By Jithendra Antonio
Sri Lanka’s is said to be a tech savvy nation and the telecommunications industry, particularly with regard to mobile phones, has been one of the fastest growing industries which has touched the entire country in less than three decades.
At one point in 1992, Sri Lanka had just 2,644 mobile connections but now 24 years later Sri Lanka has become home to over 24.6 million mobile connections (as of June 2016 according to TRCSL Statistics), turning into a country that has two million more mobile connections than people.
Mobile penetration almost touched 116.7 per 100 inhabitants and fixed lines, which amounted to just 121,388 in 1990, increased to over 2.59 million by June 2016 after hitting a peak of nearly 3.5 million fixed lines in 2010. Statistics highlight that over the last decade mobile phone penetration has increased from 16.8 (per 100 persons) in 2005 to 116 by 2015.
On the other hand, Sri Lanka’s Internet penetration expanded to 19.5% in 2015, compared to just 1.1% (per 100 persons) in 2005, according to analysis conducted by a premier conglomerate involved in ICT sector highlights.
The country’s internet connections grew by 22.2% during 2015 while fixed internet connections grew by 12.6%. As at June 2016 Sri Lanka had over 768,000 Fixed Broadband subscribers and over 3.46 million Mobile Internet subscribers. Mobile Internet subscribers alone had grown from 91,359 in 2009 to 3.46 million in 2016.
As a result, the country’s IT, Telecommunications and Digital Infrastructure sector has been earmarked to play a vital role in driving economic development, fuelling innovation, driving productivity and enabling the exploration of new knowledge frontiers. We have also witnessed that governments which came to power over the years have capitalised on ICT strategy, even marketing a ‘A Nation with Free Wi-Fi’ vision covering the whole geopolitical landscape of Sri Lanka despite some drawbacks in the implementation process. The present Government is also trying to improve Sri Lanka’s digital infrastructure, enhancing ICT policies, legislation and standards, and facilitating trade and business through ICT.
Sri Lanka was the first South Asian nation to adopt 4G broadband technology in 2013 and high competition between service providers allows users to enjoy some of the lowest data tariffs in the world.
Broadband, leased-line and satellite connectivity is also widely available and the country’s BPO/BPM industry is positioned for strong growth as the country’s high literacy rate, talent pool for IT skills, investor-friendly policies and conducive business environment and infrastructure makes it an attractive location for offshore services.
Sri Lanka now ranks 14th on the 2016 A.T. Kearney Global Services Location Index (GSLI), moving up two notches from its position in 2015. In 2013, Sri Lanka’s IT/BPM generated revenue of $ 720 million in exports and the industry has set its sights on achieving $ 5 billion in revenue by 2022, generating 200,000 jobs and creating 1,000 start-ups in the process. The telecom industry in Sri Lanka at present provides employment to over 12,700 professionals in the country. So obviously governments throughout the years learned that Sri Lankans using mobile phones and telephones were the ‘Best Base’ to tax and increase Government revenue. This is evident with the latest VAT hike applicable to telephone and mobile telephone talk time and internet services
Sri Lankans have enjoyed the benefit of free incoming calls for the last six years with both fixed lines and mobiles while total domestic outgoing calls amounted to over 44.75 billion minutes in 2015 which gradually increased from 37.2 billion in 2011 while so far in 2016’s first half as at June subscribers took over 22.1 billion minutes in outgoing calls.
Meanwhile, foreign outgoing calls gradually decreased from 694.06 million minutes in 2011 to 575.84 million in 2015. So far in 2016 outgoing international calls amount to over 232.7 million minutes of talk time.
What has been golden for governments over time has been these billions of minutes, for which the 22-million-strong population in Sri Lanka is paying a tax of 27.5% for Voice Calls, SMS (Short Message Service) and Value Added Services (VAS) amidst the International Monetary Fund (IMF) pushing the Sri Lankan Government to recover 20% of GDP as tax revenue added with a currency devaluation from the $ 84 billion economic value of the country.
Taxing the telecoms
The Government at present is waiting to proceed with a $ 1.5 billion IMF loan with the second tranche of the loan being delayed according to reports published last week, with the IMF pushing the Government to soon implement the new VAT hike.
Careful analysis of the proposed VAT hike shows that an average Sri Lankan’s tax cost per mobile bill or even prepaid phone will be hiked by over 10%-22% while people will end up paying almost 49.68% as tax for main services such as Voice Calls, SMS and VAS upon new budget proposals.
Currently, Sri Lankans pay several taxes for mobile services and citizens are also taxed for mobile services and data usage. The taxes include the Telecommunication Levy, CESS, VAT (Value Added Tax) and NBT (Nation Building Levy) and the percentage of the levy is dependant on each revenue stream of telecom and mobile services. The new tax regime comes into force again and will once more add NBT and VAT at an increased rate. A detailed snapshot of how your phone bills will rise is explained in the two charts.
If we go back to 2011, telco watchdog the Telecommunications Regulatory Commission of Sri Lanka (TRCSL) recommended consolidation of all taxes paid for telecommunication services to avoid “tax on tax” as much as possible, to make it simple on the systems of telecommunications companies and also for people to easily understand the tax components in their bills and obviously for the Government to make money.
