Telecom receives much-needed relief

FED removed, withholding tax reduced by 1%. PHOTO: FILE

KARACHI: In a move that will provide the much-needed relief to the heavily-taxed telecommunication sector, the government withdrew federal excise duty (FED) on telecom services from provinces already charging general sales tax (GST) and reduced withholding tax by 1 percentage point.

“In order to simplify the tax regime, it has been decided to withdraw FED from those provinces which have imposed GST on telecom services,” Finance Minister Ishaq Dar said in his budget speech.

This reform in the tax regime is in line with expectations of the telecom sector that had been lobbying for a centralised tax regime to avoid double taxation – the telecom sector was previously paying a whopping 19.5% GST and as much FED to provinces and federation respectively.

For provinces where no GST is charged, the government has reduced the FED from the current 19.5% to 18.5%, according to the draft of Dar’s  speech. However, this 1% reduction in FED is far from the industry’s recommendation of reducing the same by 2.5%.

Another tax benefit to the telecom sector came in the form of reduction in Withholding Income Tax on telephone services. The finance ministry reduced the advance income tax on telecom services from the current 15% to 14% – this also disregards the recommendations of the telecom lobby that had proposed to reduce the withholding tax by 5% to 10%.

In addition to the aforesaid relaxations, the finance ministry – in accordance with the already-announced policy – also proposed to reduce the corporate tax rate by one percentage point. The corporate tax rate shall be 33% for FY2014-2015, Dar informed in his speech.

Telecom sector has been contributing significantly to the national exchequer – cellular mobile companies, alone, paid $5.4 billion in taxes in the last five years, at an average of over $1 billion a year. Besides that, four of the five cellular mobile operators (CMOs) functioning in the country have invested $1.1 billion earlier this year by purchasing licences for 3G and 4G mobile internet services that have already started to roll out.

Though not all of the telecom sector’s recommendations were accepted by the finance ministry, whatever relief is given to the sector would be welcomed by the industry.

Retail sector

The finance ministry also proposed to bring – the largely undocumented – retail sector under the tax net by making it compulsory for all retailers to obtain their national tax number (NTN) while seeking electricity and gas connections for their businesses.

“Because of a variety of reasons, most of the retailers are still not under the tax net,” Dar said. “After carefully studying the issue, we’ve concluded that most of the retailers are willing to pay their due share of taxes but they want a simple and easy method of doing so,” he said.

The finance ministry, therefore, introduced a two-tier Simplified Sales Tax Regime for Retailers and categorised the retailers accordingly.

The first-tier comprises retailers who operate as part of national and international chain stores, operate in air-conditioned shopping plazas, have [point-of-sale] machines for credit or debit cards, or have monthly electricity bills in excess of Rs50,000, according to the draft of Dar’s  speech.

“These retailers will be required to pay GST in the normal regime and to keep electronic cash register of approved-specifications in order to record their transactions,” the finance minister said.

All remaining retailers will fall in the second tier.

For tier II retailers, the ministry would introduce a mechanism for payment of sales tax through the retailers’ electricity bills, the minister said. “Thus, retailers having electricity bills of less than Rs20,000 in a month shall be charged only 5% of the bill as sales tax on retail sales while those with higher bills shall be charged 7.5% as sales tax on retail sales.”

The finance ministry proposed to link the utility bills of retailers with their NTN, which would help the government in tracing the tax record of retailers – both the already-established players and the new entrants.