Telcos and the tax gripe

It’s the budget-making season. And the cellular operators are at it again. News reports last week gave voice to the sector’s concerns over continued imposition of high taxes on the sector in one form or the other. This column has long supported the cause of low telecom taxes in the interest of promoting socio-economic development via modern connectivity channels.

To begin with, the 14 percent withholding tax on account recharge is absurd. That’s not only a high levy in local context, but it is also regressive in the sense that it treats all consumers the same. WHT is a refundable tax, but a large number of folks who fall below the income tax threshold cannot access that refund. One could argue that that’s the downside of not being a tax filer, but that’s another debate.

Then, there is the GST/FED on airtime usage ranging between 18.5 percent (federal) and 19.5 percent (provincial). That again is a disproportional high sales tax. Except for federal territory and in Punjab, data services, in this case 3G and 4G mobile broadband services, are also subject to high FED in remaining provinces, ranging between 18-19.5 percent.

Based on news reports, one gathers that the operators want, among other things, the WHT to be eliminated, GST to be brought down, and future spectrum auctions to be exempted from advance income tax. These measures have long been lobbied for by telco’s, arguing that low taxes can motivate operators to invest more in their networks and also help accelerate broadband uptake.

So far, nothing significant has come out of that advocacy. Last fiscal, telecom contribution to the exchequer grew by over 25 percent, driven mainly by the 4G spectrum auction proceeds even as overall telecom industry revenues grew only marginally. GST collection was also marginally lower, and it might fall this year, too, as basic cellular revenues (voice and Sms) decline and give way to data services.

In view of recent past, the federal government will be loathing to eliminate WHT, or even reduce GST in the coming budget. The concerned ministers can respond that they have kept broadband usage – the lucrative new revenue source for operators – tax exempt, including in the largest province where the same political party governs. But there is still room to do more. It will be good if the federal government can use its sway with the provinces to keep broadband services tax-exempt across the board.

One supports the operators’ case for rationalizing the tax burden on customers. But their case will remain undercutting so long as operators keep charging their users hefty “service charges” on every account recharge without actually providing any tangible “service”. WHT is not the only reason behind cellular users exhausting about a quarter of their recharge’s value before they even dial or text someone. Operators, too, have a fair share in that.