Enquiry:

A Telecommunication Authority (the Authority) was constituted under Pakistan Telecommunication (Re-organization) Act 1996 to regulate the establishment, operation and maintenance of Telecommunication Systems and the provision of Telecommunication Services in Pakistan.

In order to regulate the Telecom sector in Pakistan, the Authority issues various licenses to different companies. As per the license terms and conditions, the licensees are required to pay Annual License Fee (ALF), Universal Services Fund (USF) Contribution and Research & Development (R & D) Contribution. As per license terms and conditions, these Fees and Contributions are calculated as follows:

“The ALF, USF and R&D Contribution shall be calculated on the basis, of 0.5%, 1.5% and 0.5% respectively, of the licensee’s Annual Gross Revenue from Licensed Services for the most recently completed financial year of the licensee minus inter operator payments and related Authority’s mandated payments. However, Initial License Fee and Initial Spectrum Fee shall not be deducted from the gross revenue.”

Keeping in view the above license term, the Authority issues demand notices to licensees and calculate the amount payable by the licensee as follows:

Annual Gross Revenue as Disclosed in Financial
Statements of licensee                                                   x,xxx,xxx
Less: Sales Tax/ Federal Excise Duty                         (xxx,xxx)
Revenue as recognized in Income Statement          x,xxx,xxx
Less Inter operator payments                                   (x,xxx,xxx)
Less: the Authority mandated payments                (x,xxx,xxx)
Adjusted Gross Revenue                                              x,xxx,xxx

Annual License Fee @ 0.5% of Adjusted Gross Revenue x,xxx,xxx
R&D Contribution @ 0.5% of Adjusted Gross Revenue  x,xxx,xxx
USF) Contribution @ 1.5% of Adjusted Gross Revenue  x,xxx,xxx

The financial statements of the Authority are audited by government Auditors and they have raised an objection in calculation mentioned in para 3 above. The government auditor’s opinion is as follows:

“The Gross Revenue means the turn over or gross income from the license services exclusive of trade discount shown on invoice of bills, derived from sales of goods or from rendering, or supplying services or benefits or of contracts. Hence, accordingly to terms and conditions, Sales Tax/ federal excise Duty is part of gross revenue for the purpose of calculation of ALF, USF Contribution and R&D Contribution.

The point view of licensees is given below, which was accepted by the Authority:

a. Para 7 of IAS 18 ‘Revenue’ defines Revenue as “the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.”

b. Para 8 of IAS 18 further explains that “Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity.”

Clause 2 (a) of Part III “Requirements as to Profit & Loss Account” of the 4th schedule of the Companies Ordinance 1984 states that Profit & Loss Accounts shall disclose the turnover after deduction of discount and sales tax, therefore the companies disclose gross revenue and then deduct tax from gross revenue in “Notes to the Accounts” and the Net Revenue is disclosed in the income statement.

From the above, it is evident that taxes i.e. FED, Sales Tax etc. do not form part of gross revenue so it is not justified to charge Regulatory dues (ALF, USF and R&D) on the amounts which are not earned by operators. This view is further endorsed by the fact that licenses do not state that FED/Sales tax are part of gross revenue.

ICAP is requested to give their opinion whether sales tax forms part of Revenue or not keeping in view the facts mentioned above.

Opinion:

Considering the provisions of IAS 18, the Committee agreed with the point of view of licensee that sales tax do not form part of gross revenue.

(July 25, 2016)