ISLAMABAD: The telecom giants have asked the government for reducing advance income tax from 12.5 to 10 percent, rationalize and harmonize GST rate at 16 percent, resolution of SIM issuance tax and reduction in Customs Duty and Regulatory Duty on telecom equipment and raw material for optic fiber cable in the budget 2021-22.
According to a joint letter written by giant telcos including PTCL, Jazz, Telenor Pakistan, Ufone and Zong to Federal Minister for Finance, they were hopeful that the tax proposals approved by the federal cabinet shall be implemented in the upcoming Finance Act, further augmenting government’s drive of Digital Pakistan.
The telecom companies asked for reduction of advance Income Tax, from 12.5 percent to 10 percent and 8 percent by FY2021-22 and 2022-23. The telecom companies have demanded rationalizing and harmonizing of Federal Excise Duty (FED) and Sales Tax rates at 16 percent and harmonizing tax laws for telecom services across the country. The grant of industrial undertaking status as per Section 2 (29C) of the Income Tax Ordinance 2001 and simplified advance tax mechanism under Section 147 of ITO 2001 in line with the banking sector.
The telecom sector wants resolution of SIM issuance tax in accordance with the Lahore High Court (LHC) decision. The telecom sector has also asked for reduction in Customs Duty and Regulatory Duty on the import of telecom equipment and on raw material for the optic fiber cable manufacturing industry.
Other stakeholders including Enfrashare wrote to the government and stated that under the current provisions of Section 153 of the Income Tax Ordinance, 2001, the entire revenue earned by ITCs is presently subject to withholding income tax (WHT) at the rate of three (3) percent, which is computed on the basis of revenue inclusive of Sales Tax (wherever applicable) and treated as ‘Minimum Tax’ (MT).
The effective rate of MT for ITC’s revenue can only be lower than normal tax liability at the present corporate tax rate of 29% if there is a net taxable income to turnover ratio in excess of 30%. The business of ITCs is capital intensive as huge investment is required in terms of lease costs of the necessary properties as well as acquisition and subsequent tower construction and ongoing operation and maintenance costs for each tower besides incurring electricity and insurance costs to ensure the connectivity of telecom users. Such capital investment is not necessarily made entirely out of shareholder’s equity, rather the same is financed through long term loans which currently have a higher financing cost.
Owing to the above factors, ITCs are not expected to be in a taxable profit position at least in the initial five years and even from fifth to tenth year, the taxable income to turnover ratio is not likely to be more than 30%, so as to absorb WHT suffered on ITC’s revenue. Consequently, for initial 10 years, ITCs are expected to be subject to MT through 3% WHT deduction on its entire revenue (inclusive of Sales Tax).
It said “keeping in view the above, we request you to kindly recommend the following amendment to Income Tax Ordinance, 2001 through forthcoming Finance Bill 2020: Change in tax regime from Minimum Tax to Normal Tax for ITCs.
The provisions of MT regime through Section 153 of the Income Tax Ordinance, 2001 should be made non-applicable on ITCs. We understand that this amendment can be made through an insertion of a clause in Part IV of the Second Schedule to the Income Tax Ordinance, 2001 whereby the provisions of Section 153(3)(b) can be exempted in the case of ITCs. As a result of this amendment, ITCs will be subject to Net Income Basis taxation whereby their annual tax liability for any tax year will be computed on the basis of net taxable profit for a particular tax year subject to MT provisions of Section 113 and 113C. In case of their withholding tax in excess of such liability, they will be entitled to claim refund or obtain a prior exemption certificate, subject to fulfillment of other conditions laid down in tax law.