Telecom taxation saga -Pakistan Press Foundation (PPF)

Paksitan Press Foundtion

Telecom taxation saga

Apparently, the mobile network operators in Pakistan are in hot soup, for allegedly evading billion in taxes on account of inter-connection charges since 2007. An unexplained figure of Rs47 billion has been doing the rounds for months now, in what is speculated to be one of the biggest corporate tax evasions in the countrys history.

News items suggest that the MNOs see it as a baseless, malignant campaign to harass the leading taxpaying sector, even as PTA sits tight on the fence. After showing initial zeal for recovering the tax arrears, FBR seems more inclined to settle and move on. Yet the tax arbiter finds itself cornered; now that NAB has jumped the gun. Amid confusion and skepticism, nobody seems to be in charge.

Before analyzing the situation, the concept of inter-connection (IC) must be understood. IC is essential for the subscribers of two different telecom operators to communicate with each other, and operators link up with each other’s infrastructure facilities for that purpose. Charges for services like collecting and delivering calls, operation and maintenance of IC points, etc. are categorized as interconnection charges.

Globally, either revenue-based or cost-based IC mechanism is followed. Pakistan’s telecom regulatory regime allows for cost-based interconnection charges to reflect the behavior of underlying costs.

Under the PTAs Calling Party Pay Regime, IC charges, as high as 90 paisa per minute for some operators, are actually paid for by the dialing customers to their operators. The operators also deduct from their dialing customers the FED of 19.5 percent on the gross amount which includes IC charges. The cost-based IC charges are then settled among the calling party operator and the receiving party operator.

The taxmen at FBR took a position, since 2010 until last month that the cellular companies were not paying taxes on IC charges, based on the assumption that both the calling and receiving operators have to independently pay the said tax.

Reportedly, the MNOs contested this interpretation, stating that the IC charges are counted as expenditures – not income. They contend that under the existing CPP regime, the said tax is not due on IC charges because the tax is already deducted on gross amount from the dialing subscriber by the calling operator, which covers both the calling and receiving operators.

They operators maintain that it would mean no loss or gain to the government if the said tax is paid in two parts by both the calling party network and receiving party network. Doing so would necessitate that the calling party be refunded the tax on IC, which essentially becomes its input tax.

The previous FBR Chairman seemed to concur with the operators in late June when his tenure was about to end. FBRs Sales Tax Chief is also on record saying that the tax on IC charges would be adjustable, implying no impact on government revenues. But the matter is now being investigated by the NAB, much to the ire and chagrin of telecom operators.

It appears that the operators may be willing to pay the said tax as per the FBRs new interpretation (of taxing both parties independently on IC charges), subject to a waiver of past practice under the sales tax laws. But NAB is continuing its inquiry, and does not seem to relent even as the operators have reportedly approached the office of the Prime Minister.

It increasingly appears now that the authorities have locked their horns over a matter which may have, at best, procedural implications – not financial as they hoped. After all this hoopla, it is important to settle this matter amicably and at an appropriate forum. The NAB must spell out the rationale behind its inquiry, and must bring to light if there is anything more to this saga than just the interconnection tax issue.

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