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