Taxing Sri Lanka’s mobile customers: Goose or eggs?

Sept 03, 2007 (LBO) – Taxes are necessary.   The consistent theme of the “Choices” columns has been that choices have to be made; that one cannot have the cake and eat it too.

The present administration got elected by promising to fight a war, give government employment to all graduates, give subsidies to all and sundry, etc.  It has done the giving and spent even more on money-losing enterprises like Mihin Air.

These bills have to be paid, one way or another.   One pays through taxes or through inflation caused by money printing.  There is no free lunch, contrary to the beliefs of many of our voters.

Paying through taxes is the better choice of the two.   The best choice, of course, is to reduce government expenditures, but that message is said to have few buyers in the political marketplace.  So, absent politicians willing and able to convince the people that hard choices have to be made, we’re left with a choice between taxes and money printing.

When I was Director General of Telecommunications there were less than a million phones (fixed and mobile) in the country.   At that time, I was asked to persuade the government to exempt the fast growing telecom industry from the newly introduced goods and services tax.   I did not, because it was not reasonable to ask for exemptions from a general tax.

So this column is in no way an objection to taxes.   But it is an objection to certain kinds of counterproductive and unfair taxes:  the kinds of taxes that are to be debated in Parliament on the 6th of September, specifically:

  • The tripling from 2.5  per cent to 7.5 per cent of the “Cellular Mobile Telephone Subscriber Levy” on the phone charges paid on every one of 5.9 million plus mobile SIM cards in operation; and
  • The imposition of a regressive, usage-insensitive LKR 50 tax on the above mobiles subscriptions.

These taxes are akin to harassing the goose that is laying the golden eggs; while leaving alone the duck that is laying ordinary eggs.  The former act is, as everyone who has read the fable knows, counterproductive: a harassed goose lays fewer eggs.   The latter is unfair.  The inequity does not end there, but more on its multiple forms later.

Golden eggs

In 2006, the post and telecom sub-sector contributed to 20.1 per cent of national economic growth.  This was the largest contribution made by a single sub-sector.

The financial services sub-sector (9.7 per cent of the entire GDP) contributed only 13.5 per cent and the entire manufacturing sub-sector (16 per cent of the GDP), only 11.8 per cent.  A larger contribution to growth was made by the post and telecom sector which constituted just 7.4 per cent of the economy.

The economic growth of the country would be lower if not for the rapid growth of this relatively small sector.

It is obvious that the sub-sector’s performance is driven by telecom, not by the moribund post office.  Within the telecom industry, growth is driven by the mobile segment, the segment that is now being targeted for punitive taxation.

Figure 1:  Fixed and mobile growth, 1992-2006

 

 

 

 

 

 

 

In 2006 alone, the four mobile operators gave out 2,050,721 new SIMs.   Even allowing for multiple-SIM-carrying customers, that amounts to around 2 million new subscribers.  That is more than the total number of subscribers with fixed phones (1,884,076), served by all three fixed operators from the beginning of telephony in the 1870s to 2006.

The average revenue per prepaid SIM (ARPU) for Dialog, the largest mobile operator, in the first half of 2007 was LKR 414; for Hutch, a smaller operator who is growing entirely in the pre-paid space the ARPU was LKR 311.

Conservatively, let us assume that an average prepaid customer (around 80 percent of the total of around 6 million) pays around LKR 350 a month on mobile service.   Again, conservatively, let us ignore the more prosperous postpaid customers whose ARPU was LKR 1,709).

Leaving aside the general taxes, the mobile-specific levy therefore would have cost a minimum of LKR 8.75/month to each of around 6 million customers and yielded the government a revenue of LKR 52.5 million a month or LKR 630 million in 2006.

That is on top of the revenues from the general tax that conservatively netted around LKR 4 billion to the government in 2006 from the mobile segment alone.

The mobile sector drives economic growth in the country.  It improves the lives of the citizenry:  gives them a sense of security and helps them keep in touch with friends and families; helps them save on other expenses such as transport and in some cases helps people make more money.

It broadens democratic participation and has potential to save lives in disasters.  It generates substantial tax revenues for the government.  It is one of the few economic segments where prices have fallen in real and nominal terms.

Every year, it does more of each of these good things.  And for all this, it does not draw on public funds.  It attracts around half the total foreign direct investment that comes into the country.   It is indeed a goose that lays more golden eggs year after year.

According to LIRNEasia research on teleuse at the bottom of the pyramid (BOP) conducted in mid 2006, 20-22 per cent of households at the BOP had only a mobile.  All these people had obtained their connections within the past five years.   Another 520,000 households at the BOP stated that they planned to become mobile owners in 2007-08.

