A Rs47 billion case relating to tax adjustments of telecom operators is currently under investigation by the National Accountability Bureau that on the face of it emanated from contradictory positions taken by tax authorities.

Background discussions with key people, however, suggest that a big transaction into accounts of one of the top tax officials raised suspicions leading to investigation to telecom scam but was not yet clear whether the transaction was related to telecom sector or any other source.

This coincided with last minute changes in procedures or tax exemption before the close of last financial year to facilitate advance taxes under clause 236 of income tax to take the FBR’s annual tax collection as much close to the target as possible. In fact, the FBR was able to collect over Rs6 billion from telecom companies alone in the concluding days of June.

Now that telecom scam has come to the fore, the Nab investigators were in the background searching for the clues behind the ‘big transaction’ some believed pertained to a different case that would not be disclosed until final conclusion.

A group of tax officials and telecom operators believed the telecom investigation was a zero-some game as far as revenues were concerned.

But the key question remains why the changes in tax procedures or tax exemption were based on cases of only two or three telecom companies and why such demands were not raised against other telecom operators and whose tax accounts were allowed to be ‘time-barred’.

The case pertains to ‘interconnection service’, that allows the person making a call of one cell phone operator to terminate the call to a person receiving call of another cell phone operator. If this ‘interconnection service’ is not available, then call from one network cannot be terminated at another network, and only calls within the same network would be possible and this termination service has a fee.

Under calling party pay regime in Pakistan only the customer making a call (Call Originating Customer) is charged for the call, while the person receiving the call (Call Terminating Customer) is not charged anything. The amount charged from the ‘Call Originating Customer’, is the total cost of the call and includes the ‘Interconnect Charges’ for the ‘Interconnection Service’ while no amount is charged from the ’Call Terminating Customer’. Tax/duty is also charged from the ‘Call Originating Customer’ on the whole amount charged for any call including interconnect charges.

Out of this total amount charged to the customer, the amount of interconnect charges is then transferred to the operator whose network was used for termination of the call as this amount is basically the revenue of call terminating network. However, the total revenue including interconnect charges is collected from customers.

Once, the customer is charged the total cost of a call, tax (FED and advance income tax) is also charged on the total cost of call and deposited in the exchequer by the call originating network.

Another transaction that takes place between the two networks is the settlement of ‘Interconnect Charges’. At this stage, this is a mere transfer of money and no corresponding service is being provided by the call terminating network and hence the call originating customers has already been charged an amount at the time of making the call.

Simply put the dispute is whether the interconnect stage is a service and if so, whether call terminating network is also liable to 19.5 per cent federal excise duty. Telecom operators argue that even if it is accepted that call terminating network is required to charge 19.5 per cent excise on the ‘Interconnect Charges’ from the ‘Call Originating Network’, it would have no revenue impact as the total collection of FED in sales tax mode from telecommunication sector would remain same because of input/output adjustment.

They argue that if ‘call originating network’ is required to pay FED on interconnection charge at the time of its transfer to the call terminating network, it amounts to double taxation of the same amount.

The amount has already been subjected to FED at the time of call origination, and cannot be subjected to FED again at the time when it is merely being transferred from one network to another network.

The only difference between the ‘Outgoing Minutes Charges’ and the ‘Interconnect Charges’ is that the ‘Outgoing Minutes Charges’ is the revenue of the ‘Call Originating Network’ while the ‘Interconnect Charges’, is the revenue of the “Call Terminating Network”. However, both these are charged to the ‘Call Originating Customer, due to ‘Calling Party Pays’ (CPP) regime being operated in Pakistan.

Interestingly, when the Large Taxpayer Unit, Islamabad made a case in 2010 against the Mobilink and PTCL, it was only for one year for Mobilink and for past five years for the PTCL. If ‘Interconnect Charges’ were liable to FED at the time of its transfer from the ‘Call Originating Network’ to the ‘Call Terminating Network’, then why the case was not made out against Mobilink for the past five years and why no case was made out against any of the other telecommunication companies.

In 2010, the case could have been made for the past five years i.e. years 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10, but now in July, 2012, only cases can be made for the years 2007-08, 2008-09, 2009-10 and onwards. The two years i.e. 2005-06 and 2006-07, have become time-barred for initiating any case against the telecommunication companies due to the relevant provisions of law that prohibit opening cases older than five years.

In case of Mobilink, LTU has determined the liability of FED payable on ‘Interconnect Charges’ at the time of transfer from ‘Call Originating Network’ to the ‘Call Terminating Network’ to be around Rs2 billion of principal amount. On this analogy, the liability for the two time-barred years would be Rs4 billion of principal amount, and extending it to the other telecommunication companies (excluding PTCL) would be over Rs20 billion of principal amount. Penalty and default surcharge are additional payable on this amount of over Rs20 billion.

As this amount relates to a time much farther in the past, the amount of default surcharge would also be very huge. An estimate of default surcharge and penalty for this time-barred amount is around Rs30 billion, which shows that around Rs50 billion of the liability of FED on ‘Interconnect Charges’ pertaining to the years 2005-06 and 2006-07 have already become time barred and should be investigated under what circumstances and by whom.

It is in this background that tax specialists believe the recent case would end in a zero-sum game for the exchequer where neither a single rupee extra would be deposited in the exchequer nor a single rupee would be lost by the exchequer.