Budget benefits through ICTs

For long, telecom operators have served as tax collectors. Every telecom bill includes taxes that are collected and handed over to the State – Pic by Shehan Gunasekara

This Government places great emphasis on technology, specifically on Information and Communication Technology (ICT). Amidst the Budget debate, a new Ministry of Technology grouping together ICT related agencies and companies was created with the President as Minister. The Secretary has yet to be named but the newly-absolved Senior Advisor to the President, Lalith Weeratunga, is likely to play a significant role. 

A budget speech is an important indicator of Government priorities. Talk is cheap, but talk backed up by financial commitment is less cheap. That is why budgets are taken seriously. 

What are the likely benefits from the perspective of the people? What investments will be made, and what barriers will be removed by the Government to facilitate greater access to ICTs? What taxes will be raised from ICT services used by the people and from companies in the sector? What jobs will be created in the software and IT enabled services sector? 

Investment

According to the Sinhala version of the speech, Rs. 15 million from the Telecommunication Development Fund (TDF) is to be spent on pushing out coverage of 4G and fibre. When we last looked, the TDF had Rs. 69 billion unspent (this was for 2015 and money kept being collected and not spent; so, the total is likely to be higher). Was the Government committing a maximum of 0.02% of money collected from incoming and outgoing international calls and lying unspent? 

So, the English version was checked. It appears the actual amount may be Rs. 15 billion; the Sinhala version may be a typo. Even that is a maximum of 21% of funds lying fallow. But because they have made it complicated, starting with a low number is good. Half the money must be spent on local suppliers; import restrictions are in place making quick deployment of vital equipment that is not locally manufactured unlikely. If half the money is spent within a year, it will be praiseworthy.

Barriers

The Budget speech commits to helping timely construction of towers and the laying of cables. This proposal is far superior to the (luckily unimplemented) proposals in previous budgets which imposed punitive taxes on towers and proposed all sorts of complicated structures for building and managing towers. 

Because most land in this country is owned by the State, it is a good thing to make them available for telecom operators. One only hopes that the proposal will be implemented and that we will not be talking about this in the future tense next year.

Tax changes

For long, telecom operators have served as tax collectors. Every telecom bill includes taxes that are collected and handed over to the State. At present, for every Rs. 100 we pay for voice calls, we pay an additional Rs. 37.7 in taxes to the State; for every Rs. 100 we spend on data, we give Rs. 19.7 to the State in taxes. The odd numbers are because these are multiple taxes layered on top of each other. In the Ravi Karunanayake years it was worse, but the rates were lowered in 2018.

The Budget speech says that a single tax (possibly with different rates for different items) will replace the current tax-on-tax regime for alcohol, cigarettes, telecommunication, betting, gaming and vehicles by 1 January 2021. This is disappointing and puzzling. It is disappointing that telecom is lumped together with all sorts of demerit goods that the State taxes excessively to discourage consumption. It is puzzling because these kinds of changes require legislation and usually take effect in April, after the Budget is approved and Finance Act amendments are approved by Parliament. 

The quantum of the single tax for telecom services is not specified. But it may be inferred that end users will pay more. The Government is expecting to increase the revenues from taxes on goods and services (of which the above-mentioned categories contribute around 50%) by 30%. It is unlikely that such a big increase can be achieved by keeping the burden on the end-user at current levels or lower.

Justification exists for lowering the taxes levied on data services in these pandemic times. It is illogical to make a big fuss about extending 4G and fibre connectivity to every nook and cranny of the country and then make data plans unaffordable by excessive taxation. But in the current circumstances, no one should be advocating for reducing State revenue. 

The Budget promises to exempt earnings from both domestic and foreign sources by those engaged in businesses in software and IT enabled services from income taxes. The foreign earnings exemption has been in place for persons directly receiving payments from foreign sources if they are deposited in local accounts and declared. What this appears to allow is the exemption from taxes of all software and IT enabled service firms, which is rather radical. The test will be whether the definitions are clear, and implementation is efficient. Again, a conclusion depends on the language of the amendments. 

The larger question is whether anyone has modelled the revenue loss from exempting most people in a sunrise industry from income tax. Whatever the loss is in 2021, it will be larger in 2022 and so on. Is there a real need to exempt software engineers from income tax? 

Employment

The Government has allocated the rather large sum of Rs. 10 billion for setting up five “fully-fledged plug and play Techno Parks in Galle, Kurunegala, Anuradhapura, Kandy and Batticaloa Districts”. Previous budgets included such allocations for such parks by slightly different names, but none were built. It appears the liking for these things comes from officials rather than politicians.

The Malambe IT Zone was established under President Kumaratunga in the 1990s. It was not easy to attract companies to that location which was considered too remote. We could not even persuade HSBC to locate its regional centre, which is not a hive of creativity, in Malambe. They insisted on the present location on Parliament Road. 

The value of the Malambe IT Zone has greatly increased now with the Athurugiriya Interchange and would have skyrocketed had the now aborted LRT been completed, but most of the land is already occupied, not necessarily by IT firms. Still the early difficulties illustrate the challenges of setting up technology parks. 

They are fundamentally different from the industrial parks our officials are familiar with. The companies that locate in such parks place a premium on attracting and holding employees. The people who work in software firms and creative industries do not particularly like suburban or rural locations; they do not want to spend hours commuting. They like the benefits of agglomeration. That is why Silicon Valley emerged around Stanford University and why Bangalore and Gurgaon, with all their shortcomings, emerged as centres of IT. Coffee shops and bars play an important role in the success of IT parks.

Artificially creating techno parks in the middle of nowhere is a recipe for failure. Government officials are incapable of designing and managing such parks. They should commission studies of what has worked here and abroad and encourage private firms to build and manage technology parks in locations that will attract companies and employees. 

On what basis were five districts picked for locating the parks? It would be useful to understand what happened to the tender that was floated by the Export Development Board in 2019 seeking to identify a suitable building and operator for a tech park in Jaffna. Just because something was started under a different government, it should not be abandoned. By most measures, including the quality of the educational system and the success of initiatives such as Yarl IT Hub and Uki Coding School, Jaffna is an obvious candidate, though much remains to be done on the leisure and entertainment side.