Telcos and taxes

In support of a wider ICT uptake, this column has been a strong proponent for reducing taxes (WHT and FED) on cellular and broadband services. Last week, the telecoms watchdog published a statement on its website mentioning the 25 percent increase in telecom sectors contribution to the national exchequer in FY16. We find the PTAs statements celebratory tone unwarranted.

The communiqu mentioned that if we compare the growth in telecom revenue vs. telecom contribution to National Exchequer over the last fiscal year, it becomes clear that the Government collections have actually increased by 25% whereas telecom revenues have increased by only 1.47% during the FY 2015-16.

Thats almost a self indictment. A sector where revenues growth is paltry but whose tax contribution is soaring resembles a sector whose activities a government wishes to constrain, on reasons linked to public health/safety or ecological balance. One can imagine tobacco and pollutant-heavy/carbon-intensive sectors as among such sectors, but not the telecoms.

But the high incidence of taxation in telecoms a disproportionately high GST/FED on actual service usage and a double-digit WHT levy on account recharge makes telecoms looks as if it is also one of those non-green sectors.

The claim of higher collections also merits scrutiny. As the illustration shows, GST on telecom services a crude proxy for telecom usage in the country declined for the second straight year in FY16. The PTA statement argued that exemption on data services by the federal and Punjab governments and reduced rate on data services by the Sindh government could be behind the GST decline.

That claim is valid after all, the tax-exempt/low-taxed data revenues have grown their share in cellular revenues to 29 percent in FY16 (FY14: 17%; FY15: 25%). But when one looks at the non-data, taxed revenues of the cellular sector (voice and Sms), then the argument doesnt appear so sound. Those revenues were down in FY16 (Rs247 bn) compared to the FY14 level (Rs269 bn).

Zero tax or low tax on data services is a good step, but lets be realistic. As long as there is that upfront federal WHT on account recharge and as long as cellular operators continue to levy high service charges without providing any service that can pass the legal definition of service usage of telecom services, especially mobile broadband, will not take off, especially with people who are on the low end of socioeconomic spectrum. The PTA, which is now under the administrative control of the MoIT, can publicize higher tax collections all it wants, but it must, at least, keep things in a bit of perspective here.