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GST COLLECTION ON PREPAID CALLING CARDS

Objective
The objective of this report is to facilitate the operations team at SRB to come to conclusion that develop a seamless process to collect GST on prepaid GSM/FLL Voice calling cards

Back Ground
Telecom services are major revenue contributor for the exchequer in Pakistan. With a turnover of around 395 Billion Rs per Anum telecom sector is depositing more than 100 billion to the government coffers in the form of IT, GST and WHT. Presently, there would be hardly anyone all over Pakistan who does not have a mobile connection. If not each & everyone then at least most people in are with a mobile set and connection. With a customer base of around 124 Million mobile users the country has achieved 75% teledensity and around 95% of these users use prepaid services and top up their accounts by either Point of Sales Machines (easy load) or pre paid calling cards. Federal Board of Revenue (FBR), on the directives of the Supreme Court of Pakistan, is engaged in preparing policy under which, all the pre-paid cards must have GST paid stamp and a serial number and FBR has to be provided record of the total number of cards issued by the companies along-with their serial numbers. Needless to mention that through a letter on August 13, Transparency International Pakistan had requested FBR to make a policy, and direct all cellular companies, PTCL, wireless phone and internet providers to get the pre-paid cards stamped as GST collected, and numbered by FBR prior to sale. These companies shall deposit 19.5 percent GST when they take delivery of pre-paid cards duly stamped and numbered by FBR. On a copy of this letter sent by Transparency International Pakistan to the Supreme Court of Pakistan, the apex court had directed FBR to prepare a report to devise policies with respect to collect GST on pre-paid cards. Transparency International Pakistan had also requested FBR to collect 10 percent WHT at the same time while collecting GST under the new system which would enable FBR to collect revenue at-least 4-5 months ahead compared to the present system and also zero tolerance for pilferage which was estimated by Transparency International Pakistan to the extent of about Rs 226 billion and also impose income tax on the alleged un-declared revenue of these companies. Since GST is now under jurisdiction of provinces FBR has requested the provinces of Pakistan to recommend the actions and facts to resolve this issue.

Methodology
In order to facilitate the panel of experts to reach to final conclusion it is necessary that first we should be quantify the prepaid GSM market. There on we will be studying the best practice in the market for selling and distribution of these cards also analyzing the current modes operandi of collecting GST from such sales. In the end we will focus on finding the loop wholes where revenue leakages are occurring and in the end I will try to recommend measures to be taken to make this entire tax collecting effort seamless and efficient.

Current Prepaid calling card market


As I mentioned that almost 95% of all mobile subscriber are prepaid and they use POS or prepaid calling cards to get service from the operator. The more users a company will have the more market share it will be enjoying. For this reason the cellular companies in Pakistan namely Mobilink, Warid, U-fone, Telenor and Zong are coming up with more and more promotion packages to ensure their market share and retain the users or subscribers.

Cellular Companies Subscribers: The mobile subscriber market in Pakistan has crossed the 100 million mark in February 2011 and has reached a total of 105,151,871 mobile subscriptions, according to the data released by Pakistan Telecommunication Authority. Today though PTA has not issued 2012 figures but it is estimated that this number has now reached 118 million. According to the 2011 stats, all five cellular companies showed

consistency in adding 1,145,103 mobile phone users in February 2011, as compared to 1,229,381 cell users in January 2011. The individual figures in terms of total subscribers by February 2011 of all the five companies were as follows: Mobilink 32,499,495 Telenor 25,388,878 U-fone 20,368,752 Waird 17,693,626 Zong 9,201,121 In terms of the percentage market share: Mobilink 32% Telenor 23% U-fone 19% Warid 17% Zong 9%

It is expected that the country's GSM market will continue to show strong growth. It is forecasted that total mobile subscribers in Pakistan will increase from 118 million in 2013 to 134.8 million in 2014 Mobilink will continue to be the largest player in Pakistan's mobile operator space over the next five years. It is expected that Mobilink will have 36 million mobile subscribers in 2014. Also, given the latest quarter numbers, it is predicted that Ufone will have 25.8 million, Telenor will have 29 million, and Warid will have 25.3 million mobile subscribers by the end of 2014." "ARPU levels remain low in Pakistan's mobile operator space. It is expected that the industry average ARPU will remain in the range of US$ 2 - US$ 3 over the next five years.

Estimated Value of Prepaid calling card segment.


So now when we have ARPU available with us we can do some small calculation to find the estimated worth of prepaid calling card market. Total subscribers (GSM only) 118 Million Percentage of prepaid customers is 95% so the users comes out to be 112 Million ARPU @2.5 USD the total calling is 112x2.5x12= 3.363 billion USD= 336 Billion PKR and if we add around one million PTCL, Telecard, Wateen and other FLL post operators this amount will reach at around 350 Billion per Anum.

Taxes on Prepaid Calling Cards

All telecom services (except internet) are subject to various Government taxes. These taxes are either charged upfront (for example Withholding Tax is deducted as soon as you recharge your pre-paid account) or are deducted on usage basis (for example Federal Excise Duty (FED) is charged on per call basis).The current rates of Withholding Tax and GST on telecom services are 10% and 19.5% respectively. However, these rates keep changing and therefore you should find out the latest applicable tax rates. Tariffs advertised by the operators normally tend to exclude tax rates. Therefore, any calculation of effective out of pocket expense to a consumer must also take into account all applicable taxes.

