The current treatment of the mobile sector in Pakistan, including higher taxes and fees, may reduce affordability and lead to inefficient investment decisions and reduced returns on investment, besides creating potential issues arising from the complexity and frequent changes of the tax regime as well as uncertain business climate, says a new Global System Mobile Association (GSMA) report.
The mobile industry recognises that its fiscal contribution remains critical to financing public expenditure in Pakistan. However, the current treatment of the mobile sector may be limiting growth in connectivity that could not support each of the seven pillars of the Vision 2025 strategy, said the GSMA report 'Current Overview: Pakistan, a Digital Future,' exclusively available with Business Recorder. The report would be formally launched in March this year.
The report said that mobile penetration and internet usage in Pakistan are notably lower than other comparable markets, and a key factor in this regard is taxation, which may impact on consumers and wider mobile ecosystem.
Mobile subscribers in Pakistan are affected by taxes that apply to devices, SIM cards and usage charges. These taxes are especially likely to affect prices ultimately paid by consumers and may have a particularly strong effect on the poorest consumers. Many of these taxes are sector-specific or have higher rates for the mobile sector than other sectors of the economy.
Taxes on mobile devices and on the issuance of SIM cards increase the cost of accessing mobile services, which could constrain mobile penetration, it said.
The report recommended that reducing the rate of sales tax/FED on mobile services has the potential to reduce prices for consumers. A reduction from the current rates of 18.5-19.5 per cent to a uniform 17 per cent could generate an additional 1.8 million connections over the four-year period to 2021, potentially increasing GDP by $1.2 billion in 2021. Across the wider economy, total investment could increase by a combined $480 million over the same period.
Compared to the rest of South Asia, Pakistan scores particularly poorly on infrastructure and consumer readiness, and concurrently, mobile internet penetration is 29 per cent versus a regional average of 32 per cent. In comparison to other discoverer countries world-wide, Pakistan scores fairly well in terms of infrastructure, affordability and content. However, one particular area of concern is consumer readiness.
Following this heavy investment, 3G coverage reached 65 per cent by the end of 2015, and by mid-2016, just under three quarters of the Pakistani population had access to 3G services. With continued investment - forecast to reach $2.8 billion over the next four years (not including any additional spectrum costs) - 90 per cent of the population will be covered by the end of the decade.
With only two operators, 4G rollout has proceeded more slowly, reaching 18% of the population by mid-2016. However, with Mobilink acquiring Warid and Telenor beginning 4G rollout in August 2016, 4G coverage will rapidly increase to 80 per cent of the population by 2020.
The report states that Pakistan has an emerging mobile industry: there are approximately 90 million unique subscribers in the country, accounting for 47 per cent of the population. However, the enablers of mobile internet connectivity including infrastructure, affordability, consumer readiness and content, all rank low in Pakistan relative to its neighbours.
These enablers are critical to creating the right conditions of supply and demand for mobile internet connectivity to flourish. Pakistan therefore has one of the lowest penetration rates in South Asia, maintained in the report.
Although mobile broadband (3G and above) coverage has increased rapidly since its launch in 2014, reaching 75 per cent of citizens by mid-2016, uptake has remained low; as of June 2016, only around 10 per cent of Pakistanis subscribed to mobile broadband services. This is the lowest of any South Asian country, except Afghanistan.
Many citizens either cannot afford or do not know how to use the devices and services that deliver mobile broadband.
Over the next three years, mobile subscriber penetration will grow to just over half of the country's population - only a small increase from now, the report maintained.
Today's users will accelerate their transition to mobile broadband from 2G services, with improved network coverage and more affordable smart phones the key drivers.
By 2020, mobile broadband will be accessed by about a third of the population, albeit predominantly those migrating from 2G. Given the lack of fixed line broadband connectivity in Pakistan, the digital divide - between those that have access to the internet and those that do not - will remain substantial.
Pakistan is an emerging digital society: digitisation is still in its early stages, and is used mainly as a tool for accelerating socio-economic development, particularly in improving digital and financial inclusion. However, through its Vision 2025 strategy, Pakistan aims to complete its transition to a knowledge-based economy, creating a globally competitive and prosperous country that provides a high quality of life for all its citizens.
