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Abolishing withholding tax, reducing sales tax rate on telecom services recommended

KARACHI: Federal Board of Revenue (FBR) has been urged to abolish withholding tax rate at 12 percent on telecom services to promote the accessibility of internet/data services to the low-income group.

Similarly, Federal Excise Duty (FED) is charged at 17 percent on telecom services which is on higher side as compared to other sectors, and general rate.

Provincial authorities levy a much lower rate of sales tax on other services. Since sales tax is a consumption tax (on usage), the decrease in sales tax rate will result in increased usage of telecom services and consequently drive tax collection upwards.

There should be single sales tax rate across all jurisdiction to remove the anomalies and undue hardships being faced by telecom sector in terms of compliances in different jurisdictions, thus, to provide ease of doing business.

These recommendations have been sent by Overseas Investors Chamber of Commerce and Industry (OICCI) to the Federal Board of Revenue (FBR) for the budget 2021/2022.

The OICCI further recommended that since the insertion of 9th Schedule in Sales Tax Act, 1990 effective 1st July 2014, the matter is in litigation. This tax should be abolished, ab initio, by accepting the decision of Lahore High Court as the resolution of the matter will result in additional upside on the corporate tax side for the exchequer and eliminate the undue litigations.

On the issue of advance tax on Auction/ Renewal of telecom licenses at 10 percent under section 236A of Income Tax Ordinance, 2001, the OICCI recommended that this tax should be abolished being irrational and burdensome on CMOs keeping in view the financial/ tax position.

The chamber said that as large utility providers, Cellular Mobile Operators’ (CMO) are subject to deduction/collection of withholding of income tax on large number of transactions, which increases the cost and complexity of tax compliance and an additional administrative burden for the telecom sector and negatively impacts the overall business environment.

It is recommended:

i. Exemption should be given to the telecom sector from deduction or collection of all types of withholding taxes, like banking and oil sector. There will be no loss of revenue to the exchequer as the tax collection mechanism will be simplified in terms of real time payment of advance tax Under Section 147 on quarterly basis.

Furthermore, this measure will also make the tax claims and its verification mechanism more transparent with minimum operational hassles as maintaining the thousands of records especially for advance tax on utility bills and imports is itself a very cumbersome procedure.

ii. Amendments need to be made in the section 147 for the calculation of tax liability. Currently the calculation of tax liability is based on the last assessed position and turnover of the year. The assessed position should not be used as a basis of calculation of tax liability until and unless an independent forum (i.e. At least Tribunal) has also confirmed the assessed position.

The OICCI recommended to reduce the custom duty rates for batteries (8507.6000) to 5 percent and to abolish additional custom duty and Regulatory duty, as these batteries are used with solar and power systems and are core asset for telecom infrastructure services provider. Reduction in duties will further encourage alternate energy resources for Telecom sector e.g. Solar etc.

On the issue of custom duty and Regulatory duty on import of telecom equipment, it is recommended to restore SRO 575, reduce Custom duty to 5 percent and abolish the Additional Custom duty and Regulatory duty as the core assets needs to be imported for provisioning of telecom services.

The OICCI demanded exemption from advance tax on electricity for Telecom Tower Infrastructure Companies. The chamber said that currently taxpayers can obtain exemption certificate for non-deduction of tax on electricity bills under section 235(3) of ITO 2001 if their income is exempt under the law or by discharging their advance tax liability for the year. Such exemption is not available to telecom service providers as their tax liability is minimum under section 153(3) of the ITO, 2001.

Enabling provision may be inserted in section 235 of the ITO, 2001 to empower the Commissioner to issue exemption certificate to Service Providers under minimum tax regime for non-deduction of advance tax on electricity bills.