Pakistan : The Pakistan telecom sector has been recording a positive growth

After passing through a difficult time during 2008-09, the Pakistan economy

is back on a recovery path, as indicated by the macroeconomic indicators for the

first half of FY 2009-10. All macroeconomic indicators show positive signs

except the budget deficit target, which exceeded by a small margin. The exchange

rate remained stable and the international reserves position strengthened during

the first half of FY 2009-10. Economic growth in Pakistan has started recovering

due to the improvement in large scale manufacturing sector's output-resulted

from the improvement in global economy-which has helped manufacturing exports

growth. However, the growth recovery prospects also enclosed few risks and

challenges, including the security situation, power shortage, the drop in

overall volume of trade and poor tax growth. A revenue shortfall and delays in

disbursements of pledged donors support have complicated the fiscal management.

The country's engagement in war against terrorism has resulted in additional

expenditures, putting pressure on the federal budget. Consequently, the budget

deficit for the first quarter of FY 2009-10 has been reported at 1.5% of the

GDP, as compare to 1.1% in the first quarter of the last year. Unprecedented

surge in inflation (CPI) remained the concern of economic managers, which has

been contained in the year 2009-10 to some extent.

CPI inflation dropped to 8.9% y-o-y in October 2009 (the lowest level in the

preceding twenty-six months); however, it went back to 10.5% in November 2009.

As a leading economic indicator, this shows growth of inflationary pressures in

the economy.

The telecom sector too appears to be on the path of recovery after the slow

growth in the year 2008-09. The growth of teledensity remained topsy-turvy in

the year 2008-09, when teledensity continued to decline from June 2008 to

December 2008 (3.5 to -0.5%) and picked up again in June 2008 and reached 2.6%

in June 2009. The total teledensity declined again in the first of quarter of FY

2009-10; however, it stated picking up in the second quarter of the same year.

The decline in teledensity in the first quarter of 2009-10 is attributed to the

decline in cellular mobile numbers by major operators, Mobilink and Ufone, who

dropped their numbers due to some definitional changes.

PTCL also reported a decline in fixed line subscribers during the period,

which caused a decline in the overall teledensity. PTA provided a uniform

definition of active subscribers to all operators for reporting purpose, where

all have compliance to this definition.

The total teledensity of the country reached 63.5% in December 2009, which

was 62.1% in June 2009. During the first two quarters of FY 2009-10, the overall

teledensity increased by about 1.8%. The rise has been mainly witnessed in WLL

density, which grew by 6%, while the cellular mobile teledensity grew by 2.2% in

the first two quarters of FY 2009-10. However, the fixed line teledensity

remained unchanged during the first two quarters of FY 2009-10. The main reason

for the slowdown in the pace of teledensity could be attributed to the maturity

of the market, where operators' efforts are now on retention policy, instead of

expansion of subscribers.

Financial Tidbits



Soaring inflation, cut-throat competition, expenditure on advertisements,

rising utilities expenditures and power shortage have squeezed down the margins

of the telecom companies in general. However, despite all these difficulties the

revenue of the industry registered a positive growth during the last few

quarters. The main reason for this positive growth is attributed towards a tax

relief provided to the industry in the budget of 2009-10, where the tax rate was

reduced from 21% to 19.5%.

During July-September 2009, the total industry revenue was reported at Rs

81.3 bn, while in the second quarter of 2009-10 (Oct-Dec,09) the industry

revenue reached Rs 85.88 bn.

During the first half of FY 2009-10 (July-Dec, 2009), the telecom industry

earned Rs 167.2 bn revenue compare to Rs 161.8 bn in the previous half yearly

revenue. The cellular mobile sector's share in the total revenue comes to about

68%, which has shown a positive growth in revenue generation in the first six

months of FY 2009-10, where it registered a growth of about 5%. The fixed line

sector grew about 0.5% during the first half of FY 2009-10.

Despite the squeezing margins of the telecom industry-owing to economic

difficulties, heavy taxes and falling exchange rates-it continued to contribute

to the national revenue, through taxes and duties imposed by authorities. During

the first six months of FY 2009-10, the telecom sector contributed about Rs 48.6

bn to the national kitty, through these taxes, of which a major share comes from

GST revenues, where the sector deposited over Rs 21.44 bn. A major decline in

tax revenues has been observed in Activation tax, which is imposed at Rs 250 per

new connection. Under this head, companies deposited over Rs 3.8 bn compared to

Rs 14.2 bn in the last year. This decline is understandable because of the

market maturity. PTA collections are quite comfortable, where it collected over

Rs 4.91 bn in the first half of the fiscal year.

