The telecom industry is playing an increasingly important role in supporting economic growth. The penetration of mobile phones, along with 3G and 4G, enhances digital connectivity by expanding internet and broadband access. As a result of that, the barriers to trade, commerce, communication, service delivery, and human development are also reducing. They provide benefits to the economy in the form of financial inclusion via mobile payment platforms, digitally-enabled local entrepreneurship, innovative health and education delivery systems, and growing numbers of e-government initiatives. Therefore, for economic growth, it is essential to facilitate the mobile industry in every aspect so that it can continue to grow and generate revenues and maximize the opportunities available to consumers, businesses and Government. Taxation is an essential factor that impacts industries to a great extent. Substantial tax incentives and rationalized tax policy can encourage the telecom companies to grow further, and make international mobile operators feel confident to invest in Pakistan. That will, in return, increase the GDP.
Importance of Tax Reforms to Increase Mobile Operators’ Contribution to GDP
Infrastructure and subscriber growth patterns in Pakistan are unmatched across the world. Besides economic indicators, Pakistan’s telecom industry has shown thriving growth patterns, especially compared to South Asian economies like India, Bangladesh and Nepal. According to PTA’s report, the” teledensity of Pakistan stands at 46.9% surpassing Sri Lanka’s 37%. Similarly, India currently has a teledensity of 15.4%, which is relatively lower than that of Pakistan.” During the last few years, the Telecom sector has emerged as the largest recipient of Foreign Direct Investment (FDI) in Pakistan. The commercial launch of 3G and 4G LTE services has opened new opportunities for revenue generation for mobile operators.
For better performance and growth, tax reforms (involves reductions in income tax rates as well as measures to broaden the tax base) can bring drastic changes. The low taxes on mobile operators can encourage them to introduce new technology without any hurdle and provide better services to customers. Tax rate cuts will help the MNOs to work, save, and invest. Still, if immediate spending cuts do not finance the tax cuts they will likely result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates. Therefore Tax reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more positive effects in the long-term on the economy. That’s why the telecom operators are also demanding the rationalization of corporate income tax, elimination of SIM tax, minimum turnover tax and double taxation as all these factors will increase their contribution to the country’s Gross Domestic Product (GDP). If a government levy high taxes on the mobile sector, it will indirectly put a burden on customers and create a significant connectivity barrier. Countries with a high cost of mobile ownership (including both device and airtime/data) typically have lower penetration rates.
The telecom sector in Pakistan has demonstrated significant growth over the past decade with the increasing number of subscribers. It is to be expected that the further improvements in the affordability of mobile services and devices would contribute to the expansion of the mobile market and the development of the digital economy in Pakistan. Currently, the tax burden on the telecom sector is high, which limits the growth potential of the telecom sector in Pakistan. Through policy reform, the Government of Pakistan will be able to create the opportunity to simplify and rebalance the taxation of the telecom sector. It will create job opportunities and a better business environment. Encouraging the greater investment in the telecom industry via tax reforms, and improving the affordability of mobile services can increase the rate of overall GDP of Pakistan. A proficient strategy that links the telecoms sector with the broader economy can be used to achieve the underlying objectives of modernizing vital economic sectors.
It will increase investment in the mobile sector and in return, a distinct improvement could be seen in Pakistan’s telecommunications infrastructure.
Tax reforms in any sector play an important role in unlocking investment in any country. Similarly, the tax reforms in Pakistan’s mobile networks can improve affordability and promote greater adoption of mobile services. The growth in the telecom sector would automatically generate higher GDP and tax revenue for the Government in the medium term.
Elimination of the minimum tax (8% which is payable in Pakistan on service income from corporate subscribers) would reduce the tax burden on operators, and that will lead to lower prices of mobile services and more significant investment into mobile networks. It will increase the Unique subscriber penetration by 0.3% (0.7 million unique subscribers) by 2023 and penetration of mobile broadband would increase by 0.4% (0.9 million individual MBB subscribers). Moreover, it will drive growth in mobile data usage per connection of 0.8%. GDP would grow by $225 million (0.07%).
Reduction in sales tax on mobile services would generate higher benefits in the form of additional increases in penetration and investment. It will develop further gains on the broader economy as well by 2023. GDP would grow by $497 million (0.16%), and annual tax receipts would be $76 million. The growth in the telecom sector will lead to more comprehensive societal benefits via increased mobile ownership and access to mobile data and broadband services. To bring the boost in the telecom sector will lead to growth in productivity and hence an increase in GDP. Pakistan needs to design proper strategies and policies that can accelerate the growth in penetration and migration to 3G and 4G technologies. There is a need to work on a tax policy reform agenda that should be targeted at stimulating growth in connectivity as well as the use of mobile broadband in Pakistan. These two factors will, no doubt, help the Government to achieve economic and social goals.