Telecom operators call for tax exemptions, reforms in FY25-26 budget

The Telecom Operators Association has urged the government to address key fiscal and policy issues in the upcoming budget for the fiscal year 2025-26 to ensure smooth operations for telecom companies. 

In a letter to the finance minister, the association emphasized the telecom sector’s crucial role in economic growth, digital inclusion, and employment generation, while highlighting several challenges the industry faces.

The association has specifically requested exemption from withholding taxes, which are a significant compliance burden for cellular mobile operators (CMOs). 

These operators, as major utility providers, face complex and costly tax compliance due to numerous transactions subject to deductions under the Income Tax Ordinance (ITO) 2001, including utility bills, sales to corporate customers, and imports. The current withholding tax system is seen as administratively burdensome and detrimental to the business environment in the telecom sector.

To improve tax compliance and create a more favorable business environment, the telecom industry has proposed an extension of exemptions from withholding tax provisions under the ITO 2001. This change would streamline the tax payment process, allowing CMOs to make quarterly advance tax payments without causing any revenue loss to the Federal Board of Revenue (FBR).

Another concern raised by the telecom industry is the Finance Act 2015’s modification to Section 153(1)(b) of the ITO, which replaced adjustable withholding tax with a fixed minimum tax on services. The 4% minimum tax rate on telecom services is viewed as disproportionately high, especially given the sector’s financial difficulties and challenges due to discriminatory taxation. 

The association has called for reinstating the adjustable withholding tax to ease the financial burden on telecom companies.

In addition, the association has expressed concerns over the aggressive tax enforcement measures, such as freezing bank accounts and halting business operations, which they argue should be used only when absolutely necessary. 

The association believes that recovery actions should be differentiated between habitual tax defaulters and compliant taxpayers, and that these measures should not disrupt business operations unnecessarily. It also urged that recovery proceedings should only begin after an appeal has been decided by an independent appellate forum, such as the Appellate Tribunal.

The association also called for tax relief for telecom sector employees, noting that the recent surge in income tax on salaries, coupled with high inflation, has made it more difficult to attract and retain skilled workers. To address this, the association recommended sector-specific tax reforms, including inflation-adjusted tax brackets, increased exemptions for essential expenses, and lower withholding tax rates.

The telecom industry has also requested a reduction in income tax and Federal Excise Duty (FED) rates. Currently, income tax under Section 236 of the ITO 2001 is set at 15%, an increase from 12.5% in 2022. The applicable FED rate has also risen from 16% to 19.5%. The association argues that reducing these taxes would promote growth rather than hinder it, especially since telecom products are already priced with taxes included.