KARACHI: The Federal Board of Revenue (FBR) has been recommended to exempt withholding tax on telecom services to facilitate a large number of population of the country living below poverty line.
Overseas Investors Chamber of Commerce and Industry (OICCI) in its proposals for budget 2022/2023 urged the FBR to rationalize withholding tax on telecom services.
“Rate of withholding tax on subscribers should be abolished completely as majority of the subscriber’s base falls below the taxable limit or the withholding tax reduction made through Finance Act, 2021 should be reinstated i.e. 8 per cent effective Fiscal Year 2023.”
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Advance tax on telecom services was reduced via Finance Act, 2021 from 12.5 per cent to 10 per cent for FY 2021 and to 8 per cent for future years. However, through Finance (supplementary) Act, 2021 the rate of withholding tax increased from 10 per cent to 15 per cent.
Increased tax hampers the affordability of mobile service which is a critical service for entire population and more than 70 per cent population of Pakistan lives below poverty line. Telecom service is also critical for economic growth of a country.
In addition to that Pakistan has the widest gender gap in mobile ownership (34 per cent) and mobile internet use (43 per cent) as compared to its regional peers. Sector-specific taxes increased cost of mobile services which lays a strong impact on the poorest consumers especially women, lessening their ability to become mobile broadband subscribers.
Since more than 70 per cent population lives below the poverty line and the percentage of return filers is also nominal so the implementation of withholding tax to entire subscriber’s base is not logical. Further, the reduction in withholding tax will also promote the affordability of internet and data services to the low-income group people.
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The OICCI also pointed out that all four provinces and federal have introduced distinct sales/service tax laws in their respective jurisdictions, with some of the clauses in clear conflict with each other resulting in undue hardships coupled with harassment by the federal and provincial revenue collectors demanding tax on the same transactions tantamount to double taxation. This situation is highly undesirable and creates complexities for taxpayers leading to unnecessary litigations.
Furthermore, there should be a single sales tax rate across all jurisdictions 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. Telecom services should not be discriminated by being subjected to higher rates of tax, sales tax rates should be in line with other services.
“There should be single sales tax rate across all jurisdictions 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. Further, in line with International and Regional practices a uniform service tax law may be drafted and agreed upon by the tax authorities of the Provinces and Federal, for implementation in their respective jurisdiction,” it recommended.
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The chamber highlighted advance tax on auction/renewal of licenses, and said this is tax is liable to be collected on “Sale by Auction” of property. Grant of spectrum is not a sale of property.
Firstly, spectrum is not a property, it does not have any physical form as it cannot be seen or is not capable of being in physical possession.
Secondly spectrum is not “sold” only a right to use spectrum for a specified term is granted to telecom operators and licenses are granted for a specific term only.
Therefore, spectrum is never sold to telecom operators, they are only granted licenses for a specified term. While the term “sale” means that the absolute ownership is transferred permanently to the buyer with a right to transfer ownership to another person which is not the case.
Therefore, this tax should be abolished being irrational. Further, Telecom sector has already paid huge amount of advance taxes much beyond its tax liability. Secondly, no such advance tax is collected on grant of other licenses like oil exploration.
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“This tax should be removed being irrational and burdensome on CMOs,” it recommended.
As large utility providers, Cellular Mobile Operators’ (CMO) are subject to deduction/collection of withholding of income tax on large number of transactions e.g. electricity bills of cell sites where are thousands in numbers, thus increased the cost and complexity of tax compliance and an additional administrative burden for the telecom sector and negatively impacts the overall business environment.
Furthermore, it is also not possible Tax Authorities to verify the claim of advance tax paid on electricity bills being a very laborious task. Similar exemptions have already been granted to banking sector to curtail the administrative cost.
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 of Income Tax Ordinance, 2001 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.
The OICCI pointed out custom duty on import of batteries and said reduce the custom duty rates for batteries (8507.6000 & 8507.2000) from 11 per cent and 20 per cent to 5 per cent and abolish Additional Custom duty (2 per cent & 6 per cent) and regulatory duty (5 per cent), 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.
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“Reduce the custom duty rates for batteries (8507.6000) to 5 per cent and 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,” it recommended. Reduction in duties will further encourage alternate energy resources for Telecom sector e.g. Solar etc., it added
The chamber said the Finance Act, 2018 inserted a new clause in sub-section (3) of section 101 of the ITO’2001, under which Pakistan source income from business derived by a non-resident person, would include income on account of import of goods, whether or not the title to the goods passes outside Pakistan, if the import is part of an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the associates of the person supplying the goods or its permanent establishment, whether or not the goods are imported in the name of the person, associate of the person or any other person.
Keeping in view the amendment in section 101(3), corresponding amendments have also been made in sub-section (7) of section 152, whereby a taxpayer would invariably now be required to obtain an order of the Commissioner Inland Revenue u/s 152(5A) of the ITO’2001 for making payment on account of such transaction without deduction of tax or at lower rate.
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“Since the title of goods passes outside Pakistan, hence deduction of withholding tax at much higher rate i.e. 20 per cent will increase the cost of the equipment as the supplier will jack up the prices by including the withholding tax factor, resultantly, telecom operators will have to bear the extra cost which will halt the expansion of the telecom services, especially in far flung areas where the cost of doing business is already on much higher side,” it recommended.
The telecom equipment constitutes depreciable assets under the Income Tax Ordinance, 2001 which are used by the telecom operators for provision of telecom services which are taxed as an income from business under the national tax regime. Currently, the telecom equipment is not properly classified in Twelfth schedule which is a cause of discrimination between telecom sector and others.
It recommended that telecom equipment should be classified under Part I of Twelfth Schedule of ITO, 2001 to equate the telecom sector with other industries as the telecom equipment is not imported for resale purposes.
