On broadband tax

The coordination between federal and provincial governments on telecom related taxes should be improved. For the next fiscal, the federal government has not increased withholding tax or sales tax (here, collected as “FED”) on users of telecom services in federal jurisdictions. However, the Sindh government has increased the sales tax on telecom services by one percentage point, effective from July 1.
To recall, back during the FY16 budgetary exercise, the federal government had reduced FED on telecom services from 19.5 percent to 18.5 percent. Moreover, it had also reduced the withholding tax rate from 15 percent to 14 percent. Among the provinces, Balochistan, Khyber Pakhtunkhwa (KP), and Punjab were each charging 19.5 percent sales tax in their territories. Sindh was charging 18 percent sales tax.
For broadband Internet, there is more disparity among the federating units. The federal and the Punjab governments have not been taxing broadband. Nor have the two proposed any new broadband tax this summer. Balochistan and KP have been levying a 19.5 percent Internet tax, which apparently remains the same for next fiscal.
After the FY16 budget, residents in Sindh with Internet bills exceeding Rs1500 per month were paying an 18 percent tax. If the Internet speed was below 2Mbps and the billed entity happened to be non-commercial in nature such as households or academia, there was an exemption from this tax. But for a service exceeding the 2Mbps data rate, an 18 percent Internet tax was charged on the total amount.
There has been a favourable change in Sindh’s FY17 budget. “In respect of Internet and broadband services, the prescribed exemption limit for non-business household users, students and researchers will also be enhanced up to 4 mbps speed and a monthly bill not exceeding Rs2500,” as per a budget brief prepared by Ernst & Young following the Sindh budget last week.
While the latest budgets don’t worsen the calculus on Internet tax, the fact that such a tax is being levied in three out of four provinces is a cause of concern. Surely, provincial governments are within their mandate to levy or alter different forms of service tax. But if broadband has to be made accessible and affordable to more people in this country, especially to those in rural areas, it would need a helping hand, not an obstacle in the form of a service made expensive thanks to a heavy tax.
There is, of course, big solace that the Punjab government has not slapped the broadband tax. With more than half of the country’s population living there, Punjab is a major battleground state for 3G and 4G operators. Reportedly, the provincial government had considered withdrawing in this budget the broadband tax exemption that was given last year. That has, thankfully, not happened so far.
There is the same party, the PML-N, ruling at the centre and in the largest province. It won’t like to put off telco’s further by levying broadband tax, which was reversed in Punjab last year after a lot of unease. But the federal government must do more than just satisfy telecom investors in Punjab. For more broadband uptake in this low-income market, the least the finance ministry – everyone knows the Q block calls the shots on money – can do to encourage all the provincial governments to eliminate broadband tax.