TAXING THE DATA SEVICES IN THE PROVINCE OF SINDH

Objective
The objective of this report is to facilitate the operations team at SRB to come to conclusion that whether Telecom Data services may be taxed or not. And if yes, at what rate this should be implemented and also to analyze the socio economic impact of such levy on the people of sindh.

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. The current contribution of Telecom service in the GST collection on services in province of Sindh is almost 40% which shows the importance to fully document this industry. But its a fact that almost all of this revenue is coming from voice services and the other segment of telecommunication which is Data communication services is totally exempted (except the SMS services ) from any tax. This disparity has been noted by Sindh Revenue Board and the management has desired that a tax regime may also be formulated for Data services in the province.

Methodology
In order to facilitate the panel of experts to reach to final conclusion it is necessary that we first fathom the actual DCNS market in Pakistan. We would be doing a SWOT analysis of the data services and finally will see that how much revenue we can extract in the form of taxes from the current customers base and also future projection of such taxes. But before we probe into the DCNS market let me first explain to the panel what services we are talking about their further segmentation and technical aspect of such service provisioning to prospective customers

Data Communication Network Services

The data services can be classified into two segments which are a) Corporate Data Services b) Consumer Data service which are mainly broad band services Let us further elaborate these segments. We first start with corporate data services which telecom operators offer to their business customers

Corporate Data Services

These include the following 1. Domestic Private Leased Circuit 2. International Private Leased Circuit 3. IP Transit 4. IP/MPLS 5. IP Internet (CIR BW) 6. VSAT 7. Data Center

Domestic Private Leased Circuit

(I have taken Multinet as an example) DPLC is basically a point to point (P2P) service offered to corporate clients within the country to connect two branches or multiple branches with their HQ for data access and sharing. This services Offers speeds ranging from E1 (2Mbs) up to n X STMS (STM=155Mbs) or Giga bits. DPLCs enables the transmission of indefinite volumes of data swiftly, reliably, securely and efficiently. The major users of this service are Banks, MNCs, FSEs, SMEs, Government departments, Oil Exploration Companies etc. Major telecom operators which provide this service in Pakistan are PTCL, Multinet, Transworld, Cybernet, Linkdotnet, Wateen and Nayatel

International Private Leased Circuit

IPLC provides an optimum platform for global private networks and is considered to be one of the basic requirements for companies in need of dedicated and secure digital point-to-point link between two international locations. Just like DPLC, IPLC Offers speeds ranging from E1 (2Mbs) up to n X STMS (STM=155Mbs) or Giga bits

The major users of this service are Banks, MNCs, FSEs, SMEs, Government departments, Oil Exploration Companies etc. Major telecom operators which provide this service in Pakistan are PTCL, Multinet, Transworld, Cybernet, Linkdotnet and Wateen

IP Transit
IP Transit is a wholesale internet access and transit service which offers the users most reliable means to route IP traffic over the internet, providing an effective service by leveraging the benefit of high bandwidth technologies IP Transit solution utilizes fully-redundant architecture at every layer of the network and offers customers the option of connecting at multiple locations on one single backbone. This allows the customer to gain additional reliability by eliminating a single point of network failure.

IP transit service provides a Committed Information Rate (CIR) for service and static IPs are also given with this service. The BW provided ranges from 512 Kbits/s to Gbits/Sec. The major users of this service are Telecom operators like LDIs, Call centers, Banks, MNCs, FSEs, SMEs, Government departments, Oil Exploration Companies etc. Major telecom operators which provide this service in Pakistan are PTCL, Multinet, Transworld, Cybernet, Linkdotnet and Wateen

IP Multiprotocol Label Switching (IPMPLS)

Multinets MPLS service is an ideal solution for the interconnection of geographically dispersed sites . It is a cost effective alternative to traditional leased line service.

The major users of this service are Banks, MNCs, FSEs, SMEs, Government departments, Oil Exploration Companies etc. Major telecom operators which provide this service in Pakistan are PTCL, Multinet, Transworld, Cybernet, Linkdotnet, Wateen and Nayatel

VSAT Services
Provisioning of Satellite communication networks for Business corporations and governmental organizations to facilitate their data connectivity are known on VSAT (Very Small Aperture Terminal) Services.

