SIM cards, handsets: Scheme of taxation legally impermissible, argue CMOs

Three leading cellular operators have made a joint representation to the Federal Board of Revenue (FBR) that the scheme of taxation contemplated by the Ninth Schedule of the Sales Tax Act 1990 in relation to both items – SIM cards and handsets – is legally impermissible and unconstitutional and practically almost impossible to implement in the manner contemplated.

According to sources, the scheme of taxation of handsets as set out in the Ninth Schedule is irrational, illogical, arbitrary and incoherent. The new regime sought to be implemented will not solve the government’s problem at all. It will lead to an increase in handsets with dummy IMEI numbers in addition to an increase in overwriting of IMEI numbers with the object of avoiding the tax, joint presentation of the telecom companies added.

The joint representation, signed by the Chief Legal Officer/Legal Head of the telecom companies, referred to the past meeting or the Joint Committee of the FBR and PTA with the representatives of three telecom companies at FBR House, Islamabad on the issue of the Ninth Schedule of the Sales Tax Act, 1990 and the subsequent order of the Islamabad High Court dated 24.11.2015. In this regard, we are pleased to submit the following comments to assist the Joint Committee in the preparation of the Report to be placed before the Honourable High Court:

During the meeting held on 12.11.2015, the representatives of Telenor, PMCL and Wand had made detailed submissions on the practical issues in relation to the implementation of the tax imposed by way of the Ninth Schedule read with Section 3B of the Sales Tax Act, 1990. The present submissions aim to cover some of the fundamental legal issues in the implementation of the tax under the Ninth Schedule while recapping some of the practical problems already presented, joint presentation said.

It said that the section 3B provides for a tax on the import and supply of the goods specified in the Ninth Schedule, in the manner and mode provided therein. The Ninth Schedule essentially taxes two items ie SIM cards and handsets. Before the introduction of the Ninth Schedule by way of the Finance Act, 2014, only the import and supply of handsets was being taxed under a special SRO regime but there was no special regime for taxes on the import and supply of SIM cards. It is submitted that the scheme of taxation contemplated by the Ninth Schedule in relation to both items, SIM cards and handsets, is legally impermissible and unconstitutional and practically almost impossible to implement in the manner contemplated.

The mobile operators referred to the joint committee’s attention to the tax on SIM, cards. The Table in the Ninth Schedule purportedly levies a tax of Rs 250 on the supply’ of SIM cards, payable at the time of supply. It is submitted that since the charging event for the tax to trigger is the supply of SIM cards, it is necessary to examine the scope of the term “supply”. Section 2(33) of the Sales Tax Act defines “supply”, in so far as it is material, as “a sale or other transfer of the right to dispose of goods as owner…” It is crystal clear from the foregoing definition that there must be a sale in the nature of a transfer of ownership for a transaction to be classified as “supply”.

In the case of the Cellular Mobile Operators (CMOs) in Pakistan, there is in fact no “supply” of SIM cards at any point whatsoever. The CMOs do not sell SIM cards to customers and there is absolutely no transfer of ownership/right of disposal. CMOs merely provide SIM cards to customers, whilst retaining full and exclusive ownership, for the sole purpose of enabling access to the networks of the CMOs. In this transaction, there is merely a transfer of possession with a limited right to use but the title remains with the CMOs as is also indubitably evident from the terms and conditions for availing cellular services agreed between the CMOs and their customers at the time of establishing a new connection, it said.

Federal Government’s power to impose sales tax is derived from Entry No 49, Part-I pf the 4th Schedule to the Constitution of Pakistan, 1973 which reads as follows, taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services. A bare perusal of this entry shows that it only empowers the imposition of taxes on the “sales” or ‘purchases” of goods. Since there is no sale/supply of SIM cards from the CMOs to their customers, it is submitted that the federal Government does not have the power to charge any tax on CMOs’ activity of providing SIM cards for use to customers, it stated.

It is not only the case that the CMOs do not sell SIM cards but also that SIM cards by themselves have no intrinsic value and therefore not capable of being sold to customers. By itself a SIM card is of no use whatsoever. It is only a tool through which CMOs allow access to their networks to users. Without services from CMOs, SIM cards are absolutely worthless, it is submitted that the Joint Committee must seriously consider how sales tax is purportedly sought being levied on a transaction which does not by any stretch of imagination fall within the scope of supply” of goods.

The provision of SIM cards is only a minor incidence of the main object of the agreement between CMOs and its customers ie provision of telecommunication services. As explained above SIM cards are simply provided to customers to enable them to connect their phones to the networks of the CMOs and therefore the act of providing SIM cards is, at best, a part of the services being provided by the CMOs (a composite contract with the dominant purpose being the provision of services). As is evident from a bare reading of Entry No 49, the power to impose taxes on services is expressly excluded form the domain of the Federal Government. By taxing the act of provision of SIM cards, without any transfer of ownership, the Federal Government is essentially seeking to charge sales tax on services, which is constitutionally impermissible. It is respectfully submitted that this is a crucial legal issue which the Joint Committee needs to address.

