Taxing broadband

Broadband acts as an enabler of human rights and freedom of expression. That’s why the United Nations and other global bodies insist on universal access to internet, or right to broadband. Many governments in both rich and poor regions now have universal broadband programs. Taxing internet access, however, is deemed a step in the opposite direction. Just yesterday, the US Congress passed a bill proposing long-term extension to the ban on state and federal taxes on internet access.
Much hue and cry ensued following the Punjab government’s May 28 notification that levied a 19.5 percent sales tax on internet usage. It isn’t exactly a gloom and doom scenario which certain bloggers and industry officials may have us to believe. But this tax – which has been levied by the Sindh government since FY14 and the Khyber Pakhtunkhwa (KP) government since FY15 – may be restrictive insofar as future broadband uptake is concerned.
The outrage after the tax’s imposition didn’t get the facts right, so the confusion regarding the said tax needs to be removed. The provincial finance department’s notification amended Serial 6 of the Second Schedule of the Punjab Sales Tax on Services Act, 2012. Previously, internet services (dial-up and broadband) were not taxed, while all other telecom services were uniformly taxed at 19.5 percent in the province.
Following the May 28 notification, all internet usage (relating to fixed (e.g. DSL), wireless (e.g. EvDO), and mobile (3G/4G, broadband) would be taxed at a GST of 19.5 percent. Whether you use a 100 rupee data bucket or subscribe to a 1000 rupee data plan or avail an unlimited package exceeding Rs1500 a month, in the future, the 19.5 percent sales tax will be charged on all internet packages availed in Punjab.
Also, the said tax will be applicable regardless of whether you’re using a 1Mbps broadband service or 10Mbps service. Whether that tax will remain inclusive or exclusive of the current advertised tariffs is something the broadband service providers would be grappling with right now.
But there are notable exclusions, relating to academia and software industry promotion. The notification exempts from this tax “internet services provided exclusively to educational institutions through dedicated lines or connections for the use solely in education and research activities within the specified premises of such institutions.”
Also excused would be “student package of Internet services meant exclusively for students of educational institutions… of up to 2Mbps speed valued at no more than Rs1500 per month per service recipient.” The pre-existing relaxation on “international leased lines used by software exporting firms registered with the Pakistan software exporting board for software exports” also continues.
With that background in mind, two issues relating to the growing incidence of internet taxes in Pakistan need to be looked into. First, these taxes will make internet access expensive, hurting low-income users the most. If the concern that these taxes will significantly lower urban broadband consumption is indeed realized, it will affect service quality as well as operators’ infrastructure roll-out towards rural areas.
Second, a taxation hotchpotch in different jurisdictions – whereas federal government has so far refrained from levying this tax, Sindh applies the internet tax differently compared to Punjab – will make it cumbersome for operators to create, price and promote broadband packages for different provinces. Compliance costs go up, too.
This column would argue that, at the very least, there should be no taxes on individual’s access to internet. It won’t be unreasonable to tax commercial usage of internet if a certain bandwidth threshold is breached by a business. Services which are built around internet, such as e-commerce transactions, can also be taxed.
The fact that broadband penetration is yet very low among individuals and businesses here, the federal government would do well to intervene on customers’ and companies’ behalf. But Punjab, Sindh and KP won’t back down easily. At best, these taxes will be reduced under civil society pressure, but not entirely eliminated. The irony is that Punjab and Sindh governments are also promising free Wi-Fi!