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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.
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