The issue of tax demand of 49 billion rupees on telecommunication companies (Telcos) by the Federal Board of Revenue (FBR) is being discussed at various forums. Telcos are rightly disturbed by threat of punitive action or a heavy tax liability. They are all professionally managed companies and most of them are multinationals.
In an era in which foreign direct investment in Pakistan has virtually dried up, the way they are being harassed has dire consequences for the investment climate in the country. The Board of Investment (BOI) must play its due role in the resolution of this issue that has the portents to tarnish the image of the country as an investment destination and flight of foreign investors from the Pakistan.
The issue has three aspects: (i) legal (ii) accounting, (iii) history of tax treatment.
But before discussing the taxation aspects, the following clarification may be required from FBR and Telcos:
- Why Federal Excise duty (FED) is charged at 19.5 percent as against the standard rate of 16 percent- what was the reason and logic? Is it because it was on the end-user/caller and was it because it included deemed, value addition, covered by 3.5 percent additional tax.
- Whether 3.5 percent additional amount collected from Telcos also covered value addition, if any on interconnect calls, and whether it had legal coverage by special procedure under the Law.
- What treatment is being given to interconnect revenue and FED, by the companies and how the accounts are settled - clearing house mechanism.
- While registered persons are entitled to input tax adjustment; any supply of interconnect services to non-registered persons, if any, would be taxable on full amount; whether there is such revenue and if there is, is it offered for tax.
Since 2007, FBR is receiving FED on the basis of end use and from the end users. Even where the provinces have received their share of FED collected in sales tax mode; the comprehensive return of sales tax is received by FBR while the Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA) receive one line entry with no details.
The connected three aspects are:
Legal: In the matter of interconnect call services, it is supply of services between two or more entities and is a taxable transaction, unless exempted. In the case, CA 813/2002 to 821/2002 collector of CE and ST V/S Mehboob industries (Pvt) Ltd decided on 21.12.2005, and Dadabhoy cement Ltd V/S Deputy collector of Sales tax decided in 2006 by Honourable Supreme Court such intermediary transaction have been held to be taxable, as has also been held by the I.R Tribunal.
In the interconnect calls among the registered persons, output tax on one is input tax of the other so that in the final analysis, the entries cross out without any net tax, besides, the charge at 19.5 percent, covers the value addition in the process, therefore, on accounting, no tax liability may emerge unless unregistered persons are involved.
Since 2007, FBR has been accepting accounts without revenue from the inter-connect calls separately. It appears that the FBR was content with the basis of tax from the accounting/reconciliation, as historically, it accepted the tax treatment given to the inter-connect calls since 2007.
- Besides, the FBR being in total control of Income tax, and FED matters of the Telcos (most of the companies are paying tax in Islamabad Jurisdiction) it should have looked into these aspects to guide this industry contributing over Rs 100 billion in tax revenue.
How to resolve this issue: (This is entirely a personal opinion, and may not be taken as expert advice that could otherwise prejudice the position of the parties). The purpose of the exercise should be to see whether tax evasion has taken place. Has the exchequer lost any revenue due to it? Whether the entire amount of FED realised from end consumers, including from unregistered persons, if any, on interconnect calls has been offered for tax as output tax amount, and any tax angle or aspect arising from the agreement between the telecoms been fully received in the exchequer in the ultimate analysis.
To overcome all the issues related to inter-connectivity, the Standing Committee of the parliament or the National Accountability Bureau (NAB) that is seized of this matter or the FBR may appoint a reputed firm of Chartered Accountants to audit the accounts for one year, say 2011-2012 or any other year that is deemed fit, to determine whether after adjustment of input, non-offering of FED on intercom calls separately has resulted in revenue loss to the state. The auditing firm's charges for such audit should be paid by Telcos.
The Telcos may provide their entire revenue receipts from end consumers (prepaid, post-paid or any other mode of realising charges and interconnect charges excluding tax amount) and from gross tax - Input adjustment. Where any exemption or exclusion is applied in this equation it is to be justified. In short, it should be reconcilable and should be reconciled.
The FBR should not involve SRB or PRA on collection of FED due to non availability of complete picture and data, or background papers with them. In case the SRB and PRA move to secure their position by issuing notices to Telcos to safeguard their revenue, if not already done, they should not raise tax demand till the issue is finalised.
If after audit, any tax amount is found on account of value addition, or interconnect calls or arrangement with un registered persons if any, or from agreement between the companies, and tax evasion or short payment is found, such short paid amount should be charged from 2007-2012 with levy of default surcharge (and penalty if it is to be levied, in case companies resist making payment).
Telcos should cooperate fully with the FBR officers to get this issue resolved and determine the actual amount due from them and the actual amount paid by them.
(The writer is an advocate on tax matters)
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