The case against punitive taxation of mobile users in Sri Lanka

Posted on September 3, 2007  /  5 Comments


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 percent to 7.5 percent 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 50 rupee 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.

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  1. The government backed off from the BOP hostile LKR 50 tax on all SIMs. We are grateful to all who helped convince the government to see sense.

    More remains to be done on restoring sanity to the Sri Lanka tax system, but this was a victory for the BOP.

  2. Unfortunately governments in Sri Lanka are very famous for “killing the goose that lays the golden eggs.” If an industry booms, the government should encourage the boom. Telecommunication industry is the only industry we see booming in Sri Lanka at a time other industries are struggling to survive.

    Amended law will at least help the small time mobile users.

  3. In our multi-faceted rapid response activity the following was a 1 pager provided to the members of parliament on the proposed lkr 50 flat tax. [ignore the CAPS; note it is for a particular audience, MPs]

    Briefing note on increased mobile levy and LKR 50 regressive tax

     This is a REGRESSIVE TAX, meaning it will have a greater burden on the poor than on the rich. The 50 rupees flat tax works out to 15% of the average pre-paid monthly bill of 350 rupees while it is only 1% of a 5,000 rupee bill.

     So it is clearly an ANTI-POOR tax as it is NOT the rich who use mobile phones today. The rich have land lines. New people getting mobile phones now are ordinary folk, both in the cities and villages; farmers, fishermen, 3 wheeler drivers etc. Currently approximately 6 million people have mobile phones while only 1.5 million have land phones.

     Already there is a heavy tax burden on mobile phone users. The average expenditure of pre-paid customer per month is LKR 344 based on operator figures. Current tax on this cost is LKR 53. This means she is only left with LKR 291 for service.

     LIRNEasia [pronounced LEARN Asia], a well respected regional think tank on telecom and related infrastructure has done work on teleuse at the bottom of the pyramid in India, Sri Lanka, Pakistan, Thailand and the Philippines. This research has found the price elasticity of demand to be 0.15 among the poor, or at the bottom of the pyramid in Sri Lanka [At LKR 7 per minute outgoing, 2006]. This means if the price increases by 1% from the current level, the number of calls reduces by 0.15% [this figure is used for all users in the analysis]

     So if you apply the new taxes of LKR 50 and 5% increase in levy the cost to maintain current use will increase to LKR 409 for the AVERAGE pre-paid user. Over 90% users have pre-paid connections. So this means for the average person the increase is 19% expenditure, from LKR 344 to LKR 409 per month.

     But, people will not be able to AFFOARD this increase. So the quantity [of calls] will drop by 19%*0.15 = 3%. This implies the new cost of service LKR 291 * 0.97 = LKR 282 and new average expenditure per month to be LKR 282 * 1.15*1.075 50 = LKR 400 per month.

     So the tax burden on the average person AFTER REVISING DOWNWARDS his or her use, will be AT LEAST 30%. In rupee terms an average person will have to pay LKR 117 in taxes to the Government on a new average monthly bill of LKR 400. This is NOT FAIR.

     So it is very clear that people will DECREASE the use of telecom services which accounted for a HUGE 20% contribution to the economic growth in 2006. More than that we all understand how much efficiency increases in day to day small business and life in general mobile phones have brought about. Using a widely used London Business School model this tax will DIMINISH GDP growth by 0.6%.

     Government expects to make approximately LKR 5,050m per year from the new telecom levy and regressive tax as shown here.

    New Tax Current Tax
    Average spend per month, LKR 350 350
    Number of mobile phones 6,000,000 6,000,000
    Regressive tax, LKR 300,000,000
    VAT and mobile subscriber levy 2,596,125,000 2,475,375,000
    Total tax, LKR 2,896,125,000 2,475,375,000
    Total tax, LKRm 2,896.125 2,475.375
    New revenue in LKRm MONTH 421
    New revenue in LKRm YEAR 5,050

     But in the long run the cost of the new tax will be FAR GREATER than the tax to be generated [without the VAT which is common to all goods and services and not discriminatory].

     According to GSM Association, the elasticity for mobile penetration is 0.5. That means when price goes up by 1% the mobile penetration drops by 0.5%. LIRNEasia has estimated mobile penetration to increase to 64% by year 2010. But with the new tax the penetration will ONLY GO UP TO 54.5%. In effect these new taxes will DELAY 2 million Sri Lankans getting connected. How will this tax be any good?

  4. Donald Gaminitillake

    How many registered tax payers in Sri Lanka
    less than 350,000 individuals

    How many mobiles phone we have ?

    Sri Lankas Tax free level is Rs 300,000 per year — any one who earns above this – liable for taxes.

    How much a 3- wheel cost? How much a Kubota Land Master cost?
    Both cost between Rs 200,000 to 400,000 depending— second hand or brand new

    One should have 200,000 savings to buy above plus he or she will have to live. Need to eat food etc
    How much that would cost for an year. Positively over 300,000 per year.

    But this group is not registered for TAX. Govt have no choice but to tax on Mobiles etc to recover the unpaid taxes.

    Donald Gaminitillake

  5. This topic is old and maybe outdated now. But I found this very interesting quotation today.

    “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.:
    Ronald Reagan