Foreign Direct Investment



The telecom industry continued to attract foreign direct investment (FDI) to

expand the infrastructure and maintenance of its networks

. However, the volume

of FDI also continued to decline with the maturity of the market over time. FDI

consists of the amount remitted from abroad and the reinvestment of profits

earned by the companies, which were supposed to be repatriated by the foreign

firms. During the quarter ending December 2009, the telecom sector attracted

$142.7 mn FDI, which was 26.4% of the total FDI in the country during this

period. While in the previous quarter, FDI in the telecom sector was reported at

$39 mn, that was about 8% of the total FDI in the country. During the last one

year, the sector has attracted about 37% of the total FDI in Pakistan, which is

a commendable.

Taxes on the Sector



The Pakistan telecom sector has been burdened with various taxes by

different organs of the Government of Pakistan. These taxes include GST/CED,

With Holding Tax, Income Tax, Activation Tax, Regulatory Fee, Spectrum Charges,

Stamp Duties and various fees by civic authorities, etc. Operators are required

to deposit a handsome amount of their revenues to the national kitty, in the

form of these taxes which are squeezing their profit margins. A comprehensive

study is required to analyze these taxes and rationalize the tax structure for

this growing sector, that could be a win-win situation for all parties.

Among all these taxes, GST/CED is a major tax which is imposed on telecom

operators at 19.5% of their revenues. In the year 2008-09, the Government of

Pakistan suddenly increased the rate for GST/CED for the telecom sector from 15%

to 21%, which had a negative impact on revenue generation as well on the growth

of the sector. The Regulatory Authority raised this issue with other authorities

along with facts and figures. Consequently, the Government of Pakistan agreed to

reduce this burden in the budget of 2009-10, where this tax was reduced by about

7% and set at 19.5%. It certainly gave a relief to operators, which enabled them

to divert sources for network expansion. However, the total revenue under this

head could not be increased in the first half of FY 2009-10, as expected owing

to drop in call rates, slowdown in the economy, falling exchange rates and

rising inflation, etc.

During the first half of FY 2009-10, FBR collected Rs 21.4 bn against Rs 25.2

bn in the previous quarter and Rs 24.2 bn in the quarters before. During the

first half of FY 2009-10, GST/CED revenues of the cellular mobile companies

dropped by about 13%, compared to the previous six months; while the revenues of

basic services declined by 18% in the same period. FBR needs to revisit the

situation and provide further relief to operators in terms of the rate of GST/CED,

so that more revenue can be generated.

Activation tax is another tax which is charged at Rs 250 per new connection,

from all operators. This tax also has increased the mobile acquisition cost,

where companies are compelled to pay this tax from their own pocket due to

competition in the market. This tax is also a burden on the cellular mobile

companies. Since, the market is moving towards maturity, where new additions in

the cellular mobile subscribers has reduced, this tax also needs to be reviewed

and may be abolished to provide further cushion to operators. Revenue generation

in tax has also reduced considerably.

During the first part of the fiscal year, FBR collected Rs 3.8 bn, while in

the previous year, companies deposited over Rs 14.3 bn against Activation tax.

FBR has also imposed With Holding tax at 10% on cellular mobile companies, which

is an advance income tax. This tax is unjustified because most of the cellular

mobile subscribers belong to poor stratas of the society, who are not liable to

pay income tax.

Telecom Imports



In the year 2008-09, the Government of Pakistan imposed custom duty and

regulatory duty of Rs 750 per mobile handset to discourage the mobile imports

and save foreign exchange. Consequently, the import of mobile handsets declined

sharply and in the very next quarter of FY 2008-09 (July-September 2008), the

cellular mobile handsets imports declined to $70.7 mn, compared to $127.6 mn in

the previous quarter. This trend continued for the next quarter as well, where

the import of mobile handsets reached just $12 mn in January-March 2008.

However, the imposition of custom duty increased the smuggling of mobile

handsets in the country, and eventually the country was flooded with smuggled

Chinese handsets and handsets of other origins, which was a loss to the national

exchequer.

In the budget of 2009-10, the Government of Pakistan took back the regulatory

duty on mobile handsets imports, which gave an impetus to the import of handsets

in the subsequent quarters. The total imports of the telecom sector registered

about 104% growth in the second quarter of FY 2009-10, compared to the previous

quarter, mainly in terms of import of equipment

. Soon after reducing the

regulatory duty on mobile handsets, the growth of mobile handsets increased by

about 27% in the next quarter, ending September 2009.

Team Voice&Data



vadmail@cybermedia.co.in