The golden goose shall never rest easy. Fresh off a postponed spectrum auction, the country’s telecom sector has been jolted by the federal budget. The FY22 Finance Bill initially proposed additional duties on mobile phone calls (Rs1 per call if duration exceeds 3 minutes), Internet consumption (Rs5 per GB of data usage), and text messages (Rs0.1 per SMS). Using FY20 official data, Rs5/GB levy on Pakistan’s 4.5 billion GB of annual data usage alone would have netted the treasury Rs22.5 billion per annum.
That money going into the kitty would be a nightmare for telecom executives as customers will cut down on spending and it would be quite a complex task to implement flat FED rates in a market where users tend to prefer bundles or packages. Lucky for them that as this move caused an uproar, the government had to retreat. First the energy minister tweeted just a few hours after budget announcement that “The PM and Cabinet did not approve the FED levy on internet data usage. It will not be included in the final draft of the Finance Bill…”
So, it first appeared that the government would put additional FED only on mobile phone calls and cellular texts, and not on Internet. But the following day, the finance minister said all three levies were off the table. Confusion still persists. Let’s wait for the revised Finance Bill and eventually the approved Finance Act. As of now, this U-turn, especially on Internet consumption, is welcome. Folks have grown accustomed to over-the-top messaging apps like WhatsApp to text and make calls. So, Internet is not going to get dearer, at least not due to a fiscal faux pas that seems to have been taken care of.
In fact, the withholding tax (WHT) that is deducted on account recharge (airtime/credit) is being reduced from 12.5 percent to 10 percent in FY22. WHT will be further reduced to 8 percent in later years. And for those living in Islamabad, GST/FED on airtime usage has been reduced from 17 percent to 16 percent. (Now it is up to provinces to reduce cellular GST in their jurisdictions). While these moves will make ICT services slightly more affordable, there is a need to do away with GST/FED on airtime usage and WHT on account recharge altogether to boost usage of ICT services in the country.
To protect local manufacturing of mobile phones, the government has proposed in the budget to significantly enhance regulatory duty on imported mobile phones across different price bands. While quality and finesse will not materialize overnight, the locally-assembled handsets need a lot of catching up to do if they are to compete with imported phones. In the short term, therefore, higher import duties will serve to fatten FBR’s coffers as the demand for imported phones is quite strong in Pakistan. Another duty on imported phones, called as ‘mobile handset levy’, is budgeted to nearly double to Rs9 billion in FY22.
Already, the government is providing a number of tax exemptions and concessions to promote local manufacturing of cellular mobile phones. As per the finance ministry data for FY21, the quantum of those relaxations includes Rs27 billion as sales tax exemption on locally-made mobile phones, Rs340 million as income tax allowance for mobile phone manufacturing industries set up in rural/under-developed regions, and Rs23 million as import duty exemption on mobile phone plant, machinery and production equipment.
The government has budgeted Rs45 billion under income from PTA in FY22, up from Rs34 billion revised estimate for FY21. About Rs25 billion of this sum is expected to come from the scheduled payments under license renewal by Jazz, Telenor and Zong. But the government could catch much more than that from the sector next fiscal, considering that the planned spectrum auction can potentially bring in over Rs70 billion in FY22, if operators chose to pay half of $900 million+ in expected spectrum fees and taxes.
Also under consideration is a move towards fiscal coverage of the e-commerce sector. From FY22 on, the goods being sold via online marketplaces have been proposed to come under the GST ambit, and online marketplaces and their third-party vendors will have to register for GST collection and deposit this tax at the treasury. While this move can create some friction in the short run, it is imperative to treat both online and offline sellers at par, so that a level-playing field can encourage more offline vendors to sell digitally. Perhaps the government can go about implementing this move in a phased manner to avoid disruptions.
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