Backfiring of enhanced WHT on telecom sector

THE INCUMBENT government in its first annual budget for the year 2013-14 has come up with an aggressive but innovative style to increase as well as expand the tax net in Pakistan. As part of this strategy, it has not spared the IT and telecom sector as it has slapped another five per cent withholding tax from the old 18 per cent to 25 per cent on this sector from July 1, 2013. This raise in withholding tax would further put an extra burden on the already heavily taxed telecom sector, rather it would certainly impact the overall growth of this sector as is evident from the statistics of revenue generation soon after the slapping of the increased withholding tax. According to the data, during the first four days following the levy of this tax the recharge by prepaid mobile phone card users registered a decline of an average four per cent per day posting about one billion rupees slash in tax as this sectors monthly revenue comes around at Rs 20 billion. The telecom sector is already experiencing a saturated situation as no foreign direct investment has come to the country during the last couple of years thus giving rise to the stagnation in the overall telecom sector. The major point of concern for the stakeholders is that this revenue shortfall would not stop here as with this ratio the government would not see any increase in the overall tax collection from this sector at the end of the financial year, rather would face a remarkable shortfall in tax collection. Furthermore, this would also frustrate the governments third generation license auction plan, which was delayed repeatedly during the last couple of years on one pretext or the other. The government is expecting to earn $ one billion dollars out of this auction, which will support the cash-strapped Pakistani economy crippled by energy crisis and volatile law and order situation. The telecom industry is already surviving with the lowest average rate per user (ARPU) of Rs210, which plummeted from Rs 350 during the last five years. In fact, the government is moving in a wrong direction by jacking up taxes on the telecom sector. And if the sectors growth travels in negative zone, foreign investors will become hesitant to come to the country with investment plans particularly in the IT and telecom sector. The governments decision to enhance the withholding tax on this sector remains still unanswered especially in the wake of declining trend in the revenue generation. The authorities need to review their decision as if the ratio of taxes on this sector is rationalized it would ultimately swell the overall taxes volumes.