The government may be doing a good job in broadening the tax-net in the country by collecting additional revenues. However, some of these tax-reforms may prove counterproductive to the long-term economic growth and prosperity of the nation.
The government’s decision to usher in new laws that place excessive tax on the highly regulated and compliant industries is not a good look. How is that? Because the corporate sector has already been paying heavy taxes and contributing to the national exchequer. As the technology sector grows rapidly, it is all the more important for government to provide an atmosphere that is conducive for this growth.
The telecommunications sector in Pakistan is deploying the world’s latest technologies. This connectivity has nurtured cross-continental cohesion and trade. Thus playing a major role in attracting large-scale foreign-investments, generating employment opportunities and strengthening the economy.
This is sufficient to understand why the government must support the growth-trajectory of the telecom sector. The sector has empowered the common man by giving him the latest technology in his hand.
However, it is sad to note that telecom and cellular enterprises have always been the easiest prey for the tax regimes in Pakistan. Understandably, this is due to their easily monitored equipment and the traceable digital footprint of their formal transactions.
Billions of rupees are paid as advanced licensing fees, to establish each cellular operator, while more than 10% is deducted from every reload of cellular minutes. Recently, Customs duty has been made mandatory on every mobile-device imported into Pakistan.
This system named DIRBS has been aimed at regulating the import of commercial and personal smartphones into the country. However, as per 8-month results, only 7 billion Rupees of customs-duty have been collected under the scheme.
Although the government may claim that DIRBS is a successful program, the fact is; in the long run, it will restrain the consumption of cellular services and hamper growth. Why is that? Because the heavy taxes and other costs will ultimately fall on the shoulders of the user.
Statistics show that reckless imposition of taxes on this healthy industry is having negative side effects, and creating a bigger ‘Digital-Divide’. Experts in the telecom sector believe that DIRBS has actually reduced tax-collection for the government, by around 7 billion Rupees, due to lesser consumption of data-services, reduced imports and churned users. Despite its tangible benefits, this tax regime has decreased the uptake of smartphones and consumption of data, by the consumers.
Average Revenue Per User (ARPU) for a feature phone is around PKR 239 while the ARPU on 3G network is around PKR 370, which goes up to PKR 531 for a 4G subscriber (this includes GST and WHT).
Indications are clear that 3G and 4G smartphone users contribute more revenues for the government, as well as cellular companies.
Prior to the introduction of DIRBS, a large volume of smartphones was being brought into Pakistan, but most of these devices were being smuggled. This tax-evasion was causing losses and was not sustainable for the economy.
So the government imposed DIRBS to regulate the import of cellphones by making it mandatory to pay a registration tax on every cellphone entering the country.
While, in theory, this system curtails illegal channels, the reality paints a different picture. After the imposition of DIRBS in Pakistan in 2019, the share of revenues, previously generated from smartphones imports, has dropped by more than 25 percent.
From a historical high of 52.3 percent, smartphones share in imports is now down to only 40 percent.
On the contrary, the illegal trade was actually accelerating the growth of a legal and robust industry. In light of this fact, the question that arises is: should the government have disrupted the tremendous amounts of GST being contributed by telecom?
Companies dependent on smart-phones for their business and growth are also suffering. They may not seek a removal of DIRBS, however, they did urge the government to reduce the rate of taxation, to minimize the threats of this new system.
The cellular industry completely supports DIRBS as an effective solution to the taxation challenge. However, since the government can now trace and tax every device operating in the country, it must give some tax-relief to the common users.
Especially, the low-cost smartphones phones may be exempted, to enable the poor to take advantage of this technology.
Other effects of this high taxation include lower productivity of the masses with less access to smartphones, lesser Digital-Enablement, challenges in Financial-Inclusion & FATF-compliance, difficulty in documentation of economy, obstructions in 5G auction and creation of a Knowledge-Economy.
Currently, foreigners and overseas Pakistanis visiting Pakistan are able to use their phones for only 60 days in Pakistan, after which, they have to pay the tax. This causes a lot of inconvenience and portrays a negative image of the country.
The incremental import of mobile handsets would have a significant impact on the development of the digital ecosystem as well as provide additional revenues for the government by increased usage.
All these measures are temporary, local manufacturing or assembly of smartphones is the ultimate solution for reducing taxes and costs of telecom in the country. Numerous manufacturers have evaluated this proposition from PTA.
However, they are not convinced about the viability of local assembly, so they continue to import into Pakistan. Some significant tax-holidays, may inspire domestic production, to foster digitization of the society. So, the policy-makers must weigh these options for sustainable growth.