VSAT networks provide all communication between a remote site and its headquarters to pass through the central hub station. These services comprise corporate VPNs, broadband internet access, or content distribution. A majority of customers who use VSAT services are multinational corporations or governmental institutions, which connect their remote locations by satellite to a central server for such applications as Voice, Fax, data or database updates. The same technology is ideal for the distribution of multimedia applications such as video conferencing, marketing material, or corporate teleconferences from a central site to hundreds of sites across the world. And finally, this technology is the ideal broadband internet access solution for isolated locations with no available direct internet connections. VSAT services are also used for redundancy for terrestrial DPLCs. The provider of this service in Pakistan are PTCL, Supernet, SATNET, Pakistan Datacom limited, Redtone through Clicksat, Wateen, Comsat, Atel and Cybernet.

Data Center
A Data Center is an environmentally controlled centralized facility providing business services by securely delivering applications and data across a network to remote users. It is an integral part of an Enterprise Business Continuity Plan. It encompasses hosting services, physical and logical security, secure data storage and power management, backed up by highly skilled human resource. The major user of this facility are banks and corporate. Prominent service providers are Multinet, PTCL, Cybernet, Mobilink and Transworld.

Consumer Data service /Broad Band service

The most important segment of data service which can bring major revenue to us is consumer BB services. As known to everybody BB service are used for internet surfing, getting connected to social sites like face book and Twitter and used for communication purpose both voice and chatting by masses by accessing sites like Skype, MSN and Google chat. BB services are extended to domestic as well as commercial customers through three technologies i.e. Wireless, Optical Fiber Cable (HFC) and through Copper local loops ( DSL). Consumer BB Features Bandwidths of 64 kbps up to 16 Mbps (increasing every day) these services are essentially shared services but all operators on some premium provide CIR BB services to their customers also. Like small call centers or businesses who want host their own POP3 mail servers. Let me explain the three technologies which are used to provide BB service one by one.

Wireless BB services
In Pakistan wireless BB services are extended through three technologies, namely EVDO, WIMAX and EDGE/GPRS. Let us define these three technologies a little bit more to have a better understanding.

EVDO
Enhanced Voice-Data Optimized or Enhanced Voice-Data Only (EV-DO, EV, EVDO, etc.) is a telecommunications standard for the wireless transmission of data through radio signals, typically for broadband Internet access. It uses multiplexing techniques including code division multiple access (CDMA) as well as time division multiplexing (TDM) to maximize both individual users' throughput and the overall system throughput. This services is provided through BTS site just like mobile service and can support band widths ranging from 31.Mb/Sec to 14.2 Mbits.sec. PTCL is the lead runner in providing EVDO services in Pakistan followed by World call.

WiMAX
WiMAX (Worldwide Interoperability for Microwave Access) is a wireless communications standard designed to provide 30 to 40 megabit-per-second data rates, with the 2011 update providing up to 1 Gbit/s for fixed stations. The name "WiMAX" was created by the WiMAX Forum, which was formed in June 2001 to promote conformity and interoperability of the standard. The forum describes WiMAX as "a standards-based technology enabling the delivery of last mile wireless broadband access as an alternative to cable and DSL. Wateen and Witribe are the two major Wimax service providers in Pakistan.

EDGE (mobile BB) Enhance GPRS

Enhanced Data rates for GSM Evolution (EDGE) also known as Enhanced GPRS (EGPRS), is a digital mobile phone technology that allows improved data transmission rates as a backward-compatible extension of GSM. EDGE is considered a pre-3G radio technology and is part of ITU's 3G definition. EDGE was deployed on GSM networks beginning in 2003 initially by Cingular (now AT&T) in the United States. EDGE is standardized also by 3GPP as part of the GSM family. Through the introduction of sophisticated methods of coding and transmitting data, EDGE delivers higher bit-rates per radio channel, resulting in a threefold increase in capacity and performance compared with an ordinary GSM/GPRS connection. EDGE can be used for any packet switched application, such as an Internet connection giving speeds up to 235Kbits/sec. All GSM operators Mobilink, Zong, Ufone, Warid and Telenor used this technology to extend BB service to their mobile service users.

