mobile handsets imports declined to $70.7 million as compared to $127.6 million in previous quarter. This trend continued for the next quarter as well where the imports of mobile handsets reached just $12 million in Jan-Mar 2008.

However, the imposition of custom duty increased the smuggling of mobile handsets in the country and eventually the country was flooded with smuggled Chinese and handsets of other origins which gave loss to national exchequer.

CONCLUSION

The Pakistan's telecom sector has been burdened with various taxes by different organs of the government of Pakistan. During the first half of FY10, FBR collected Rs21.4 billion against Rs25.2 billion in the previous quarter and Rs24.2 billion in the quarter earlier. During the first half of FY10, GST/CED revenues of the cellular mobile companies dropped about 13 per cent compared to the previous six months while the revenues of basic services declined 18 per cent in the same period. FBR needs to revisit the situation and provide further relief to operators in terms of the rate of GST/CED so that more revenue can be generated.