The reduction or elimination of the current activation tax on new mobile phone connections is essential if the mobile industry is to continue attracting foreign direct investment (FDI) in telecommunications. If today's Rs 500 activation tax is reauthorized in the next federal budget, something's got to give.
Up to now, foreign investment in telecommunications has been strong, representing 54 percent of all FDI in 2006. But this level of investment will no longer be sustainable under the current activation tax scheme, which exists in only a handful of countries around the world.
The mobile industry already contributes 35 percent of its total revenues to the government. This level of contribution will continue increasing even if the activation tax is reduced or eliminated. Significant increases in annual taxes generated by the mobile industry will continue because without the onerous taxes on the entry of new subscribers, more consumers in the nation's numerous rural communities will be able to afford mobile phones, and these consumers will still pay VAT and other taxes.
What is wrong with the activation tax? The activation tax is a regressive form of taxation, posing a formidable barrier to mobile telecommunications for low income families. Aware of this situation, until now mobile operators in Pakistan have subsidised this tax. But there is a trade-off. Operators subsidise the tax in order to attract new subscribers, but this has limited their ability to expand coverage, especially into rural areas. As the mobile industry in Pakistan has become hypercompetitive among six players-five of them backed by strong parent companies-continuing the subsidies at the current taxation level of Rs 500 per new subscriber is simply no longer sustainable.
Policy makers at all levels now know that Pakistan has adopted an excellent framework for telecommunications reform, allowing the country to take full advantage of capital surpluses in oil producing countries in the Middle East and Northern Europe, as well as China. As a result, last year over $2 billion was invested in Pakistan's telecommunications sector, representing well over half of all foreign direct investment.
Over the last three years, FDI in the telecoms sector, especially in mobile, totalled $9 billion and has been crucial to balancing Pakistan's current account deficit. Pakistan's privatisation has sparked these new investments, which led to creation of new companies (Telenor Pakistan, Warid), and expansion of existing firms (Mobilink, Ufone, China Mobile Pak). All this entrepreneurial growth has driven new job creation, adding 1.3 million jobs in engineering, marketing and sales as well as in real estate and construction as thousands of new cell sites are built.
A recent report by the international consulting firm, Deloitte, showed that the mobile industry is the leading sector behind Pakistan's recent spurt of economic growth. As the mobile industry grew from 4% to 35% of mobile penetration, it added 1.2% to GDP growth per each additional 10% increase in penetration. Prices per minute of usage in Pakistan's mobile networks have plummeted, demonstrating that the industry has also had a positive impact in containing inflation.
This entire process of industry expansion, job creation and economic growth has been driven by sound telecommunications policies. One of the most significant of those key policy decisions was to reduce the activation tax in 2005 from PKR 1000 to PKR 500.
This move has been proven by the Central Board of Revenue (CBR) to benefit both mobile penetration and total tax collection. The tables will turn again, however, if the activation tax is maintained at PKR 500, given the industry's new competitive landscape. It is time to reduce or completely eliminate the activation tax. The government of Pakistan, including the CBR, has only to gain from reducing or eliminating the activation tax. Tax collectors can do lots of things, but killing the layer of golden eggs should not be one of them.
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