Higher Taxes Lead To Lower Revenue: PTA Shows Futility Of Raising Mobile Taxes

LIRNE Asia notes the efforts of PTA to convince the government that raising taxes will not result in more money coming in - the reverse is actually true as the Pakistan government got less revenue from the mobile market after tax increase.

The Pakistan Telecom Authority in their December 2008 quarterly review gives the reasoning behind the government’s decision to impose high taxes on mobile phone use. To reduce the high fiscal deficits, the government had increased taxes. The increase for the telecom sector was over 40 percent; for other sectors it was only seven percent. However, the end result was unexpected, though it could have been predicted from economic theory. In the two quarters after the tax increase, the tax revenue from mobile declined.

How was the telecom market affected? In the same report, a figure shows how the subscriber base increased over time. However, the rate of growth declined in recent quarters. In 2007, the rate of growth was 9.9 percent; 2008 ended with a minus 0.3 percent growth. The average revenue per user went from USD 3.1 in the last quarter of 2007 to USD 2.58 during the last quarter of 2008.

Similarly in Sri Lanka, government has seen the mobile industry as an easy source of revenue through taxes and levies. There may be lessons for Sri Lanka from the counter-productive outcomes of Pakistan’s efforts to milk the golden mobile goose.

LIRNEasia’s T@BOP3 study conducted in 6 Asian countries indicated that only 38 percent of households at the bottom of the pyramid in Pakistan have access to mobile phones. There are consumers waiting to adopt mobile phones. Shouldn’t the government make efforts to make them available to them? Getting more people connected and taking a reasonable share of their payments as tax would be more productive than imposing taxes that bar them from becoming customers and deprive the government of tax revenues.

The PTA is to be applauded for doing these kinds of analyses. One hopes that the government of Pakistan will take remedial action to get telecom growth back on track. One hopes that other regulatory agencies will conduct and publish similar studies.