To improve the affordability of mobile services and encourage the adoption of communication services, especially for lower income segments in Pakistan, the global mobile industry association (GSMA) has proposed gradual abolishment of Advance Income Tax (AIT or withholding tax) on essential telecom services.
In a letter to the Federal Board of Revenue, GSMA has made key recommendations on tax reforms to accelerate the digital economy including the reduction of AIT from 15% to 8% in the upcoming federal budget as envisaged in the Finance Act, 2021 and repealing the increase in AIT rate made through the Finance (Supplementary Act) 2022.
As per the report mobile consumers face a high-level of sector-specific taxes in addition to general taxes. There is 19.5% sales tax on mobile services, plus 15% AIT, which is amongst the highest in the region. This creates additional barriers to digital inclusion, for low-income households. Removing sector specific consumer taxes would accelerate digital inclusion by facilitating access and usage of mobile services. Such a reduction of consumer taxes would generate higher government tax revenue and GDP in the medium term. This would result from the expansion of the mobile sector and the induced growth in productivity.
Moreover, the AIT is particularly regressive given many users on low income are not required to, and do not, file their tax returns and therefore are unable to claim the tax back. Therefore, the application of this tax to entire telecom subscriber base only disproportionately adds to the cost of mobile ownership for poorer individuals and further deepens the gap in mobile ownership and usage.
Over the past decade, the mobile sector in Pakistan has expanded rapidly, enabling life-enhancing benefits such as financial inclusion via mobile money, access to educational resources and connected businesses. As highlighted by the Prime Minister’s Digital Pakistan vision, the mobile sector plays a critical role for the development of the country’s economy and its digital transition.
However, there remains a significant unconnected population in terms of unique subscribers. The GSMA estimates that about half of Pakistan’s population (43% unique-subscriber penetration) remains unconnected to a mobile network and only 30% population (unique penetration) are using mobile internet services which is lower than the average in South Asia.
The tax contribution of the mobile sector in Pakistan remains considerably higher than the average for Asia and other regional averages which constrains mobile operators’ ability to invest in connectivity, as well as the availability and affordability of mobile services to consumers.
In 2020, the total tax contribution of the mobile sector, amounted to Rs170 billion ($1.1 billion), equivalent to 38% of mobile sector revenues. Furthermore, this is substantially higher than the Asia Pacific average (24%) and the global average (22%).
GSMA further highlights that the 100% cash margin restriction on imports imposed by the State Bank of Pakistan should be removed for telecoms equipment, to avoid jeopardizing current and future network roll-out. Custom duties should be reduced on batteries used for telecom infrastructure to encourage green energy use.
A conducive regulatory environment, especially the tax framework, is required to accelerate countries’ digital transformation and maximise the benefits of connectivity.
All the suggestions made by GSMA make sense!!