As shown by survey data and by declining ARPUs, the people now getting their mobile phones are those at the BOP, those who do not have a lot of money in their pockets, those who will be paying small amounts.

These are the beneficiaries of continued growth in the mobile segment; these are the people who will be shut out from the information society if growth is stifled or the costs of mobile ownership are raised beyond their reach.

Harassing the goose

According to the fable, the regular supply of golden eggs was not enough for the foolish owners; blinded by greed, they cut open the goose to get all the eggs at once.  They found to their grief that there was no trove of golden eggs in the goose’s stomach; that their greed had deprived them of any more golden eggs.

I do not accuse the government of being that foolish.   They are not killing the goose; their behavior is more like that of trying to milk the goose for more eggs.  The end result, however, will be a stressed goose yielding less eggs than it otherwise would have.

It is widely recognized that the new subscribers obtaining telecom services will be from the bottom of the pyramid.   The average revenue per subscriber of Hutch, an operator that specializes in serving the BOP is LKR 311.   Let us see what the new taxes mean for this subscriber:

  • Today the average Hutch customer pays LKR 311 a month, of which approximately LKR 55 currently goes to the government, leaving around LKR 255 for phone calls.
  • The new proposals will increase the government’s take to around LKR 120 by taking a LKR 50 fixed tax plus 7.5 per cent mobile levy on top of the general taxes.
  • That leaves a mere LKR 191 for the subscriber to use on phone calls.

Figure 2:  Impact of proposed taxes on average Hutch customer

 

 

 

 

 

 

 

 

 

People will not stop using mobiles because of these taxes; but they will call less.  Most importantly, the new subscribers planning to join the ranks of levy- and VAT-paying subscribers will do so at a much slower pace.

The government will get less tax revenues than it thinks it will.  It may get a little more than it gets now in the short term; but if it was patient and allowed the sector to grow organically, it would have got more in the long run.  Happy goose gives more eggs over time; stressed goose less.

Unfairness

The regressive, fixed tax of LKR 50 per SIM is absolutely wrong.  Taking LKR 50 from a person paying LKR 311 per month as well as from a person with a LKR 5,000 phone bill is unfair.   The effect is a 16 per cent tax on the low spender and a 1 per cent tax on the high spender.  That is why these kinds of taxes are called regressive.

The proposed taxes are to be imposed only on mobile subscribers and not on fixed subscribers.  There are far less fixed subscribers than mobile.   Having obtained their connections when connections or bribes were required, many of the fixed wireline subscribers are relatively wealthier than the majority of the mobile customers, especially the millions connected in the past few years.

While the courts have labored to produce a nine per cent reduction in prices for the favored few, the government is imposing massive mobile-specific taxes on the larger, and poorer, group of mobile users.

The fixed segment that is giving fewer benefits to the economy and society (the duck laying normal eggs) is being rewarded while the mobile segment (the goose) is being tortured.  In a time of convergence, it is retrograde to treat differently, services and technologies that serve similar functions.

If the proposals are implemented, the average Hutch customer will pay around 23 per cent of his monthly payment in mobile specific taxes, in addition to the general taxes about which there can be no dispute.

The moral of the story

The fable is about greed.   The goose bestows blessings in the form of golden eggs on the villager and his wife.  Instead of being grateful for this largess, the couple become greedy: they want more, sooner.  They cut open the goose and revert to poverty as a result.

With the 2.5 per cent levy, the otherwise enlightened UNP government of 2001-04 took the first step on the path of greed.   The present government is taking the next step: 7.5 per cent plus LKR 50 regressive tax.

This will not yield as much revenue as expected because less people will become owners and call volumes will not grow as fast.  Greed will kick in again, and there will be more attempts, increasingly convoluted, to extract more taxes from the mobile segment.  It will be reinforced by the Irisiyava that is bigger than Rusiyava.

We, who were overtaken by Pakistan in mobile penetration in 2006, will fall behind even further.   The tortured goose will produce less and less.

Having begun by admitting the need for taxes to pay for the extravagant and excessive expenditures of the government, I am duty bound to propose an alternative.

The fairest way to collect these taxes is by increasing the VAT rate and removing exemptions, not by imposing various kinds of unfair and counterproductive taxes on arbitrarily selected industries and customers.

It is time for the Ministers of Investment Promotion, Posts and Telecom and related subjects to reeducate the people at the Treasury who have forgotten what they were taught in their Public Finance courses.  It is time for Parliament to speak on behalf of the six million plus mobile owners and the millions waiting to get their first phones.   It is time to defeat this pernicious proposal.

True wisdom lies in making government smaller and more efficient.  Until then, desisting from service-, technology- and group-specific taxes and regressive taxes will do.