Reduction in taxes to benefit mobile sector

Islamabad:Mobile subscribers in Pakistan are affected by taxes that apply to devices, SIM cards and usage charges.

According to experts of telecommunication sector, these taxes are especially likely to affect the prices ultimately paid by consumers and may have a particularly strong effect on the poorest consumers.

Many of these taxes are sector-specific or have higher rates for the mobile sector than other sectors of the economy.

According to GSMA Intelligence Unit report, the SIM card sales tax is a consumer tax that is likely to increase costs of mobile ownership.

As a flat rate tax, it is especially likely to be regressive and significantly increase the barrier to accessing mobile services for the poorest consumers.

Previous reductions in this tax have been accompanied by rapid growth in penetration in Pakistan. Eliminating the tax could drive penetration further and enable the poorest consumers to benefit from mobile connectivity and value-added services such as mobile money.

International experience of similar tax reforms suggests that there could be a strong and positive impact on mobile sector.

Pakistan Telecommunication Authority (PTA) has proposed that mobile operators should be granted industrial undertaking status. A consequence of this change would be to make operators exempt from income tax on imports, as well as granting certain other tax advantages.

The differential treatment of sectors according to this status adds to the complexity of taxation

in Pakistan and may be distortionary. Given the need for further investment in Pakistan, granting industrial undertaking status could be effective in enabling further investment in extending networks and upgrading base stations to 3G and 4G.

Similarly, a reduction in customs duty rates for network equipment – which were increased recently – could help operators to deliver important investments.

Import taxes on mobile devices have an impact on affordability. Currently, the flat rates of customs

duty and sales tax applied to mobile handsets amount to a total of Rs 550–1,750 depending on handset specification.

These flat rate taxes are particularly regressive; for the lowest 20% of earners in Pakistan this amount is equal to approximately 3–10 days’ income.

Similarly tax on the SIM card activation increase the barrier to mobile ownership. Reducing or removing these taxes could allow many of the poorest consumers to benefit from mobile connectivity and access life enhancing mobile services.