DSL BB
Digital subscriber line (DSL, originally digital subscriber loop) is a family of technologies that provide Internet access by transmitting digital data over the wires of a local telephone network. In telecommunications marketing, the term DSL is widely understood to mean asymmetric digital subscriber line (ADSL), the most commonly installed DSL technology. DSL service is delivered simultaneously with wired telephone service on the same telephone line. This is possible because DSL uses higher frequency bands for data. On the customer premises, a DSL filter on each non-DSL outlet blocks any high frequency interference, to enable simultaneous use of the voice and DSL services. The bit rate of consumer DSL services typically ranges from 256 kbit/s to 40 Mbit/s in the direction to the customer (downstream), depending on DSL technology, line conditions, and service-level implementation.

In ADSL, the data throughput in the upstream direction, (the direction to the service provider) is lower, hence the designation of asymmetric service. In symmetric digital subscriber line (SDSL) services, the downstream and upstream data rates are equal. The major DSL operator in Pakistan is PTCL followed by Supernet, Multinet, Cybernet, Linkdotnet etc.

Optical Fiber Cable (HFC)

HFC or cable broad band in Pakistan is provided through aerial optical fiber cables which are then converted into coaxial cable while entering into the customer premises. These service can support Bandwidth ranging from 256Kbits/Sec to STM1 in both shared and CIR environments. Cable broad band license are bundled with cable TV in Pakistan. There are both major operators and small operators limited to localities who provide this facility to both corporate and household customers. The industry front runners in this segment are world call, Wateen and Nayatel

Broadband Subscribers by Technology

Technology 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Jul-12 Aug-12 Sep-12 Oct-12 DSL 26,611 44,669 102,910 262,661 476,722 695,245 880,071 888,380 896,325 904,154 913,102 42,760 36,201 49,110 34,274 35,520 35,795 35,385 35,343 34,141 19,612 88,477 257,616 428,523 589,887 593,363 597,618 591,680 587,967 HFC WiMax FTTH 484 2,800 3,967 5,002 6,346 8,444 8,577 8,741 8,971 9,299 22,503 111,194 325,140 584,459 610,106 637,782 666,886 700,214 1,004 1,963 2,934 2,955 2,982 2,965 3,069 EvDO Others Total 26,611 45,153 168,082 413,809 900,648 1,491,491 2,101,315 2,139,176 2,178,833 2,209,999 2,247,792

Quantifying the Data Services

As I mentioned in the starting of the report that almost all of the data services in this country are exempted from taxes so there is not much documentation available for the revenues the segment generates, but digging into the customer base of major data operators gives us some figures on which we can rely. PTA has quantified the number of Broad band users and revenues for data services (Broad band internet only) which are appended below.

Telecom Contribution to Exchequer

Period 200304 200405 200506 200607 200708 200809 200910 201011 GST 12.1 20.5 26.8 36.28 44.61 49.35 44.0 52.6 Activation Tax 4.02 7.53 11.4 17.6 19.2 14.2 6.6 7.2 PTA Deposits 0.69 17.71 17.38 9.72 10.86 9.15 13.6 12.0 Others 21.59 21.38 21.55 36.95 36.96 39.3 44.9 45.2 (Rs. in billion) Total 38.40 67.12 77.13 100.55 111.63 112.00 109.0 117.0

Source: Central Board of Revenue and Pakistan Telecommunication Authority. Note: PTA's contributions comprise of all its receipts including Initial and Annual License Fee, Annual Spectrum Administrative Fee, USF and R&D Fund Contributions, Numbering Charges, License Application Fee, etc. Others include custom duties, WH Tax and other taxes.

