The Overseas Investors Chamber of Commerce and Industry (OICCI) has requested in the budget for 2022-23 that the Withholding Tax on Telecom Services be rationalized, that federal and provincial sales tax laws be harmonized, and that the telecom sector be excluded from Withholding Taxes.
OICCI demanded that the rate of Withholding Tax (WHT) on subscribers be abolished completely because the majority of the subscriber base falls below the taxable limit, or that the WHT reduction made through Finance Act, 2021 be reinstated, i.e., 8% effective fiscal year 2023, in its budget proposals, a copy of which is available with ProPakistani.
The Finance Act of 2021 decreased the advance tax on telecom services from 12.5 percent to 10 percent for FY2021 and 8% for subsequent years. However, the rate of withholding tax was raised from 10% to 15% by the Finance [supplementary] Act of 2021.
Increased taxes make mobile service less affordable, which is a critical service for the entire population. The introduction of withholding tax to the entire subscribers base is not reasonable, according to the OICCI, because more than 70% of Pakistan’s population lives in poverty, and the percentage of return filers is also small.
Furthermore, the reduction in withholding tax will make internet and data services more affordable to low-income households. Telecom service is also essential for a country’s economic development.
The OICCI has suggested the following subsidies in its budget proposal:
Harmonization of Federal and Provincial Sales Tax Laws:
In their respective jurisdictions, the provincial and federal governments have enacted separate sales and service tax rules. Some sections are clearly in conflict, resulting in excessive burdens. Furthermore, harassing federal and provincial revenue collectors for tax on the same transactions amounts to double taxation. This is a highly undesirable condition that generates complexity for taxpayers and leads to wasteful litigation.
Furthermore, a single sales tax rate should be used across all jurisdictions to eliminate atrocities and excessive hardships suffered by the telecom sector in terms of compliance in several jurisdictions, hence facilitating business. Telecom services should not be subjected to higher tax rates than other services, and sales tax rates should be consistent with other services.
Advance tax on Auction and Renewal of Licenses
On the sale of a property or via auction, an advance tax is due. A Grantor Spectrum is not a property sale.
To begin with, the spectrum is not a property; it lacks a physical form because it cannot be seen or held in physical possession.
Second, spectrum is not auctioned; instead, telecom companies are granted a license to utilize spectrum for a set period of time. As a result, telecom operators are never sold spectrum; instead, they are granted licenses for a set period of time.
While the phrase “sale” implies that the buyer receives absolute ownership with the ability to transfer ownership to another person, this is not the case.
As a result, this tax should be repealed because it is unreasonable. In addition, the telecom industry has alre ady paid a significant sum of advance taxes in excess of its tax liability. Furthermore, no such advance tax is charged on the issuance of other licenses, such as those for oil exploration. This unreasonable and costly levy on cellular mobile operators should be repealed (CMOS).
Exemption from Withholding Taxes to the Telecom Sector
CMOS is subject to deduction/collection withholding or income tax on a significant number of transactions, such as thousands of electricity bills or cell sites, as big utility providers. As a result, the cost and complexity of tax compliance will rise, as will the telecom sector’s administrative burden.
This has a negative impact on the entire business climate. Furthermore, because verifying the claim of advance tax paid on electricity bills is a time-consuming task, tax authorities are unable to do so. To reduce administrative costs, similar exclusions have previously been granted to the banking sector.
The telecom industry, like the banking and energy industries, should be free from all sorts of withholding tax deductions. There will be no revenue loss to the government because the tax collection method will be streamlined in terms of real-time advance tax payment. Furthermore, this move will make tax claims and their verification mechanisms more transparent with fewer operational headaches, as maintaining thousands of records, particularly for advance tax on energy bills and imports, is a time-consuming process in and of itself.
Customs Duty on Import of Batteries
Because these batteries are used with solar and power systems and are a core asset for telecom infrastructure service providers, the custom duty rates for batteries (8507.6000 and 8507.2000) should be reduced from 11 percent to 5 percent, and Additional Custom duty (2 percent and 6 percent) and Regulatory duty (5 percent) should be eliminated. Reduced tariffs will stimulate the use of alternative energy sources in the telecom sector, such as solar and wind.
Withholding Tax of Foreign Suppliers Against the Import of Telecom Equipment
The Finance Act of 2018 added a new clause to section 101 of the Income Tax Ordinance (ITO) 2001, which states that income from a non-resident person’s business, whether or not title to the goods passes outside Pakistan, is included if the import is part of an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees, or supervisory activities.
In light of the changes to section 101(3), corresponding changes have been made to section 152, sub-section (7), whereby a taxpayer must now obtain an order from the Commissioner of Inland Revenue u/s 152(5A) of the ITO2001 before making payment on account of such transaction without deduction of tax or at a lower rate.
Because the title to the products moves outside of Pakistan, a deduction of withholding tax at a significantly higher rate, i.e. 20%, will raise the cost of the equipment because the supplier will increase the price by factoring in the withholding tax element. As a result, telecom operators will be forced to shoulder the additional costs, putting a halt to the expansion of communication services, particularly in remote areas where the cost of doing business is already high.
Classification of Telecom Equipment Under Part I of Twelfth Schedule of ITO, 2001
Under the ITO, 2001, telecom equipment is considered a depreciable asset that is used by telecom operators to provide telecom services and is taxed as a business income under the national tax regime. The telecom equipment is now misclassified in the Twelfth Schedule, resulting in discrimination between the telecom and other industries.
Telecom equipment should be classed under Part-I of the Twelfth Schedule of the International Trade Organization (ITO), 2001, to align the telecom sector with other industries because it is not imported for resale.