E-commerce and IT need to watch out for the budget

As bizarre as it may sound, only 900,000 people file tax returns in Pakistan in a country with a population size of 200,000 million. This is less than 1%.

In terms of Gross Domestic Product, 9.4% share goes to direct tax collection while 60% to indirect taxes. Regardless of the size of the tax net, the revenue collection process remains heavily flawed and tarnished. The elephant in the room remains unchallenged, for decades.

In the process, the country’s financial wizards slay the profit-making industries to make up for missed revenue targets. The lamest amongst all of them is to squeeze IT & telecom or Information Communication Technology corporations.

Broadband services in this country are subject to 19.5% tax. The telecommunication companies are left with only two options: either to politely lobby for withdrawal and rationalisation of the tax or pass the burden on to the consumer. They have to resort to the latter but are left with a smaller market and reduced profit margins.

Budget expectations

The forthcoming budget may create more liabilities owing to increasing appetite for repaying debts amidst swelling domestic needs. The government’s last budget before the election will expectedly be packed with indirect taxes along with direct ones that the public may not even understand. Even ahead of fiscal budget 2017-2018, the telecom industry has been seeking elimination of withholding tax (WHT); rationalisation of the Federal Excise Duty (FED) or General Sales Tax (GST), end to advance Income Tax on auction price of 4G spectrum as well as SIM issuance and IMEI taxes.

For every cellular top-up, a consumer pays 14% of the amount in taxes. Such high adverse taxation policies may fare better for the government to lazily meet some of its revenue targets but is tantamount to strangling a sector whose potential has yet to be realised.

In the last fiscal year, the government collected Rs41.65 billion through GST alone while overall revenue collection from the telecom sector amounted to Rs157.85 billion. Yet, the telecom sector remains devoid of the industry status.

If someone thought that success of e-commerce platforms would go un-noticed, think again. The forthcoming budget is most likely to include proposal for taxing the nascent but a budding tax sector. Thus, any online shopping or hiring of service (such as an Uber or Careem pick-n-drop facility) may come at additional cost. So far, the national tax gurus are keeping the percentage and nature of tax to be imposed on e-commerce. Pakistanis won’t be deprived of a wholesome tax experience, anyway.

More expensive computers

What has not been taxed so far is the electronic hardware such as laptop and desktop computers, printers and servers.

This tax exemption ends this year, however, and may possibly be revived with a caveat. Even if the finance ministry slaps 5 or 10% sales tax on sale of computers and associated appliances, there won’t be street protests. The media does not have the capacity to gauge the adverse impact of such decisions, thanks to its piecemeal interest and limited knowhow.

Meanwhile, officials in the ministry of planning report that the National Economic Council has approved a Startup Package worth Rs2 billion. There is nothing wrong with the package but would it not have been better to give the necessary reliefs the country’s IT sector has been seeking for years. Worries about its unfair distribution notwithstanding, the package may create dependency.

With 17% GST on all hardware purchased in Pakistan, how can the country excel in modernising its systems and marketplace?

Add to this is office rent, import duty, taxes on employee salaries, taxes through energy bills and the biggest indirect tax from the government inability to meet the electricity demand in the form of rolling blackouts. The government’s addiction to regressive taxation on the $2.2 billion industry is tantamount to slaying a goose that lays golden eggs.

Be it the ICT hardware or cellular telephony and its affiliate services, they serve as engines for innovations and development. Instead of slapping taxation, the government must declare FY18 a year of innovation.

The success of numerous homegrown startups has already hinted at the prospects of success if they are let to snowball into a movement.

The writer is a Pakistani investigative journalist and academic with extensive reporting experience in the Middle East and North Africa. He is based in Doha and Istanbul and tweets @naveed360.

This article was originally written for Express Tribune.