ICTs in the budget

Evaluating the latest federal budget’s taxation measures for the local Information and Communication Technologies (ICTs) industry, it appears that the trajectory of putting incremental burden on the digital economy and service providers is not reversing anytime soon. These are fiscally-straining times for the government, so extra taxation pressure is bound to be felt by businesses, including telecom & IT players.

On the telecom side, FED on airtime usage has been raised from 16 percent to 19.5 percent for the Islamabad region. This is not a huge increase in tax burden on end users as majority of them won’t likely spend more on airtime – but this move will negatively impact telecom players’ revenues. Meanwhile, provinces havealready been charging 19.5 percent sales tax on telecom usage in their jurisdictions.

The operators won’t like this at all, as it comes after the withholding tax (WHT) on airtime recharge was raised by the previous government to all-time high level of 15 percent six months ago in the mini-budget. Previously, the former federal government’s pledge was to bring the WHT down to 8 percent. The current government has not raised the WHT, perhaps thinking it was already too high. Hence the move on FED.

With an eye on preserving forex reserves and raising higher tax revenues, the business of importing mobile phones has been made even costlier. For instance, the mobile phone levy on imported handsetshas been further enhanced in the budget. The new levy ranges from Rs4,000/set priced between $350-$500 (previously Rs3,000) to Rs8,000/set priced between $500-$700 (previously Rs5,000). Already, mobile phone importers are subjected to 100 percent cash margin requirement before opening their LCs.

Moreover, advance tax on mobile phone imports has been revised. For instance, finished (CBU) mobile handsets with import value between $350-$500/set will have advance tax at Rs5,000 each (Rs3,000/set earlier). However, to encourage local assembly, CKD and SKD mobile phones in the same price range will have advance tax at Rs3,000/set (Rs5,000/set earlier). On the other hand, imported CKD kits for local phone assembly will carry sales tax at 10 percent of import value, as opposed to just Rs10 per set earlier.

In addition, optical fiber cables (OFC) have been made expensive by doubling regulatory duty on their imports to 20 percent. It is not a gigantic increase, but there was no need for it, as local OFC production requires competitiveness instead of protection. Pakistan needs massive investments in fiber optic infrastructure so that broadband services can be expanded to un-served and under-served population segments. Government must have a clear policy on this issue and make it easier to invest in this space.

In the end, as per the finance bill, IT firms registered with Pakistan Software Export Boardwill now pay 0.25 percent income tax (final tax) on export earnings related to software &IT services at source (deducted by bank). Un-registered firmswill pay 1 percent tax at source on IT export proceeds. With that move, government has withdrawn 100 percent tax-credit incentive that was previously available to eligible IT firms on all their payable taxes related to IT exports. Let’s see how this tax move impacts IT exports.