Due to the Ministry of Information Technology and Telecom’s inability to bring all stakeholders to agreement on decisions at the policy level and the lack of interest on the part of the Finance Ministry, Federal Board of Revenue (FBR), and State Bank of Pakistan (FBR) in resolving unresolved problems, Pakistan’s information technology and telecom sector is falling short of its potential.
This was the crux of background discussions with the ministry officials, industry stakeholders, and sector experts.
The government has set a target of $5 billion for export remittances of IT and IT-enabled Services (ITeS), which include computer services and call centre services. However, ITeS exports decreased by 0.3% in the first quarter of the current fiscal year 2022–23; overall, IT exports totaled $633 million in the current fiscal year’s first quarter compared to $635 million in the prior fiscal year. ITeS exports remittances declined by around 10 percent on a month-on-month (MoM) basis in September 2022 and were $206 million compared to $228 million in August 2022.
Amin-ul-Haque, the federal minister for information technology and telecommunication, claimed that the sector’s poor performance was due to a number of factors, including the Ministry of Finance’s, FBR’s, and SBP’s inability to address some of its unresolved problems.
The minister stated,
“We seek incentives including tax rationalisation for the industry in every budget, but the Ministry of Finance ignores it,”
Adding that FBR’s policies and some SBP restrictions are impeding the expansion of IT exports and driving up export remittances through freelancers. He continued by saying that additional factors harming the business include political unrest and the global economic downturn. He claimed that in order to get the required results, the sector needed to be encouraged through tax relief and capacity building.
According to sources in the telecom industry, the Ministry of IT and Telecom, which is responsible for guiding agreement on policy-level choices to ensure the health of the IT and telecoms sectors, has so far been utterly useless in securing the necessary alignment of stakeholders. The source added that as a result, the sector was continuously suffering and both the export value in the IT sector and size of the sector as well as investment attractiveness in the telecoms sector continued to decline. There has also been no movement towards a decision to create fiscal and operational space that falls squarely within the ambit of the Ministry and the Regulator, i.e. Pakistan Telecommunication Authority (PTA), the source said.
According to the source, one of the agreed-upon solutions was to halt R&D and Universal Service Fund (USF) contributions in addition to reversing the withholding tax rise in order to give the struggling industry some breathing room and boost its cash flow. Additionally, the Ministry of IT and Telecom was unable to persuade the Finance Ministry to favourably evaluate the justifiable tax plan to provide customers with relief, and even the proposal to reduce contributions has not advanced.
Additionally, all planned PTA actions, such as a moratorium on licence obligations and measures opening up commercial space to business (such as inflation fees and price caps), have been rejected. The official continued,
“So neither economic measures nor Ministry and PTA-specific ideas had been approved.”
Further, according to industry analysts, the government has eliminated the 100% tax credit programme for exporters of IT and IT-enabled services and has replaced it with a 0.25 percent final tax rate. However, there were issues with cash flow and an increase in service costs due to the hefty taxing of the IT sector, withholding tax (WHT) on products and services, general sales tax (GST) on utilities, etc.
The Global Mobile Industry Association (GSMA) and the Pakistan Business Council (PBC) have urged the government to immediately evaluate the present set of regulations and practises affecting connectivity and digitization.
PBC claimed that if Pakistan wanted to have a significant presence in the knowledge economy, it needed a comprehensive long-term strategy to encourage connection and digitization. Speaking to the Ministry of Information Technology and Telecom and the PTA, the GSMA stated that for Pakistan to become a digital nation, policy reforms and the establishment of the proper regulatory framework were required. In response to the current digital emergency in Pakistan brought on by issues in the telecom industry, the PBC and the GSMA claim that if these issues are not remedied, the nation could enter the “digital dark ages.”
While the nation aspires to be a top destination for Ease of Doing Business (EoDB), Aamir Ibrahim, CEO of Jazz and Chairman of the Prime Minister’s IT and Digital Economy Advisory Council’s Subcommittee on Telecom, said that the way telecom companies are handled, having invested about $25 billion, tells a different story.
He cited a recent ruling about the changing of the electricity price from commercial to industrial requested by telecom operators. Even though the government recognised telecom as an industry in 2004 and various ministries have since confirmed this classification, its towers and data centres are nonetheless subject to commercial tariffs that place them in the same class as cafes, hairdressers, and movie theatres.
According to Aamir, the telecom industry builds the digital motorways that enable other industries to generate value. There is widespread agreement that digital infrastructure ranks equally with all other important national assets. Unfortunately, the industry in Pakistan is still seen as a way for the government to meet short-term revenue deficits, which discourages a more comprehensive and long-term policy agenda targeted at increasing universal internet coverage.
The most basic imported smartphone costs about $100, but there is a Rs. 11,000 tariff on it, which is a significant obstacle to internet usage. In addition, telecom consumers pay one of the highest tax rates in the world—34.5 percent—which is outrageous.
According to Aamir, some of the nations with the greatest economies today are those with thriving digital industries that rely heavily on telecommunications. All of the digital benefits, including a robust startup ecosystem, exports of IT and IT-enabled services, etc., rely on the sector’s widespread internet connectivity. Even though we have talked a lot about “Digital Pakistan,” without the proper policy changes, we risk falling back into the “digital dark ages.” To ensure that the future is bright, we must take substantial policy action right away.