Recently a lot of hue and cry has been raised in the media about the evasion of sales tax by the telecom operators. According to these misleading reports, the telecom operators have not deposited sales tax on interconnection charges during the last five years. These reports are based on ignorance of facts and law, and can cause great damage to this flourishing sector in the coming years.

All the Cellular Mobile Operators (CMOs) and major telecom operators in Pakistan are multinational companies working under the direct control of their foreign parent companies/investors. Being multinational companies, the CMOs are required to strictly follow the corporate governance procedures, guidelines of their shareholding groups and total adherence to the governing legal framework of the countries they are operating in. These are also subject to group internal audit and statutory audit requirements, which ensure transparency and legal compliance.

Mobile telecommunication is currently the largest tax collecting and paying sector of Pakistan. The total contribution of the telecom sector to national exchequer for financial year 2011-12 was in excess of Rs 120 billion. This is in addition to the billions paid as other fees and levies to the federal and provincial governments and their concerned authorities. The telecom operators are making a significant contribution towards the overall economy of the country by contributing 5 percent in the total Foreign Direct Investment (FDI), in addition to a total of approximately 1.4 million direct and indirect jobs created by the telecom industry. Despite all the grave challenges faced during last couple of years and resultant decline in progress, the telecom operators have provided highest quality services to the customers and are continuously upgrading and expanding their networks to serve the un-served with the state-of-the-art infrastructures; thus showing their commitment to the society at large.

In the year 2000, the Pakistan Telecommunication Authority (PTA) implemented the Calling Party Pays (CPP) regime to encourage subscribers to make and receive more calls; to further ensure penetration of mobile cellular service; and to bring the calling regime in Pakistan in line with that followed in the developed counties. The concept can be easily understood by an example where a subscriber A of a mobile network, say network O, intends to call a subscriber B from a different mobile network, T. For this purpose, both networks have to be interconnected. While in that case network O has to provide an origination service, network T terminates the call. Both operators usually charge fees for their services, namely the call charge and the termination rate (t), in order to cover costs. Under the CPP regime, mobile operator T charges network O a termination fee (the “interconnection fee”), which network O completely charges to its own subscriber in addition to the call charge.

Under this arrangement, a Federal Excise Duty (FED) for each call made is deposited in the government treasury by the telecom operators (interconnection rate of Rs 0.90 is fixed by PTA). This practice has been followed by the telecom operators since 2003-04 when interconnection between them was allowed. As a matter of fact, under the current practice, the calling party is required to pay FED for the entire charges of telephone call (calling party network + receiving party network) that is subjected to tax in sales tax mode at 19.5 percent; thus incurring no loss of revenue to the government. It is evident that the entire sales tax is being deposited by the operators with no tax evasion, as is being depicted in the electronic and print media. 

The problem arose in 2010 when the Federal Board of Revenue (FBR), which had not objected to this practice previously, came with a new interpretation of law to collect tax beyond what is due on telephone calls. The total tax on telephone calls had already been deposited in the retail mode, while no tax is due on interconnect as it is mere after tax sharing of revenue on which tax has been collected/deposited on gross amount by each of the concerned telecom operators from whose network the calls were initiated.

In good faith and to avoid any litigation issues, the telecom operators offered to adopt the new procedure proposed by the FBR that, in turn, should at least provide waiver for past practices of the industry under Section 65 of the Sales Tax Act, 1990. However, instead of creating positive synergy, the FBR is creating hurdles in the path of smooth operations and the expansions of the operators’ networks by frustrating them through illegal taxations. In a country, which is already on the verge of bankruptcy, these steps of starving foreign investment will trigger a backlash by foreign investors; thus ruining whatever industry we are left with. It is time to think logically, instead of cutting one’s own feet.

    The writer is a PhD in Information Technology, alumni of King’s College London and a         social activist. He is life member of the Pakistan Engineering Council and senior             international editor for IT Insight  Magazine. He has authored two books titled             Understanding Telecommunications and Living In The Grave and several

    research papers.