Over All Telecom Revenues

Cellular 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 27,840 48,880 89,896 133,132 182,122 212,423 236,047 262,761 Local Loop 76,444 78,828 71,186 68,368 63,693 62,568 61,595 58,320 LDI 1,336 3,672 7,199 15,567 23,396 47,969 32,895 29,954 WLL 1,152 275 12,453 2,645 2,704 2,670 2,880 4,849 VAS (Rs. Million) Total 116,827 144,226 194,562 235,613 279,964 333,809 344,212 362,935

(Estimated)

10,056 12,570 13,827 15,901 8,048 8,179

10,202 7,052

The current year revenues of the telecom sector have reached to all time high of Rs 99.4 billion during the second quarter of current financial year registering a growth of 9.1 percent over the corresponding quarter in previous year. This is a healthy growth keeping in view stiff economical situation we are going through. Dec 2011 data is showing year on year growth of 30 percent.. The revenues of telecom sector can be divided into voice and data. With the increasing use of data services in the country, estimated data revenues of telecom operators are on the rise and have reached Rs. 12.2 billion during Oct- December 2011. This year (end of 2012) it is expected to reach around 16 billion mark showing a 30% growth. The cellular mobile revenues from data services have shown a growth of 19 percent during the same period. It is expected that after the launch of 3G services in the country, data revenues of cellular mobile operators will increase significantly.

As I mentioned above that the above figures include the BB services only extended through DSL, Wimax, EVDO, WLL and GSM. It is estimated that another 8 billion/Anum ( for the year 2012) in revenues are generated by Telecom operators through DPLCs, IPLCs, IPMPLS, VSATs, Data center hosting to the corporate customers. Since it is not taxed it is also not shown in the above charts. So the total kitty we are looking at is around Rs 24 Billion/Anum being generated by data service in Pakistan. The share of Province of Sindh will be significantly higher (Major contributor will be Karachi) than the voice service which is calculated at 22%. If we moderately take it at 25%, then we are looking at revenue of Rs 6 Billion which need to be brought under tax net.

Socioeconomic impact due Tax on Data services in Sindh.

As I mentioned earlier the data service are divided into to discrete segments which consumer Broad Band i.e. internet and the corporate data services mostly B2B (Business to Business) or P2P (Point to Point) connectivitys so in order to come to a rational conclusion we have analyze the two segments separately for the socioeconomic impact, let us first discuss the consumer data services or Consumer Broad Band.

Consumer Broad Band

Pakistan is a populace ranking 5th in the world with 180 Million people. Around 50% of this population is below 21 years meaning that Pakistan is rightly considered as a country of youth. The country is spread from the deserts of Thar to Mountains of Hindukush and has variety of terrains both remote and accessible to modern world. The population is mostly rural and depends on agriculture for the livelihood at the same time we have urban centers Like Karachi and Lahore which are teaming Metropolises of 20 million living in vertical dwellings and rely on Industry to generate jobs for them. Pakistan has 2.2 Million BB users till date. Most Internet usage in Pakistan is still in English; however there seems to be a shift towards the Urdu language. Many Urdu based newspapers maintain an Urdu presence on web, however common usage is often done in Romanized Urdu. Google has also realized the potential of Pakistan BB market and has launched its Urdu service. An independent survey shows that there are 6 million registered Face book users in Pakistan Broadband, as a tool for efficient information exchange and a platform for the provision of high-end business and social services, is considered to be one of the fundamental propellers of national economic development. Economies of Europe, North America and much of Asia have witnessed the significant economic benefits by way of using broadband technologies for several strategic applications. It is no secret, that with broadband access, worker productivity increases, jobs skills are enhanced and diverse opportunities are created alongside growth in wages and subsequent higher efficiency of the economy. In Pakistan BB is extensively used for distant earning, telemedicine and ecommerce. Broadband creates opportunities for telecom services providers giving better options for bundling of services and enables operators to offer more services and new business portfolios to their consumers at optimal prices, creating added efficiencies in both time and money. In addition, new or offshoot industries are created as a result of broadband. As broadband penetration rates grow, there will be a resultant demand for computer and home networking equipment, as well as wireless handheld devices and other equipment that facilitates broadband use, thereby enhancing skills, market expansion and creation of new job opportunities.

