The fiscal 2011 witnessed many events for the bad effects on the country’s economy, and one of them was super floods that hit hard and eroded 2 percent of the country’s earnings. Then inflation decelerated the pace of economic reforms, so all reforms measures are to be taken as the last chance in the annual budget for the next fiscal.
No doubt, the focus of the budget would be tax increase and creating new avenues for further taxes in order to curtail the budget deficit. For that matter the government has some things in its wallet that include Introduction of the Gross Asset Tax (GAT) and possible implementation of the Reformed General Sales Tax (RGST).
What will this bode for telecommunication sector? General Sales Tax (GST) is likely to stay intact at 19.5%, with a downward revision only likely when reformed GST is implemented. So it means that no measure on SIM-card activation would be taken as it is currently stands at Rs250/ on new connection because this cost has already come down (Rs6.6bn in FY10, down 53%YoY) on the back of slowdown in new connections.
In addition, the new regulatory measure of the Pakistan Telecommunication Authority (PTA) to block unregistered and unverified SIMs from 17th of this month on the directives of Interior Ministry will certainly work in two ways: first it would reduce the number of subscribers very heavily, so does the reduction in the SIM-card activation revenues. Secondly, this may in turn bode well for the sector because the subscribers that would have their SIMs blocked would definitely go for new connections, but this is not going to have a major share.
For the largest player of the sector, Pakistan Telecommunication Company Limited (PTCL) this budget will create massive concerns as they have to do a 50% hike in government employee salaries announced in the last year’s budget, which will lead the cost to climb and margins to deteriorate significantly.
Yet, it has already been announced by the government that this time the salaries of government employees will be kept the same as part of government’s efforts to control expenditure, which will be somewhat positive for the incumbent operator.
However, a significant rise in minimum wage will lead the payroll expenses to escalate further.
The withholding tax rate on cellular services had been raised by 1.5% to 11.5% in 4th Quarter Financial Year 2011 as part of the measures announced to contain the fiscal deficit. A likely development could come in the shape of this being made permanent for FY12, which would be another set back for this sector as this sector has come to its point of saturation and the cellular companies are not making much profit.
It is of much concern that the hyper competition in the cellular industry has contracted Average Revenue Per User to US$2.5, which has resulted in the consolidation in the industry and it is very likely that one out of five telecom players could drop out. It is also to be noted that the PTA has recently cut Access Promotion Contribution (APC) from USc5.5/min to USc2.75/min international incoming tariffs, which hit one of the most profitable, high-margin segments for the PTCL. Its international revenue is expected to drop by 20% per annum in FY10-13.
On the other hand, deregulation of the business in the country does not help much on the front of rural telephony in the country because the telecom operators don’t like to invest in the areas where they are not going to make good profits. This results in the constant elimination of the rural telephony from the bright scene of urban telephony.
Rural areas spreads over vast land where density of human being is less but areas are vast and bigger and the affordability of the people is also comparatively less. The telecom infrastructure provision requires more money and Operators spend in priority areas. That is how digital divide is widening day by day. In these days telephony is not only speech but data services like fast speed internet are its part. The video telephony and video on demand may be next features to come.
The government has a created a fund named Universal Service Fund (USF) to support telecom growth in un-served and rural areas through existing Operators. And to say that the performance of USF was satisfactory is difficult because it was made dysfunctional for almost 9 months over petty issues raised by its own persons in authority. Yet, the future of the rural telephony lies with the USF as it has funds of billions of rupees in this regard, but there is a dire need of guidance and support for USF and right people must be in place to run if efficiently. The cellular companies could also take this avenue for their slow but substantial growth in this period saturation for them because the country comprises of vast rural population.
In the end, the upcoming budget is expected to be a non-event for Telecom, it is suggested that government should take measures to help the industry grow further and must consider the post-SIM-blocking-scenario that is going to hit the 40 percent of all the subscription base of the industry.