Sri Lanka: Telecom's contribution to economic growth and the impact of taxes

Sri Lanka: Telecom’s contribution to economic growth and the impact of taxes

Posted on September 17, 2008 / 2 Comments

Government has released the 2008 second quarter economic performance data, which shows, again, that the telecom sector is growing the fastest, at 23.2 per cent (as against 21 per cent, 2007 Q2), followed by mining and quarrying at 19.6 per cent.

In his weekly newspaper column in the Lankadeepa, Mr Udaya Gammanpila, the Chairman of the Central Environmental Authority and the main proponent of mobile-specific taxes, has posed the question to me why the mobile sector keeps growing even as they keep loading taxes on it. For example, the mobile subscriber levy of 10 percent of every bill was in effect in 2008 Q2. Possibly, the 10 per cent levy on CDMA “fixed” phones was also in effect for at least part of 2008 Q2. Yet, mobile connections grew by 43.5 per cent and fixed (primarily CDMA) by 42 per cent.

In one of my first columns on the subject of mobile-specific taxes, in September 2007, a year ago, I talked about the goose that lays the golden eggs:

“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.”

I did not say the goose would stop laying eggs. From our research we know that people will not radically increase their calling if the prices come down; we also know that people will not radically reduce their calling if the prices go up. Note that I did not say less eggs than before the taxes; I said, “less eggs than it otherwise would have.”

Now Mr Gammanpila has a response. The mobile operators are foreign owned and enjoy tax holidays. All that he’s doing is preventing profits from being repatriated. He imposes taxes on the customers; the operators reduce their prices because of competitive pressures. The customers come out even; they pay more taxes, but they pay less to the company. The company makes less profit; less profit is expatriated; we all live happily ever after in the JHU-mercantilist heaven. The problem is that it’s not only profits that get affected. Capital expenditure gets cut back too. You don’t see the results immediately; they take a few quarters to show up. But show up they surely will. That’s when we’ll see the slowing down of growth in the sector, and as a result, in the economy as well.

How many quarters? Four, I’d guess. If not I’ll eat crow.

Which reminds me of an equity analyst who predicted that the mobile industry will plateau in 2008 at 38 SIMs/100. Based on our teleuse@BOP research, both Harsha de Silva and I disagreed (see comments). FYI, it’s 2008 and we have 45.76 mobile SIMs/100 according to the Department of Census and Statistics. That is 20 per cent off.

Crow is served, Mr Equity Analyst. Do you prefer it hot or will you have it cold?

2 Comments

Muhammad Arif Sargana
October 17, 2008, 11:48 am
In case of Pkaistan, there is strong negative corelation between Taxe rates and Tax collection from telecom (mainly mobile). Government icreased GST rate from 15% to 21% in June 2007-08 and immediately it has to face about Rs, 1 billion revenue loss in the Month of July 2008 compare to July 2007. Try to get may not not get necessary result.
Rohan Samarajiva
October 17, 2008, 10:08 pm
Arif, does this mean that mobile use has declined? Or that there is a problem with collection?