Foreign investors operating in Pakistan are calling on the country to abolish the withholding tax on telecom services.
They argue that the imposition of this tax hampers the affordability of mobile services, which are critical for the entire population, especially considering that over 70% of Pakistan’s population lives below the poverty line. Additionally, telecom services play a crucial role in the country’s economic growth.
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Although the Finance Act of 2021 reduced the advance tax on telecom services from 12.5% to 10% for the fiscal year 2021 and to 8% for future years, the Finance (Supplementary) Act of the same year increased the withholding tax rate from 10% to 15%. This increase in tax rates negatively impacts the affordability of mobile services, particularly for the poorest consumers, including women, and reduces their ability to become mobile broadband subscribers.
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Pakistan currently has the widest gender gap in mobile ownership (34%) and mobile internet use (43%) compared to its regional peers. The higher costs imposed by sector-specific taxes on mobile services exacerbate this disparity and hinder the ability of low-income individuals, especially women, to access internet and data services.
Considering that more than 70% of the population lives below the poverty line and the percentage of tax filers is relatively low, applying withholding tax to the entire subscriber base is seen as illogical. The foreign investors recommend completely abolishing the withholding tax on subscribers, as the majority of the subscriber base falls below the taxable limit. Alternatively, they suggest reinstating the withholding tax reduction introduced through the Finance Act of 2021, bringing it down to 8% effective from Fiscal Year 2023.
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Furthermore, the investors highlight the complexities and hardships faced by the telecom sector due to distinct sales and service tax laws introduced by the federal government and the four provinces. They argue that these conflicting laws result in double taxation and unnecessary litigations, leading to difficulties for taxpayers. To address this issue, they propose implementing a single sales tax rate across all jurisdictions to provide ease of doing business for the telecom sector. They emphasize the need for sales tax rates on telecom services to be aligned with those applied to other services.
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The foreign investors suggest drafting a uniform service tax law that can be agreed upon by the tax authorities of the provinces and federal government, following international and regional practices. This would streamline compliance in different jurisdictions and create a more favorable business environment for the telecom sector in Pakistan.