Accordingly, in January 2011 the then Government imposed a Telecommunications Levy of 20% of operator revenue and a CESS tax of 2% to replace 27% collective taxation broken down as 12% VAT, 10% Mobile and Fixed Subscribers Levy (MSL), 3% Nation Building Tax (NBT) and 2% Environment Conservation Levy (ECL). The effective rate of the mentioned tax charges are more than 30%.
However, as later Government policy was directed at promoting Broadband data (BB) services, they decided on a lower rate of 10% for Broadband-related services but again in the 2014 Budget the Government decided to increase the general Telecommunications Levy from 20% to 25% and charge 10% on broadband services while the CESS of 2% remained as it was.
This shows that as of now telecommunication services have a unique taxation structure in Sri Lanka. If you look at the bills you get from service providers today, you see the following tax components (some service providers don’t show the breakdown of the taxes and levies): CESS (of 2%), 10% Telecommunication Levy on broadband services and 25% Telecommunication Levy on all other services.
Since late last year the new Government has shown some inconsistency with regard to taxes and levies. The Budget for 2016 said the following on VAT. It was proposing to remove certain exemptions with the view of generating an increase in revenue. The present single rate was revised to three bands 0%, standard rate of 8% and a 12.5% higher rate for the service sector and the minimum threshold for the liability for VAT was Rs. 12 million per annum. But a few months later the Prime Minister declared a different set of tax policies in Parliament and decided to implement them from 1 April 2016.
That was postponed for unknown reasons and now VAT is set to increase to 15% and NBT to 4% from 2 May 2016 onwards. On the other hand, the President publicly mentioned that no tax burden would be imposed on the public but as of now Telecommunications is not exempted from 15% VAT and 4% NBT. As shown above, the 25% tax charged in telephone bills already includes 12% VAT and if another 15% VAT and 4% NBT are imposed, we will witness a 46% tax on general telecommunications services and 31% on BB services.
Separately, the 2016 Budget Proposals also stated increasing the International Telecommunication Operator Levy (ITOL) from US 9 cents to US 12 cents and a total increase to be credited to the Consolidated Fund. ITOL has been going down everywhere in the world (maybe except in a few underdeveloped African countries) in the past decade to discourage illegal international call termination practices and also to enable telecommunication operators to somewhat compete with over-the-top (OTT) players such as Skype, Viber, WhatsApp, etc.
But Sri Lanka has kept it high all the time and this increment in the last budget is a shocking surprise to the telecommunications industry locally and internationally as it encourages illegal terminations of international calls received as well as making local operators less competitive to OTT players.
These tax increments surely affect call volumes and the duration of calls and this will affect the profitability of telecommunications operators, which in turn will affect corporate taxes paid by them. This will also affect many other industries as telecommunications is a basic need of all other industries as well.
It is interesting to know the recent history of these values to understand the impact of the additional VAT and NBT which was already imposed from 2 May 2016 onwards but only slightly reduced in August 2016 as per reflected in telecom bills as the new VAT imposition was challenged in the Supreme Court.
The Supreme Court in July issued an interim order to suspend the Value Added Tax (VAT) increase from 11% to 15% imposed from 2 May 2016 until the relevant legislation was passed by Parliament. But on 13 September 2016 the Finance Ministry again confirmed the VAT hike imposition on several services upon approval from the Cabinet of Ministers to raise Value Added Tax (VAT) to 15%. Accordingly, the Cabinet has approved the VAT bill with amendments as required by the Supreme Court judgment.
Apart from the said taxes above that largely affect the consumer, Sri Lanka’s largest mobile services provider Dialog Axiata Plc, which has a 10.4 million local subscriber base, has highlighted in their latest annual report that the new taxes on telecom and corporates had affected the financial performance of the company.
Accordingly, as per 2016 Budget Proposals, Finance Act No. 10 of 2015 certified on 30 October 2015 contains a Super Gain tax, a one-off tax at the rate of 25% on the taxable income of the year of assessment 2013/2014.
Accordingly, Dialog Axiata alone had paid over Rs. 1.79 billion as Super Gain Tax while partly state-owned national telecom services provider SLT and Mobitel collectively paid over Rs. 769 million as the same tax. On the other hand, Mobile Telephone Operator Levy, a one off levy of Rs. 250 million on every person who is engaged in the business of a licensed mobile telephone operator as at 31 March 2015, is accounted as expenditure incurred during the year by Dialog Axiata Plc, Mobitel, Airtel and Hutch which amounted to a total of Rs. 1 billion as tax income to the Government.
The VAT is borne by the ultimate consumer and not by the trader. It is an indirect tax and the Government will receive at the end, through all the intermediary suppliers and wholesalers and retailers, an amount equal to the amount paid by the final consumer. Surely showing the VAT in the invoice to the customers will give operators some benefits on the cost side.
Above all, it is very clear that the decision to extend the VAT increment to telecommunication services is done without giving much thought to its impact on the public and the telecommunications industry.
It seems like telecommunication services are to be subjected to more taxation in the time to come, squeezing the average Sri Lankan’s income and deleting the nation’s savings habit.
(The writer is an Investment Banker and Economic Analyst at Frontier Capital Partners Ltd. and CA PLUS Ltd. He has previous experience as both an Investigative Journalist and Financial Journalist at four national newspapers in Sri Lanka. The writer can be reached at firstname.lastname@example.org)