Sri Lanka’s ICT progress at risk: Interim Budget provisions on mobile taxes need reconsideration

Thursday, 5 February 2015 00:00 -     - {{hitsCtrl.values.hits}}

The mini-budget requests mobile operators to absorb the 25% tax for mobile reloads, which are used by over 90% of mobile customers - AFP
    In 2007-08, LIRNEasia contributed to a fruitful policy debate about the imposition of regressive and technology-specific levies on mobile users. When the legislation imposing a Rs. 50 per month levy on every mobile connection came up for a vote, the then Minister of Posts and Telecom Rauff Hakeem moved a floor amendment changing the levy to 10% of the bill, thus responding to our evidence-based argument that the fixed levy was unfair to the poor or “regressive.” Speaking on behalf of the Opposition, MP Kabir Hashim stated: “We will be pleased if Hon. Minister removes the regressive tax of Rs. 50 as pointed out by Prof. Rohan Samarajiva, Dr. Harsha de Silva of LIRNEasia and UNP members. We also request not to increase the mobile subscriber levy to 10%. This tax will have an adverse effect on the common man.” (Translated from the Hansard). A few months later, the levy was extended to fixed phone bills as well, making it technology neutral. LIRNEasia applauded that action. In his “100-day Revolution” statement, the Minister of Finance has proposed a “one off” levy of Rs. 250 million on all mobile operators and has asked them in addition to absorb the existing 25% tax on mobile reloads without passing them on to their customers. In a subsequent statement, the Minister is reported as having said, “We will ensure when we say it is one-off that it is one-off unless the market decides to behave in a different way.” If this report is accurate, there appears to be an implicit threat that the levy may be permanent unless the companies behave to his satisfaction. In 2007-08, the Ministry of Finance made nonsensical revenue proposals based on a lack of understanding of the mobile sector and the role that it played in people’s lives. LIRNEasia, which had research evidence on mobile phone use by the poor and the small amounts they paid for the service, was able to communicate these facts to the Minister in charge of the subject and Opposition spokespersons. As a result, the regressive element was stripped out and the tax made technology neutral. Today, there is no Minister formally in charge of the subject of telecommunication, but there are many in Cabinet and in Parliament who understand the pernicious effects of retroactive and technology-specific taxation on an industry that is of vital importance to Sri Lanka’s future. We hope that evidence will be looked at and modifications made as was done in 2007.   Why ask mobile operators to absorb the tax? After imposing various levies on the mobile sector in 2007-09, the Government finally simplified the complex tax-on-tax edifice. In 2011, telecom services were exempted from VAT and subject to a turnover tax which gradually increased from 20 to 25%. This was a pass through, collected by the telecom operators and transmitted to the Government. It increased the tax burden on the companies who were no longer able to set off VAT paid, but from the perspective of the customer it was a positive change. The mini-budget requests mobile operators to absorb the 25% tax for mobile reloads, which are used by over 90% of mobile customers. Is there any logic for treating post-paid bills differently? Is there an urgent need to further lower mobile prices in Sri Lanka? The authoritative Measuring the Information Society 2014 report issued by the UN body with responsibility for telecommunication, the ITU, states: “Most countries with the cheapest prepaid mobile-cellular prices are in the Asia and the Pacific region, with Sri Lanka (USD 0.95 or PPP $ 2.6 per month) and Bangladesh (USD 1.41 or PPP $ 4.0 per month) standing out with the lowest prepaid mobile-cellular prices in the world.” Macau, Hong Kong, Denmark, Singapore, Qatar, UAE, Switzerland, Norway, Austria, Australia and Finland are the only countries with mobile prices that are lower than Sri Lanka’s as a percentage of GNI per capita. Irrespective of international comparisons, is there not a general perception that mobile prices are low in this country? Is there a demand for even-lower prices?   What implications for investment? In investment circles, there is a strong perception that prices are actually too low in Sri Lanka and that this is main reason for inadequate Internet use. We at LIRNEasia do not share this view. Yet we do agree on the need to improve the conditions for greater Internet use in Sri Lanka, including the lowering of international backhaul costs, greater attention to download and upload performance and improved latency, and the creation of greater opportunities for providers of innovative content and applications. Some of these issues can be addressed by better regulation. But the most important thing is greater investment. The retrospective imposition of taxes and levies solely on mobile operators would raise red flags among those who make investment decisions. Except for Mobitel, which is majority-owned by the Government, the other mobile operators are owned by companies that have operations in other countries. Arbitrary measures such as those proposed in the mini-budget will depress much needed investment in ICT infrastructure in Sri Lanka, with investments flowing to other destinations. Internet and voice-service users may enjoy the short-term benefits of the taxes they now pay being absorbed by operators. But they will quickly suffer the consequences of lower value for money as investment dries up and quality of service deteriorates.     Should governments favour technologies and companies? It is well accepted that Governments should not favour specific technologies and companies. This distorts market processes and creates opportunities for rent seeking by politicians and officials. What people want is to communicate over distance using voice or to use the Internet; they are indifferent as to the underlying technology. Some suppliers will use wireless technologies to provide services, others will use wireline. But the mini-budget is extraordinarily technology specific. It imposes taxes and obligations on mobile operators and services, not on fixed operators and services. It singles out direct-to-home satellite services with more than 50,000 subscribers and exempts companies that deliver the same content using other technologies. This makes one wonder whether this could be a punishment for the blackout of a television program featuring the Common Candidate. But then, that unacceptable blackout also occurred on the wireline-based Peo TV, which has been shielded from the Rs. 1,000 million levy. There should be a proper investigation of the blackout, not punishment through the Budget without due process being followed.   Why punish mobile operators? The mobile industry developed during the war. Unfavourable conditions did not hold them back from making the necessary investments, including in the Jaffna peninsula during the ceasefire, to enable our people to participate in the modern knowledge economy. A 2014 comprehensive systematic review completed by LIRNEasia that covered over 7,000 research publications has definitively established the existence of positive economic benefits from the mobile networks. Therefore, we cannot agree with mobile-specific taxes and levies being imposed only on the mobile industry. The Government will argue that revenues are needed to cover the additional costs of keeping its election promises. It is short-sighted and counter-productive to levy punitive taxes on the mobile industry which in 2013 contributed Rs. 24.5 billion to the Government through the telecommunications levy alone, in addition to spectrum fees and other payments to the Telecom Regulatory Commission. The telecom levy yielded more revenue to the Government than PAYE tax in 2013. Internet and voice services over mobile networks are a merit good that should be encouraged. But if money is needed, tax them like other goods and services, nothing more, nothing less. But most importantly, do not harm the conditions for the ICT investment that is essential if Sri Lanka is to become a knowledge economy.

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