Policy Research Institute - PRI Bangladesh

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Rationalising taxes in telecom sector

Published: Tuesday, May 19, 2015

FE-PRI EAU Special

Posted : 19 May, 2015 00:00:00


Rationalising taxes in telecom sector

Naureen Khan

Rationalising taxes in telecom sector

The future potential of Bangladesh’s telecommunications sector in the Information Communications Technology (ICT) Industry is immense. It is imperative that the government’s budget and Seventh Five-Year Plan adopt consistent strategies and policies to take this sector forward.

A special challenge that currently lies ahead is to further increase the mobile teledensity and to expand internet and bandwidth connectivity through lowering access cost by way of reductions of taxes in the ICT sector. This will also increase investments in network infrastructure.

This will be a win-win policy for the government because a larger subscription volume will benefit both service expansion and total tax revenues from the ICT industry.

The existing fixed telecommunications infrastructure, the ongoing programme to upgrade to fiber optics technology, and additional bandwidth expansion plans through the second submarine cable SEA-ME-WE-5 suggest that technical capacity is not a constraint to the expansion of services.

The presence of a significant number of internationally competent private service providers also indicates that the supply of ICT services is not a constraint. This highlights the key question about what constrains the more rapid pace of use of ICT services.

Given the extremely limited fixed telephone density and the progress with modern mobile technology in Bangladesh, mobile telephony appears to be the only practical way for spreading the ICT revolution.

Notwithstanding recent progress with the expansion of mobile phone, the spread and usage of mobile phone technology is currently constrained by the cost. The average cost of talk-time and SMS for basic mobile phone is very low owing to stiff competition among providers.

Nevertheless, the service-providers have raised serious concerns regarding the level of taxation of the ICT industry. High taxation has raised the cost of other higher value-added services such as video and data services and related equipment.

There is limited flexibility to reduce the cost of these services despite high competition. Costs of such phones and computers are also high partly because of taxes.

With 80 per cent of the country’s population living at around twice the upper poverty line, affordability of internet, smart phones and computers and related video and data services has become a serious constraint to the expansion of ICT.

High taxation is also impinging on the incentives of private investors to acquire additional radio spectrum and roll out services to the untapped rural areas.

Independent research shows that these concerns are valid and require urgent policy response.

A study by Miller and Atkinson under the auspices of the International Technology Information Foundation (ITIF) covering 125 countries shows that Bangladesh has the highest rate of taxation of ICT among all the countries reviewed in the study.

The primary basket of ICT goods and services used in the study consists of taxes and customs duties on the following: basic mobile phones, smart phones, computers and other digital products like digital cameras and digital audio devices.

Taxes are computed as a per cent of cost of service provided. China imposes the lowest taxation at 3.0% while Bangladesh, the highest at an astounding 58% which is still quite far on the scale from Turkey, with the second highest but much lower tax rate of 26%. Taxes in 40 of the countries in the study are in the low range of 3.0-5.0% and taxes in the remaining others are mostly in the 5.0-20% range.

Therefore, in the global context, Bangladesh is clearly an outlier in the matter of high ICT taxation. The country also records the highest tax rate in the South Asia region.

The Miller and Atkinson study also looks at price elasticities of demand and concludes that this elasticity is quite high for Bangladesh. This suggests that related high rates of taxation are a major reason for the low use of ICT services in Bangladesh relative to other countries. In this context, the high taxation issue has now become a huge liability as foreign investors are reluctant to further invest in new mobile network or acquire additional radio spectrum in Bangladesh, in view of low profitability.

Finally, the high taxation of ICT services is clearly inconsistent with the Prime Minister’s Digital Bangladesh policy. The potential cost to the economy, in terms of loss of development momentum and citizen’s welfare, can be substantial.

Bangladesh is already lagging behind in the adoption of the ICT revolution relative to most other countries. Instead of pushing the momentum, the high taxation is constraining the growth of ICT services.

This inconsistency taxation policy with the stated development objectives and the Prime Minister’s initiative must be reviewed carefully and addressed speedily.

The growth of mobile telephone including smart phones and mobile broadband is critical for the spread of Digital Bangladesh and the ICT revolution. The experience so far is very positive and encouraging.

Yet, as reviewed above, significant challenges have emerged on the incentive side. The present level of high taxes on mobile phone and related equipment and services has become a serious constraint to both private investment in mobile phone infrastructure and the use of mobile phone services. Accordingly, the taxes should be reduced to increase mobile phone density, to facilitate increased use of related services, and thus also to make Bangladesh a competitive place for additional foreign direct investment (FDI) inflows to is ICT sector.

The priority actions on the tax front include the elimination of the SIM tax for both new and renewals, the reduction of broadband tax, the harmonization of import duties on mobile phones and accessories and the reduction of spectrum fees.

(The writer is Naureen Khan, Senior Sr. Research Associate, PRI. FE-PRI Economic Analysis Unit)