The other item sought to be taxed by way of the Ninth Schedule is mobile handsets. Handsets are obviously valuable goods capable of attracting the levy of sales tax at the time of import and/or supply. Under the scheme of the Sales Tax Act, the tax on handsets should be charged from the importers and/or suppliers. However, due to the Government’s failure to curb smuggling of handsets and its tendency to succumb to pressure from importers, the CMOs are being unduly and illegally burdened with the liability to charge collect and pay sales tax on handsets at the time of “registration of IMEI numbers” even though the CMOs have absolutely no nexus with the import and/or sale of the handsets being used by their customers, it said.

It further said that the government’s power under the Constitution only extends to taxing the “sales and purchases of goods”. It is submitted that this tax can only be collected from the seller or the purchaser and not from any unrelated third party. It is the activity of selling or purchasing that can be taxed and it is only persons involved in selling and purchasing who can be made liable to charge, collect and/or pay the same. It is not permissible to place a burden on an unrelated third party in lieu of placing responsibility on the parties to the activity sought to be taxed. The Joint Committee must address this issue of how a person not connected with an activity can be made liable to charge, collect and pay a tax on that activity.

It said that the scheme of taxation of handsets as set out in the Ninth Schedule is irrational, illogical, arbitrary and incoherent. There is absolutely no nexus between a number of different elements of the scheme which renders it invalid and impractical. It is by now well-settled that there must be a rational nexus between the different elements of any scheme of taxation (subject matter of the charge, rate of charge, charging event, collection mechanism, persons to be charged etc) for it to be legal. In the present case, there is no nexus between the subject matter of the charge (import and supply of handsets) and the persons to be charged (CMOs). There is also no nexus between the subject matter of the charge and the charging event (registration of IMEI nos.). These glaring disconnects between the different aspects of the scheme of taxation of handsets make it unsustainable in the eye of the law.

The regime under the Ninth Schedule in relation to handsets is also unsustainable because it will definitely lead to double taxation. All old handsets on which taxes would already have been paid well, in the past will also be caught by the charge since there is no record of IMEI numbers of handsets already subjected to sales tax in the past. This would not only be inequitable but also impermissible under the law of Pakistan. In addition to old handsets, the charge, as indiscriminate as it is, will also apply to international inbound roamers whose handsets would neither have been purchased nor permanently used in Pakistan. Either the CMOs would be compelled to bear the burden of charges or they will have to face a lot of infuriation from local and foreign customers, as well as foreign partners.

Another major issue for the CMOs is in relation to prepaid customers. The subscriber base of CMOs is mostly low-income consumers using prepaid connections. Most of the times they maintain little or no credit balance in their accounts. CMOs will not be able to collect tax from them but will be forced to pay it to the Government leading to huge losses, it said.

The CMOs’ current technical and human resources are not capable of implementing the tax regime and they will have to incur costs running into hundreds of millions of dollars in capital expenditure in addition to huge operational costs on account of human resources for complying with, the tax regime. The Joint Committee must consider how it is legal to force an enterprise, which has nothing to do with the transaction sought to be taxed, to incur such exorbitant costs solely for the purpose of performing what is essentially a core function of the state, joint presentation said.

The new regime sought to be implemented will not solve the Government’s problem at all. It will lead to an increase in handsets with dummy IMEI numbers in addition to an increase in overwriting of IMEI numbers with the object of avoiding the tax. Not only will the entire purpose of this, new regime stand defeated, but it will also lead to tracking issues for law enforcement agencies if IMEI numbers are forged. The only solution for the Government is to crackdown on smuggling and charge sales tax at the import and supply stage, joint representation said.

It said that the government is fully aware of the loopholes in the system which allows smuggling of handsets. It needs to effectively plug these loopholes, curb corruption within the department and establish a serious enforcement mechanism to ensure that all handsets are properly taxed at the import and/or supply stage. Rather than wasting its resources in alternative methods while allowing smuggling to thrive, the Government should develop and implement a long-term strategy to deal with the problem of smuggling. The solution may be difficult but it is the only one. The alternative the Government is seeking to implement will cripple an industry already struggling under very heavy taxes.

The foregoing constitutes a brief summary of some of the major problems received by the CMOs with regard to the implementation of the tax on SIM cards and handsets under the Ninth Schedule. Cellular operators would be grateful to the joint committee if we are given an opportunity of a hearing to explain our views in more detail before the finalisation of the report to be placed before the high court, joint presentation added.