ECO402 GDB NO. 1 FALL 2022 || 100% RIGHT SOLUTION || Microeconomics II BY VuTech

ECO402 GDB NO. 1 FALL 2022

ECO402 GDB NO. 1 FALL 2022 || 100% RIGHT SOLUTION || Microeconomics II BY VuTech

GDB TOPIC:

The Telecom sector has emerged as one of the vibrant sectors of Pakistan’s economy. Increasing revenues, growing investment and enhanced contributions to the national exchequer are hallmarks of the sector for many years now. This sector is complex, extensively regulated, and rapidly evolving to keep up with the global markets and initiatives. The Internet plays a vital role in education.  Popular search engines like Google, Yahoo, etc. are the topmost choice of people as they offer an easy and instant reach to the vast amount of information in just a few seconds. Hence, the internet has become a major tool for effective teaching as well as a learning tool. At the start of the year 2022, the government of Pakistan increases withholding tax on the telecom industry. Therefore, every recharge will now be taxed at a rate of 15%. The detail of tax is described in the following table:

Particulars	Current rate	New rate
Withholding tax	10%	15%
Recharge [example]	Rs. 100	Rs. 100
Balance on Rs. 100 recharge	Rs. 90.91	Rs. 86.96

Requirement:

Being a student of economics, logically discuss how does this policy affects the telecom industry? Also, describe the impact of this tax on education. 

Solution:

The telecom sector is one of the fastest-growing segments of Pakistan's economy and is a key driver for growth. There are an estimated more than 100 million cellular users and the sector directly or indirectly employs approximately 1.36 million people.

Infrastructure and subscriber growth patterns in Pakistan are unmatched all across the world. The Telecom sector of Pakistan has been exhibiting thriving growth patterns. Today teledensity of Pakistan stands at 46.9% surpassing. Prices of telecom services have reduced significantly due to competition among operators which is the major factor behind this impressive growth in teledensity. The operators have improved the quality of service since PTA is continuously pursuing operators to meet international standards.

The government of Pakistan is contemplating offering incentives to lead manufacturers of cellular mobile handsets and telecom equipment to consider the manufacturing of cellular mobile handsets and other equipment’s in Pakistan where cheap labor and other inputs are available. A lucrative market exists in Pakistan where about 2 to 3 million subscribers are being added on cellular mobile networks every month and still a large potential exists. According to an estimate cellular mobile companies have access to only 61% of the target market in Pakistan and they can still access the remaining 39%. Pakistan's environment has been very conducive to Foreign Direct Investment for the last few years and the trend is expected to continue into the future. Plenty of skilled and cheap labor is available in Pakistan, and all other factors of input of doing business are also quite attractive compared to the region. The survey also found that 20% of users change their mobile handset after every two years. This indicates that Pakistan is a lucrative market for manufacturers of mobile handsets and other telecom equipment and this could be a successful business model. The strategic location of Pakistan is also an added advantage. The potential investors can also target other emerging and developing economies in the region by exporting handsets/ equipment from Pakistan to provide better economies of scale. The potential investors may also explore public-private partnerships in such adventures.

PTA has created a conducive and investor-friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. All operators (mostly foreign) are rolling out their networks rapidly all over the country, which requires huge investments. After the liberalization of the sector, a large number of firms are working in Pakistan’s telecom sector. Some of them are laying Optical Fiber all across the country while some have laid undersea cable. Telecom companies have invested over US$ 8 billion during the last four years in Pakistan particularly the mobile sector whose investment share accounts for 73%. LDI operators have invested about US$ 603 million in 2006-07 which is about 15% of the total investment by the sector. It is expected that the trend of an investment may continue in the next 5 years because a large potential market still exists in Pakistan and all operators intend to grab their share. China Mobile acquired Pak Tel which has contracted out US$ 500 million worth of projects to renowned companies like Erickson, ZTE, and Alcatel to roll out their networks. Similarly, Mobilink also planned to invest US$ 500 million in 2007-08 for improvement of quality of service and infrastructure expansion. Wateen Telecom which has already laid out 5,400 Km of optical fiber all across the country has announced to invest US$ 600 million in the next two years to improve its infrastructure. Telenor plans to invest US$ 750 million in the next two years.

The Telecom sector is a major contributor in generating revenues for the Government in the form of taxes, duties, and regulatory changes. To generate an adequate level of revenues government is undergoing large tax reforms which include broad-based tax policy and tax administration reforms that aimed to reduce indirect taxes that are considered regressive taxes. telecom usage has increased tremendously due to low tariffs and other steps taken by the regulator and the government. The government also collects activation tax on new mobile connections. However, analysts are of the view that the CBR and various local governments & civic authorities are levying exorbitant taxes and charges such as Rs. 500 Activation Tax on every new mobile connection, 10% Withholding Tax on prepaid calling cards and postpaid accounts, and 15% Federal Excise Duty (FED) on Fixed Wireless Terminal (FWT) equipment for WLL which is are a hurdle for further growth of the sector. Rationalization of taxes is required in the sector. In 2006-07, Cellular Mobile companies deposited Rs. 17.3 billion in the form of Withholding tax which is an advance income tax credit that can be taken by a user from the tax authorities at the time of filing his/her Income Tax return. However, most users are not liable to pay income tax. Hence, they cannot get the credit of this withholding or advance tax. Hence, imposing this tax on prepaid mobile cards is completely unjustified. Similarly, Cellular mobile companies deposited over Rs. 17 billion as an activation tax of which 66% activation tax has been paid by two companies Mobilink and Telenor which are the fastest-growing companies in the sector. If this tax is reduced, they would have more resources to expand their services in the rural areas of Pakistan. Analysts believe that a reduction in activation tax is unlikely to lead to a decrease in government tax revenues. It is estimated that if the government reduces the amount of activation Tax to Rs. 250, tax collection from the cellular mobile sector will increase by about 32% in just one year.

100 cards have now been withdrawn and mobile network users will have to pay 12.5% withholding tax and 19.5% FED, which is still applicable on every top-up and balance transfer. The move is likely triggered by the Supreme Court's verdict that reverted mobile phone taxes to July 2018

Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak but smaller when it is operating near capacity.

An official of Pakistan Telecommunication Authority (PTA) when contacted said that PTA is vigilant about the rates and tariffs being charged by Cellular Mobile Operators (CMOs) and action will be initiated on any reported incidence of charging above the published tariffs and applicable taxes in accordance with the law.

The reduction in adult income makes it harder for the parents to bear the direct costs of education such as tuition, fees, books, supplies, uniforms, and private tutoring. Educational outcomes are consequently harmed because the child is either withdrawn from school or inadequately prepared for it.

The Telecom sector is growing at an outstanding pace where all stakeholders are getting due benefit out of it. The digital divide is bridging at a faster pace, particularly with the start of USF roll-outs, and wireless-based services, in particular, are reaching out to remote areas of the country very rapidly. The sector is contributing about 2% in GDP directly and if we include its indirect contribution in other sectors of the economy this share comes to about 5%. Telecom revenues are on the rise and the sector continued to attract a major portion of foreign investment.

SUBSCRIBE, SHARE, LIKE, AND COMMENTS FOR MORE UPDATES

KINDLY, DON’T COPY-PASTE

SEND WHATSAPP OR E-MAIL FOR ANY QUERY

 0325-6644800

kamranhameedvu@gmail.com