The Federal Board of Revenue (FBR) is likely to reduce federal excise duty (FED) on telecommunication services from 21 percent to 16 percent in the 2009-10 budget. Sources told Business Recorder on Friday that the government had imposed 21 percent excise duty on telecom services in budget of 2008-09 to generate additional revenue of around Rs 6 billion.
Thus, all telecommunication services were subjected to FED except those already exempt under the Third Schedule of the Federal Excise Act, 2005. At that time, the FBR had argued that the telecom services were mainly used by well-to-do people, who could afford to pay this levy.
The urgent need for generating additional revenue could be met through 21 percent FED, it said. However, the telecom sector, particularly cellular companies, agitated that substantial increase in FED from 16 percent to 21 percent had created negative impact on the revenue collection due to higher tax rate.
Pakistan Telecommunication Authority (PTA) has also proposed to the FBR to decrease excise duty on the telecom sector. According to sources, the FBR is working out the revenue implications of the proposal to slash FED from 21 to 16 percent on the telecom services from next fiscal year.
In a recent FBR report, the collection from telecom, one of the key revenue generators and an emerging sector, grew only by 7.1 during half of 2008-09. The possible explanation for this meagre growth could be the increased rate from 16 percent to 21 percent announced in the budget 2008-09, the FBR added.
Sources said that the expansion of telecom base would result in increased collection despite reduction in rates. The FBR may propose to the Ministry of Finance to consider this proposal for incorporation in the 2009-10 Finance Bill. If the government approves the proposal, telecommunication services falling under Pakistan Customs Tariff (PCT) heading 98.12 (including all subheadings) may be liable to excise duty at the rate of 16 percent of charges.
THE BUDGET PROPOSAL MAY BE TO LEVY EXCISE DUTY AT THE RATE OF 16 PERCENT OF CHARGES ON THE FOLLOWING TELECOMMUNICATION SERVICES:
-- Telephone services;
-- Fixed line voice telephone service;
-- Wireless telephone;
-- Cellular telephone;
-- Wireless Local Loop telephone;
-- Video telephone;
-- Payphone cards;
-- Pre-paid calling cards;
-- Voice mail service;
-- Messaging service;
-- Short Message Service (SMS);
-- Multimedia Message Service (MMS);
-- Bandwidth services;
-- Copper line based, fibre-optic based, coaxial cable based, microwave based, satellite based;
-- Telegraph;
-- Telex;
-- Telefax;
-- Store and forward fax services;
-- Audiotext services;
-- Teletext services;
-- Trunk radio services;
-- Paging services;
-- Voice paging services;
-- Radio paging services;
-- Vehicle tracking services and burglar alarm services.
Recently, the PTA had conducted an analysis that the increase of FED from 16 percent to 21 percent on cellular sector had failed to achieve the desired results of revenue collection from cellphone companies. The analysts said that the government had enhanced over 40 percent FED/GST rate on telecom sector while this raise was only 7 percent for the rest of the sectors.
The motive behind this raise was revenue generation, which needed to be analysed by tax authorities. Generally, the increase in tax rate has a negative impact on telecom usage and consequently the decline in tax revenues. Since the levy of extra GST, the FBR revenue declined consecutively in subsequent two quarters.
During April-June 2008, the FBR received over Rs 12.4 billion in GST revenue from telecom sector while it received about Rs 11.4 billion during July-September 2008) which was about 8 percent less than the previous quarter. Again, in the quarter ending December, 2008, FBR received Rs 11.7 billion in GST, which was about 6 percent less than the quarter ending June.
The PTA made a comprehensive analysis of increase in FED/GST rate on cellular sector from 15 percent to 21 percent in the budget of 2008-09 and found that taxation measures were unable to achieve the desired results. Analysis showed that with the given increase of tax rate from 15 percent to 21 percent the FED collections declined by 8.53 percent which resulted in loss to government revenue to the tune of Rs 882.8 million in the first quarter of the fiscal year 2008-09.
The same loss would continue in the next quarters if the tax rates remain constant, which has been summarised. The sales tax projections made by the PTA showed that 15 percent sales tax rate would generate more revenue as compared to 16 percent.
The PTA has worked out these projections in tax collection based on growth rates calculated through regressing GST collection on time for different tax rates. In case 16 percent sales tax and 21 percent FED continues in the remaining months of 2008-09, it would further decrease collection from telecom sector due to higher tax rates, the PTA opined.