OICCI Demands Rationalization of Taxes on Telecom Sector


The Overseas Investors Chamber of Commerce and Industry (OICCI) has proposed for rationalization of Withholding Tax on Telecom Services, harmonization of federal and provincial sales tax law, and exemption from Withholding Taxes to the telecom sector in the budget for 2022-23.

In the budget proposals, a copy of which is available with ProPakistani, OICCI demanded that the rate of Withholding Tax (WHT) on subscribers should be abolished completely as the majority of the subscriber’s base falls below the taxable limit or the WHT reduction made through Finance Act, 2021 should be reinstated, i.e., 8 percent effective fiscal year 2023.

The advance tax on telecom services was reduced via the Finance Act of 2021 from 12.5 percent to 10 percent for FY2021 and 8 percent for future years. However, through Finance [supplementary) Act, 2021, the rate of withholding tax increased from 10 percent to 15 percent. Increased tax hampers the affordability of mobile service, which is a crucial service for the entire population. More than 70 percent population of Pakistan lives below the poverty line, and the percentage of return filers is also nominal, so the implementation of withholding tax to the entire subscribers base is not logical, the OICCI remarked. Further, the reduction in withholding tax will also promote the affordability of internet and data services to low-income group people. Telecom service is also critical for the economic growth of a country.

The OICCI, in its budget proposal, has proposed the following subsisdies:

Harmonization of Federal and Provincial Sales Tax Laws:

The provincial and federal authorities have introduced distinct sales/service tax laws in their respective jurisdictions. There is a clear conflict in some clauses, which results in undue hardships. Furthermore, harassment by the federal and provincial revenue collectors demanding tax on the same transactions is 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 atonalities and undue hardships being faced by the telecom sector in terms of compliances in different jurisdictions, thus providing ease of doing business. Telecom services should not be discriminated against by being subjected to higher rates of tax, and sales tax rates should be in line with other services.

Advance tax on Auction and Renewal of Licenses

Advance tax is liable to be collected on Sale by Auction or property. A Grant or Spectrum is not a sale of the property.

Firstly, the 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. 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 for being irrational. Further, the telecom sector has already paid a huge amount of advance taxes beyond its tax liability. Moreover, no such advance tax is collected on grants of other licenses like oil exploration. This tax should be removed from being irrational and burdensome on Cellular Mobile Operators (CMOs).

Exemption from Withholding Taxes to the Telecom Sector

As large utility providers, CMOs are subject to deduction/collection withholding or income tax on a large number of transactions, e.g., electricity bills or cell sites, which are thousands in numbers. Therefore, increasing the cost and complexity of tax compliance and an additional administrative burden for the telecom sector.

This negatively impacts the overall business environment. Furthermore, it is also not possible for tax authorities to verify the claim of advance tax paid on electricity bills, as it is a very laborious task. Similar exemptions have already been granted to the banking sector to curtail the administrative cost.

The telecom sector, like the banking and oil sector, should be exempted from the deductions on the collection of all types of withholding taxes. 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. Furthermore, this measure will also make the tax claims and its verification mechanism more transparent with minimum operational hassles as maintaining thousands of records, especially for advance tax on utilities bills and imports, is itself a very cumbersome procedure.

Customs Duty on Import of Batteries

Reduction of the custom duty rates for batteries (8507.6000 and 8507.2000) from 11 percent and 20 percent to 5 percent and abolish Additional Custom duty (2 percent and 6 percent) and Regulatory duty (5 percent), as these batteries are used with solar and power system and are a core asset for telecom infrastructure service provider. Reduction in duties will further encourage alternate energy resources for the telecom sector, i.e., solar, etc.

Withholding Tax of Foreign Suppliers Against the Import of Telecom Equipment

The Finance Act, 2018, inserted a new clause in sub-section (3) of section 101 of the Income Tax Ordinance (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 the 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 ITO2001 for making payment on account of such transaction without deduction of tax or at a lower rate.

Since the title of goods passes outside Pakistan, hence deduction of withholding tax at a much higher rate, i.e., 20 percent, 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 the much higher side.

Classification of Telecom Equipment Under Part I of Twelfth Schedule of ITO, 2001

The telecom equipment constitutes depreciable assets under the ITO, 2001, which are used by the telecom operators for the provision of telecom services and are taxed as an income from business under the national tax regime. Currently, the telecom equipment is not properly classified in the Twelfth schedule, which is a cause of discrimination between the telecom sector and others.

Telecom equipment should be classified under Part-I of the Twelfth Schedule of ITO, 2001, to equate the telecom sector with other industries as the telecom equipment is not imported for resale purposes.

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