FBR proposed to exempt withholding tax on telecommunications services


KARACHI: The Federal Board of Revenue (FBR) has been recommended to waive withholding tax on telecommunications services to help a large number of the country’s population live below the poverty line.

The Chamber of Commerce and Industry of Foreign Investors (OICCI) in its proposals for the 2022/2023 budget urged the FBR to streamline the withholding tax on telecommunications services.

“The rate of withholding tax on subscribers should be completely abolished as the majority of the subscriber base falls below the taxable limit or the reduction in withholding tax effected by the Finance Act 2021 should be restored, i.e. 8% from the 2023 financial year.

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The advance tax on telecommunications services has been reduced via the 2021 finance law from 12.5% ​​to 10% for the 2021 financial year and to 8% for future years. However, under the (supplementary) finance law of 2021, the withholding tax rate has been increased from 10% to 15%.

The increase in taxes hampers the affordability of mobile service, which is an essential service for the entire population and more than 70% of the Pakistani population lives below the poverty line. Telecommunication service is also essential for the economic growth of a country.

On top of that, Pakistan has the largest gender gap in mobile phone ownership (34%) and mobile internet usage (43%) compared to its regional peers. Sectoral taxes have increased the cost of mobile services, which has a strong impact on poorer consumers, especially women, reducing their ability to become mobile broadband subscribers.

Since more than 70% of the population lives below the poverty line and the percentage of taxfilers is also nominal, the implementation of withholding tax on the entire subscriber base is not illogical. In addition, the reduction in withholding tax will also promote the accessibility of Internet and data services to low-income people.

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The OICCI also pointed out that the four provinces and the federal government have introduced separate sales and service tax laws in their respective jurisdictions, with some of the clauses clearly in conflict with each other, causing difficulties. excessive charges associated with harassment by federal and provincial collectors demanding tax on the same transactions amounts to double taxation. This situation is highly undesirable and creates complexities for taxpayers leading to unnecessary litigation.

Also, there should be a single sales tax rate across all jurisdictions to remove the anomalies and undue difficulties that the telecom industry faces in terms of compliance in different jurisdictions, to make it easier to do business. Telecommunications services should not be discriminated against by being subject to higher tax rates, sales tax rates should be aligned with those of other services.

“There should be a single sales tax rate across all jurisdictions to eliminate the anomalies and undue difficulties that the telecommunications sector faces in terms of compliance in different jurisdictions, in order to facilitate the conduct of business. Furthermore, in accordance with international and regional practices, a uniform tax law on services can be drafted and approved by the tax authorities of the provinces and the federal government, for implementation in their respective jurisdictions,” he recommended.

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The chamber pointed to the advance auction/license renewal tax, and stated that this tax is likely to be levied on the “auction” of the property. Spectrum allocation is not a sale of ownership.

First, the specter is not a property, it has no physical form because it cannot be seen or physically possessed.

Secondly, the spectrum is not “sold”, but a right to use the spectrum for a fixed term is granted to the telecommunications operators and the licenses are granted for a fixed term only.

Therefore, spectrum is never sold to telecom operators, they only receive licenses for a fixed term. While the term “sale” means that absolute ownership is transferred permanently to the buyer with a right to transfer ownership to another person, which is not the case.

Therefore, this tax should be removed as it is irrational. In addition, the telecommunications sector has already paid huge amounts of withholding tax far beyond its tax liability. Second, no such advance tax is levied on the granting of other licenses such as oil exploration.

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“This tax should be removed as it is irrational and burdensome for CMOs,” he recommended.

As large utility providers, Cellular Mobile Operators (CMOs) are subject to the deduction/collection of income tax withholding on a large number of transactions, e.g. electricity bills from cell sites where there are thousands of them, which has increased the cost and complexity of tax compliance and additional administrative burden for the telecommunications sector and has a negative impact on the overall business environment.

In addition, it is also not possible for the tax authorities to verify the claim for advance tax paid on electricity bills, which is a very laborious task. Similar exemptions have already been granted to the banking sector to reduce administrative costs.

The telecommunications sector should be exempt from the deduction or collection of all types of withholding taxes, such as the banking and petroleum sectors. There will be no loss of revenue for the Treasury as the tax collection mechanism will be simplified in terms of real time payment of withholding tax under Section 147 of the 2001 Ordinance income tax on a quarterly basis.

In addition, this measure will also make tax claims and its verification mechanism more transparent with minimum operational hassles, as the retention of thousands of records, especially for anticipated taxes on utility bills and imports, is in progress. itself a very cumbersome procedure.

The OICCI highlighted the customs duties on the import of batteries and said to reduce the customs duty rates for batteries (8507.6000 and 8507.2000) from 11% and 20% to 5% and abolish the additional customs duties ( 2% and 6%). and regulatory obligation (5%), as these batteries are used with solar and electric systems and are the primary asset of the telecommunications infrastructure service provider. The reduction in duties will further encourage alternative energy resources for the telecommunications sector, eg solar energy, etc.

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“Reduce the customs duty rates for batteries (8507.6000) to 5% and abolish additional customs duties and regulatory duties, as these batteries are used with solar and electric systems and are an essential asset for the service provider telecommunications infrastructure,” he recommended. The reduction in duties will further encourage alternative energy resources for the telecommunications sector, eg solar energy, etc., he added.

The chamber said that the Finance Act 2018 inserted a new clause in subsection (3) of Article 101 of ITO’2001, under which Pakistan derives its income from a business of a non-resident person, would include income from importation. of goods, whether or not title to the goods passes outside Pakistan, if the importation is part of an overall agreement for the supply of goods, installation, construction, assembly, commission, warranty or supervisory activities and that all activities or principal activities are undertaken or carried out either by associates of the person supplying the goods or by his permanent establishment, whether or not the goods are imported in the name of the person, of the person’s partner or any other person.

In view of the amendment to section 101(3), corresponding amendments have also been made to subsection (7) of section 152, whereby a taxpayer would now invariably be required to obtain an order from the Commissioner of the tax u/s 152 (5A) of ITO’2001 to make payment under such transaction without tax deduction or at a lower rate.

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“Since the title to the goods passes outside Pakistan, deducting the withholding tax at a much higher rate, i.e. 20%, will increase the cost of the equipment, as the supplier will increase the prices by including the withholding tax factor.Therefore, the telecom operators will have to bear the additional cost that will halt the expansion of telecom services, especially in remote areas where the cost of doing business is already much higher,” he recommended.

Telecommunications equipment are depreciable assets under the Income Tax Order 2001 which are used by telecommunications operators in the supply of telecommunications services which are taxed as business income in the under the national tax system. Currently, telecommunications equipment is not properly classified in the twelfth list, which is a cause of discrimination between the telecommunications sector and others.

He recommended that telecommunications equipment be classified in Part I of the twelfth schedule of the ITO of 2001 in order to assimilate the telecommunications sector to other industries because telecommunications equipment is not imported to resale purposes.

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