Vision 2025 aspires to a more advanced digital society: digital development can drive increased engagement between individuals and institutions, provide huge growth potential and productivity gains in all sectors, and enable more advanced and innovative government services.
Pakistan's mobile sector is in a unique position to support the country's digital development for three key reasons: mobile can connect more people than any other technology, particularly in underserved rural areas; mobile can provide secure access to a variety of digital services such as health and education; and mobile can provide a platform to provide financial inclusion, engaging many people in the economy for the first time. In parallel, innovative services that run over mobile networks can support many of the government's Vision 2025 objectives, such as increasing enrolment in education, improving food security and driving private sector growth.
Mobile operators in Pakistan are playing their part in innovating to deliver the services that will accelerate progress towards the goals of Vision 2025 and in doing so generating growth, jobs and investment in the wider economy. But they have an opportunity to do more. Today, more than half of Pakistani citizens do not subscribe to a mobile service, and some (predominantly rural) areas of the country do not have high-quality mobile broadband coverage at all. There is a clear role for the government in addressing some of the factors that lie at the heart of this issue, and its agenda must focus on the following areas.
Taxes and regulatory fees are applied specifically on the mobile sector, including a tax on SIM cards (a relatively rare form of taxation) and various regulatory, numbering and administrative spectrum fees levied on mobile operator revenues. With this different treatment of mobile services compared to other goods and services, the mobile sector contributes around 38 per cent of its revenue in tax and regulatory fee payments, which is higher than most of the countries.
These higher taxes and fees on mobile services may reduce affordability; for example, for the poorest 20 per cent of the population, the total cost of mobile ownership may account for as much as a fifth of average annual income. Taxes and regulatory fees in Pakistan represent a large share of final consumer costs compared to other countries in the region, and could be preventing more widespread uptake of mobile services, including mobile broadband.
It further recommended that reducing taxation on mobile services to be more in line with other goods and services, and simplifying the structure of taxes and fees, could support economic growth, investment and fiscal stability.
It recommended that removing the SIM card sales tax has the potential to make mobile more accessible. Elimination of the sales tax could generate almost one million new connections over the four-year period to 2021, potentially increasing GDP by more than $600 million in 2021. Increased activity in the mobile sector may increase employment in the sector and the wider economy by more than 2,000 employees.
Reducing regulatory fee has the potential to create a more favourable environment for investment. Elimination of the annual licence fee could generate almost 200,000 new connections over the four-year period to 2021, potentially increasing GDP by $140 million in 2021. Increased investment by the mobile sector may lead to 250 new or upgraded mobile sites by 2021 and 500 new jobs created in the mobile sector alone.
Given the myriad taxes and fees imposed on the mobile sector, further reforms may be possible in order to generate similar benefits. Mobile operators are not currently considered industrial undertakings, meaning they face different treatment compared to other sectors in relation to certain taxes. Addressing this issue could lead to a simpler and less distortionary tax structure.
Customs duty and sales tax levied on imported handsets are applied using flat rates, which have a greater impact on the poorest consumers. Reducing these taxes may lower the cost of mobile ownership and drive higher penetration.
In the short-term, the government may consider alternative ways to cover the tax revenue shortfall from removing sector specific taxes. Based on the 2016-17 budgets, a modest increase of less than 0.5 per cent of total general sales tax (GST) may be sufficient to cover revenue shortfalls for each reform scenario. This estimate is intended to provide perspective on the scale of tax revenue shortfalls. Aside from changing the GST rate, changes to other general taxes, such as direct taxes, are alternative options.
Three key areas require immediate attention: Firstly, a competition policy that considers all market players, not just telecoms service providers, in a technology-neutral environment aimed at preventing bottlenecks and exclusionary conduct. Secondly, clear and simplified licensing practices based on function rather than technology or legacy industry structures, which can accommodate the rapidly changing market and encourage investment and innovation. Thirdly, a new framework for physical network cooperation (including network and spectrum sharing) that is light-touch and focuses on general competition principles and transparency. Without policy reforms that reflect this changed digital landscape, markets will become further distorted, and investment and innovation will be put at significant risk. There is a real opportunity for the government, institutions, mobile operators and the wider mobile industry to work together to make these regulations a better fit for the modern digital ecosystem, it added.