Impact of VAT & other Taxes on Telecommunications Services & Industry
THE ISLAND : April 27, 2016, 9:11 pm
by Dr. Manodha Gamage
As of now Telecommunication services has a unique taxation in Sri Lanka. If you look at the bills you get from the service providers today, you see the following tax components (Some service providers don’t show the breakdown of the Taxes and Levies: 1. CESS (of 2%) 2. 10% Telecommunication Levy on broadband services 3. 25% Telecommunication Levy on all other services It is interesting to know the recent history of these values to understand the impact of the additional VAT and NBT to be imposed from 2nd May onwards. In 2011, Telecommunications Regulatory Commission of Sri Lanka (TRCSL) recommended consolidation of taxes in telecommunication services to avoid “tax on tax” as much as possible, to make it simple on the systems of Telecommunications companies, also for people to understand easily the tax components in their bills and obviously for the government to make money. In Jan 2011 the government imposed Telecommunications Levy and it was 20% of operator revenues, to replace a 27% collective taxation broken down as: 12% VAT, 10% Mobile & fixed Subscribers Levy (MSL), 3% Nation Building Tax (NBT) and 2% Environment Conservation Levy (ECL). Since the government policy then was to promote broadband (BB), they decided on a lower rate of 10% for BB related services However at the 2014 Budget the government decided to increase the general Telecommunications Levy from 20% to 25% and to continue the same policy to promote BB by keeping the tax on BB unchanged at 10%. Since late last year, this government has shown some inconsistency on taxes and levies. The Budget for 2016 said the following on VAT. “I propose to remove certain exemptions with the view to increase revenue. The present single rate will be revised to 3 bands 0%, standard rate of 8% and 12.5% higher rate for service sector and the minimum threshold for the liability for VAT will be Rs.12 million per annum” But few months later the Prime Minister declared in the parliament, a different set of tax policies and decided to implement them from 1st April. That was postponed for unknown reasons and now everything is set to increase the VAT to 15% and NBT to 4% from 2nd May onwards. On the other hand the President, publicly mentioned that no tax burden will be imposed on the public, but as of now Telecommunications is not exempted from 15% VAT and NBT of 4%. As shown above, 25% tax charged from telephone bills already includes 12% VAT and if another 15% VAT and 4% NBT are imposed, we would see 46% tax on general telecommunications services (including Voice used by almost everybody in the country) and 31% on BB services. Is this reasonable/justifiable and logical?? I am sure it’s a big mistake by this government and they have made that decision without studying the recent history of telecommunications Levy as explained above. Recently the relevant Minister of telecommunications said that the “Government wants the internet penetration to be increased from current 25% to 50% in a year (i.e. doubled). But the increment in taxes on BB would have a direct negative impact on this very optimistic target. This is another phrase from 2016 Budget, “I propose to increase International Telecommunication Operator Levy (ITOL) from USD Cents 9 to USD Cents 12 and total increase to be credited to the Consolidated Fund.” ITOL has been going down everywhere in the world (may be except few under developed African countries) in the past decade to discourage the illegal international call termination practices and also to enable telecommunication operators to somewhat compete with Over The Top (OTT) players such as Skype, Viber, What’s App etc. But Sri Lanka has kept it high all the time and this increment by the last budget is a shocking surprise to Telecommunications industry (locally and internationally) as it encourages illegal terminations of international calls received as well as it makes the local operators less competitive to OTT players. These tax increments surely affect the call volumes as well as the durations of the calls and this will affect the profitability of the Telecommunications operators, which in turn would affect the corporate taxes paid by them. Also this would affect many other industries as telecommunications is a basic need of all other industries as well. Surely showing the VAT in the invoice to the customers, would give the operators some benefits on cost side. In conclusion it is very clear that the decision to extend VAT increment to telecommunication services is done without giving much thought to its impacts on the public and also the telecommunication industry. I request very politely from the government and the Finance minister to revisit this and make suitable adjustments.