New taxes on Mobile phone industry to increase smuggling by 50%

The government has imposed new taxes on already burdened mobile phone industry in Pakistan. While delivering the budget speech for FY 2016-17, Finance Minister Ishaq Dar announced a further increase of PKR 500 to the existing sales tax on the middle range as well as high-end smartphones.

The total amount of sales tax on a middle range smartphone has reached to PKR 1,000 whereas, for a high-end smartphone the tax has grown to PKR 1,500.

However, the lower end mobile phones, mainly called the feature phones, will be imported as per previous sales tax structure which stands at PKR 300 per phone.

The mobile phone industry in Pakistan has shown disappointment over the increase of tax and called it the trade killer.

35% increase in Smuggling due to previous tax

Pakistan’s mobile phone industry legally import some 1.3 to 1.5 million mobile phones every month comprising of feature phones as well as smartphones of various denominations. The number of legal import has been dropped by almost 35% from the monthly number of what industry imported in FY 2014-15.

An official of the leading handset distributor explained that the demand for mobile phones hasn’t been reduced, but the chunk of smuggled phones has been increased.

“In 2015 legal import was almost 2 million handset a month which came down due to ruthless tax PML-N government implemented in the previous budget of 2015-16 which paved the way for smuggled mobile phones that grew steadily every month.”

In the last year, MORE warned that smuggling of mobile phones was expected to rise when govt doubled the sales tax on mobile phones from PKR 150, PKR 250 and PKR 500 to PKR 300, PKR 500 and PKR 1,000 on lower, middle and high-end phones respectively.

In January 2016, FBR published a special report on the smuggled goods in which officials of the FBR and customs evaluated that mobile phones topped the list of 11 most smuggled items in Pakistan and contributed 50% share in the total value with a loss of worth $ 4.4 bn

FBR achieves Sales Tax target despite fall in import

Despite a chunk of legal import getting washed away due to the deep-rooted mafia who smuggled the phone, mobile phone industry was able to generate PKR 8.06 billion sales tax in FY 2015-16 for the government against the target of PKR 8 billion.

The officials of the mobile phone industry commonly stated that the goal was achieved not because of the number of handsets, but the average value of handset that also rose because of feature phone to smartphone conversion phenomenon.

Although the volume of import has decreased, their monetary value increased as more smartphones are replacing the feature phones.

According to sources, every month, 1% feature phones are replaced by smartphones owing to the spread of 3G and 4G services in Pakistan.

Smuggling to rise further by 50%

The target well achieved boosted the confidence of finance gurus and set the ground for a further increase in sales tax in the FY 2016-17. The representatives of the mobile phone industry have warned that opportunist inside customs with the help of “Khapias” will take advantage of the situation and bring more smuggled mobile phones in the country. FBR might not achieve the budgetary targets this time at the end of the financial year as the volume of import will fall drastically this time which will not be compensated by the monetary value of the import.

Mobile phone industry has appealed to the government to rationalize the tax regime and create a level playing field for every handset seller. They further requested to cleanse the customs department whose connivance plays the primary role in helping mafia do the dirty work.

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