Telecom services, consumer devices: Taxes are among highest in the world: GSMA

ISLAMABAD: Taxes on telecom service providers, consumer devices and services in Pakistan are among the highest in the world and the policymakers should gradually eliminate the 15 percent Advance Income Tax (AIT or withholding tax) on essential telecoms services and the 19.5 percent sales tax on mobile services, which create additional barriers to digital inclusion for low-income households.

This was recommended by GSMA in its report, “Realising Pakistan’s Aspiration to become a Digital Nation,” launched here on Wednesday at its Digital Nation Summit held in Islamabad.

GSMA stated that these taxes, some of which are sector-specific, often impact network investment affordability and have a disproportionate impact on the most vulnerable. The recently introduced Pakistan Finance Bill imposes a sales tax on low-cost mobile handsets and a steep advance tax on telecom services for specific taxpayers. Additionally, it mandates mobile network operators to disconnect services for non-compliant users.

To mitigate the potential harm to digital inclusion and broader access, it is suggested that the sales tax on affordable mobile phones be removed. Furthermore, reducing the advance tax on telecom services could encourage wider usage. By implementing incentives and educational programs, the government can foster voluntary tax compliance. Finally, exploring alternative revenue sources can support the digital economy's growth without compromising essential services.

The report further noted that Pakistan is planning a 5G spectrum auction scheduled to be completed by early 2025. Mobile operators in Pakistan currently have around 270 MHz of licensed spectrum and the potential addition of new spectrum bands such as 700 MHz, 2.3 GHz, 2.6 GHz, and 3.5 GHz are necessary to support the expansion of network capacity and the deployment of 5G.

Yet spectrum cost in Pakistan is already high and ARPU have been declining. Thus, it is imperative that a rational approach to pricing is adopted for the upcoming auction so that the total cost of spectrum is sustainable and operators have the right incentives to invest in network rollout which delivers affordable connectivity to more consumers and lower the broadband usage gap and the digital divide.

Additionally, denominating spectrum costs in US dollars exposes the operators to significant currency devaluation risk, given that the depreciation of the local currency adds to higher spectrum fees paid in US dollars. The unpredictable currency value impacts business plans and eventually affects company revenues and the retail price for consumers.

As a result, policymakers should consider denominating spectrum payments in local currency, which would provide greater certainty for operators, given that revenue is also earned in local currency.

Adopt a framework for financing smartphones for all - Smartphone uptake across and within regions and markets is uneven, which risks leaving large population groups without the means to get online. Smartphones are one of the most used devices to access the internet but are not affordable to everyone.

Beyond income levels, several supply and demand factors can influence smartphone affordability, including manufacturing costs influenced by factors such as import duties, taxes and transportation charges, and inadequate distribution channels in rural areas.

The report also noted that service restrictions order (SRO) has negative impact on citizens and businesses in Pakistan. The imposition of these restrictions violates individuals' rights, as outlined in international human rights conventions, including those integral to democratic processes and elections such as freedom of expression, access to information and privacy.

Prolonged restrictions can also have far-reaching negative effects on citizens’ health, education social and economic welfare, and damage trust. In addition to the harm imposed on businesses, restrictions can disrupt credit and investment plans, damaging the country's reputation for managing the economy and foreign investment.

The government should instead support initiatives like "Always-on Network Service"(AONS), which enables accessibility for business-critical mobile applications such as financial and payment applications and emergency services in data-restricted geographical areas. This initiative, which was developed by GSMA and mobile operators in Pakistan, has undergone several successful trials in controlled settings for regulatory authorities.

In view of the challenging operational environment, including forex and inflationary headwinds, policymakers should consider the measures to mitigate economic pressures and spur long-term planning including; review and freeze the forex rate for license-fee payment to mitigate currency risk and remove uncertainty in business planning, stagger license-fee instalments over 10 years to provide the much-needed fiscal space and ease cash-flow pressures, review policy-mandated levies, such as universal service funds (USFs) and research and development (R&D) contributions and consider a moratorium on rollout and quality-of service obligations.

The report that Pakistan has witnessed rapid expansion in mobile broadband networks. Around 81 per cent of the adult population now reside in areas covered by 3G or 4G networks, a substantial increase from just 15 per cent in 2010. Smartphone adoption has also risen significantly, with 63 per cent of the population owning smartphones by the end of 2023.

However, only 23 per cent of the population subscribe to mobile internet services, leaving a high usage gap of 58 per cent. Key adoption barriers include lack of affordability, particularly for devices, and lack of digital skills, particularly among older citizens.

Copyright Business Recorder, 2024