The economic benefits of broadband can also be attributed to indirect factors, including increased ecommerce, reductions in commuting needs, increased demand and consumption of entertainment, Internet telephony, savings in healthcare and benefits associated with sophisticated telemedicine and distance learning services. For the enterprise sector, the economic benefits result from efficiencies in the distribution of goods, better management of franchised services and quicker dissemination of information. Thus, the economic benefits of broadband arise from both direct and indirect sources. Before we make a decision to levy GST on broad band services in the province of sindh we have look into the following interesting figures. We have a large population of more than 180 million Young people between ages 15-21 account for over 50% of the population of Pakistan this segment is n the largest user of internet service users both for entertainment and education. This is also the future of Pakistan Pakistan has 17% (31 Million) Matriculates and only 5% (9million) graduates. Very low literacy rate one of the lowest in world About 105 million telephone users including 100 million mobile cellular customers rest of the 5 million are fixed line, WiMAX and WLL users. Between 7 million PCs in the country (only 5% of the population density) BB density stands at around 3%

This clearly shows that we are far behind the rest of the world in BB penetration and we have to go a long way to reach to the figures we have achieved in voice telephony through GSM. Taxing heavily the BB segment at this point of time will jeopardize the growth and penetration of internet in Pakistan and in province of Sindh. The Federal government has already given exemption on this segment under the pressure of ISPAK (Internet Service providers of Pakistan). Initially CBR vide its SRO No. 455(I)/96 dated 13 June 1996 imposed 40% CED on telecommunication services defined as telephone, telefax, telegraph and alike services. This duty was reduced to 25% w.e.f. 01.01.1997. In 1998, Central Excise Department issued notices to all ISPs in Pakistan to abide by this SRO. ISPAK again took up this matter with Central Board of Revenue (CBR), Minister for Information and Media Development, Minister for Finance, PTA and other relevant authorities. The Government then took a decision to exempt Internet from CED and leased Internet circuits were also exempted from CED. Later on, CBR converted CED into General Sales Tax but Internet Services and international leased data circuits are still exempted from GST.

Levy of tax on BB service would again prompt ISPAK to go to Federal government or court of law. Same reprisal is also expected from Social web sites and electronic media as well as consumer protection society of Pakistan as cost of living and inflation has already heavily burdened the middle class which are the prime users of BB services. Currently Universities and educational institutions are getting FOC internet services from HEC through its PERN project, government of Pakistan through its USF fund is also giving subsidized BB to remote areas of Pakistan particularly Sindh so in order to formulate the tax policy we have to consider this aspect also.

Consumer Data Services

This segment of data service as explained above is mainly used by Banks, MNCs, FSEs, SMEs, Government departments, Oil Exploration Companies. And among all Banks are single largest customers of data services. Pakistan is currently undergoing recession and business borrowing has hit record low as declared in the latest State bank of Pakistan economic report for the year 2012. This has negatively impacted on Banks businesses and a sizable number of banks are restructuring the branch networks. The other corporate are also going through more or less same situation.

If we are going to put GST at the current rate on the data service used by corporate sector there will be a sizable increase in their cost of doing business and they might desist from acquiring new services thus inducing negative growth in the telecom industry. Sensing this telecos and ISPAK may also become a party in this situation and try to oppose to such a levy. Another factor which I have discussed with Kazmi and Barakzai sb is the adjustment of telecom usage GST by the corporate in the GST they are already paying on the services they provide as cost of doing business. If that happens that the total impact on the revenue generation effort of the province on Corporate data service will be miniscule.

Conclusion and Recommendations

Based on the information provided in the above report I am pretty sure our operations team will be now in a better position to come to a decision for GST levy on Data services which will not be only be revenue generating for SRB but it will also not hamper the growth of telecom in our province of Sindh. In order to facilitate the initial deliberation on this report I deemed it right to give my recommendations in the end of this report, these are as follows. 1) Exemption of GST on Data services for educational institutions, USF and NGO's 2)Exempt 256k shared connections from GST all together which are mostly used by students and USF. In order to remove the disparity between CIR and Shared connections this exemption should not applicable on any connection which is generating Rs1000/- revenue /month for the operator 3) We can put GST at on all bb connections upward of 256k/Rs 1000 @ 10% 4) Corporate Data services may also be taxed @10% but concurrence has to be taken from Member Technical as he has mentioned that GST adjustment cannot be claimed by end user if he is not paying 19.5% initial tax. If laws can be amended than I think the telecom industry will absorb this tax.

Zulfiqar Ali Ursani Telecom Consultant SRB Karachi Dated 3/2/2013 zursani@gmail.com