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Say a prayer for the goose that lays golden eggs! The fidgeting, budgeting, tax-chasing government has historically looked towards telecoms sector for easy taxes. But how many more eggs can this old poulet provide? While folks will get a rude shock in near future when they have to replace their smartphones or laptops, the country’s mobile network operators have already termed recent tax proposals as “aggressive”. They are warning about “unintended consequences” for affordability and adoption of digital services as well as as investor confidence. The situation may not be as dire, but it still demands unpacking the potential impact of tax measures that are in the offing.

As per the latest available information, the telecoms-related tax proposals in the so-called mini-budget may have two kinds of impact: one on digital usage and the other on adoption. In the “usage” sphere, there will be an increase in withholding tax (WHT) rate on prepaid airtime recharge, from existing 10 percent to all-time high of 15 percent. Recall that the government’s FY22 budget had recently reduced this WHT from 12.5 percent to 10 percent, with a commitment to further reduce it to 8 percent next fiscal.

Assuming mobile network operators achieve annual revenues of around Rs480 billion in FY22 (an assumption based on recent data and trends), a five percentage point increase in WHT may provide government with additional tax of Rs24 billion per annum at those revenue levels. The net collection on this count will be somewhat lower, as many among the 2 million+ income-tax-return filers are presumed to claim this deduction. However, net additional collection won’t be too much below Rs24 billion mark, for just over 2 percent of Pakistani adults file their returns.

As consumers are expected to either slightly cut back on their communication spending or keep it at same level, the additional money going into government coffers is set to impact operators more, with net-revenue-pie shrinkage of about $140 million per annum. No wonder, this move has peeved operators, who have protested that their respective headquarters’ business plans for further investment into Pakistan market were based on continuity of the telecoms-related tax regimes, especially concerning WHT. The impact on the “uptake” side will be felt more by ordinary people, as computing devices and smartphones are about to get expensive. There are two tax measures proposed in this regard. First, if the mini-budget is passed, local sales of computing devices (personal computers, laptops, notebooks, etc.) will carry a GST of 5 percent (previously the rate was 0%). This will come at a time when imported computers and laptops have already become expensive thanks to PKR depreciation.

As per data from the Pakistan Bureau of Statistics (PBS), during FY21 Pakistan’s imports of “laptops, computers and notebooks” (HS Code: 8471.3010) had reached 0.92 million units (up 81% YoY), valuing Rs19.5 billion (up 76% YoY). Whereas imports of “personal computers” (HS Code: 8471.3020) in FY21 stood at 1.1 million units (up 25% YoY), with a worth of Rs19.4 billion (up 16% YoY). After accounting for post-import margins in the supply chain, a 5% GST on imported computing devices may yield just over Rs2 billion in new taxes p.a. This is not a big amount – certainly not worth the negative impact it will have on the youth’s ability to buy computers. And the second tax measure on the uptake side concerns the imposition of uniform GST of 17 percent on imported mobile phones whose value exceeds $200. Previously, imported mobile phones valuing $200-350 attracted a flat tax of Rs1,740; handsets valuing $350-500 were levied Rs5,400; and cellphones with prices above $500 carried Rs9,270 tax. This move may not impact users with low spending power. Local smartphone assemblers will have to up their game if they want to attract high-end smartphone users.

As per PBS data, Pakistan’s imports of cellular mobile phones (HS Code: 8517.1219) during FY21 were 21.8 million units (up 12% YoY), valuing Rs229 billion (up 10% YoY). Assuming that 20 percent of Pakistan’s annual mobile phone imports by value are made up of handsets priced $200 and above (and given that existing flat tax on mobile phones valuing $200 and above come in the range between 3 to 7 percent), the 17 percent GST imposition on high-end phones may yield incremental taxes somewhere between Rs4 billion to Rs7 billion (at FY21 volumes).

In all, telecoms-related measures cited above may yield the government between Rs30 billion to Rs33 billion in fresh taxes, equivalent to roughly a tenth of the Rs350 billion of additional tax receipts envisaged under the mini-budget. While it is not the end of the world for either the telecom users or mobile network operators, there is palpable disappointment that the government continues to view digital connectivity through fiscal lens and ignores, in the process, long-term goal of market development. The need is to incentivize digital uptake and usage, something which other countries have been doing during Covid-19.

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