Calculating Taxes:
As mentioned above, WHT of 10 percent is deducted as soon as you will recharge your account. Hence, 10 percent of whatever amount you will recharge will be deducted. For Example: If you recharge Rs. 100 then Rs. 10 will be deducted as With Holding Tax. In case if you recharge Rs. 35 then Rs. 3.5 will be deducted as WHT in advance. FED is charged on per call/SMS or any revenue generating transaction. Example: If you make a call that is charged at Rs. 1 per minute and you make a three minutes call then taxes (FED at 19.5%) will be as following: Airtime Charges: Rs. 1 x 3 (minutes) = Rs. 3 FED = 3 x 19.5/100 = 0.585 Total Charges: Airtime Charges + FED = Rs. 3 + Rs. 0.585 = Rs. 3.585

Service Charges on Scratch Cards and Easy loads:

Mobile operators and several Fixed Wireless Local Loop operators levy additional service charges on reload of pre-paid accounts through scratch cards and easy-loads. The following charges are currently being charged mobile operators on pre-paid accounts: All mobile operators except Telenor levy 5% service charges on the face value of all recharges (through top-up / Jazz load/ easy load/ money load and scratch cards). This charge is 7.0% in case of Telenor. In addition to the above service charges, the following cellular mobile operators (CMOs) also deduct the following fees/charges on the face value of all recharges (through top-up / Jazz load/ easy load/ money load and scratch cards). Ufone Account Maintenance Charge: 2.0% Mobilink Operational Fee: 2.0% Zong Operational Charge: 2.0% Warid Maintenance Charge: 2.0% In simpler words, all operators charge 7 percent of your scratch card or easy load as service/maintenance/operational charges. Earlier Mobilink also increased the service charges on credit reloads/easy-share to 7 percent, in addition to other charges/fee already in place. It merits mentioning here that Telenor had imposed 1.5 percent admin fee on card reloads in June 2011, which was taken back in August 2011 but service charges were increased from 5 to 6.5 percent. Charges/Taxes on Rs. 100 Card (for Telenor Customer after February 15th): Withholding Tax @ 10% = Rs. 10 Service Charges @ 7% = Rs. 7 GST on remaining amount of Rs. 83 @19.5 percent = Rs. 16.19 Total Taxes + Service Charges: 33.19

Or in other words, with Rs. 100 card you get only Rs. 66.81 for telecom services while remaining amount goes under the head of taxes, services charges. Currently Withholding tax and service charges are deducted right away when you load a card of Rs. 100. With remaining Rs. 83, you will have to pay 19.5 percent GST on all calls, SMS, MMS or for any other usage

Retailers Commission
Each operator as a sales strategy hires a sole distributor who in turns inducts sub distributors or retailers to sell prepaid telecom services. The commission given to this sole distributor through mutual agreements is further divided among the distributor and retailers. Telenor and Zong have decreased retailers commissions for account-recharge (easy load) transactions. After revising the commission structure, Telenor has decreased its easy load commissions from 3% to 2.80% for retailers, which is now industrys lowest commission rate offered by any cellular company. While, on other hands, Zong revised its commission structure by offering 3% margins to retailers down from 4% which was once industrys highest commission. Business Model of Prepaid Voice Calling Card In order to better understand the sales process let us take a imaginary company which deals in selling prepaid calling cards, I take Dialog as an example which wants to operate in Karachi the sales flow diagram will be as under.

Current Tax Collection from Service Providers on sales of Prepaid Calling Cards:
As mentioned above currently WHT @10% and GST @ 19.5% is being deducted when the card is actually activated on the IVR of service provider. Though the Wholesaler and retailer divide the service provider commission among each other on a mutually agreed formula they do not pay any GST on the commission they get. All the transactions in this business are made on cash terms it means the service provider gets his money the moment he delivers the cards to whole seller and WS pass these cards to retailer on the same terms. The service provider though collect the entire amount of card denomination upfront but usually they hold deposition of WHT and GST till the card is activated by their customer.

Problem Resolution and Recommendations;


From the above study it is quite evident that serious efforts may be taken to stop pilferage in the prepaid customer segment of GSM and voice operators. By studying different modules of taxing the prepaid segment I have found the Australian and Singaporean Models quite near to our business requirment. (Copies attached with this email) These models enforce that GST may only be realized when the card is actually activated unlike what Transparency International which has recommended that the cards may be pre stamped and GST should be submitted by the operators to TCA(tax collecting authority) before they handed over the cards to their whole sellers. At the same time the Singaporean model also requires that GST may also be implied on the commission operators give to resellers and also on the amount which they deduct as service charges from the customers. These two factors amount to 11% of 350 Billion/Anum and 19.5% of this 11% will be sizeable amount collected by TCA if this clause ifs enforced. There is a dire need to cross examine the total number of minutes generated by telecos against the total numbers of minutes bought through prepaid vouchers (easy load/POS/prepaid calling card) to make sure that all the prepaid calling cards are accounted for and the tax has been realized against them.

Zulfiqar Ali Ursani Telecom Consultant Sindh Revenue Board. Pakistan zursani@gmail.com