East African Business Week (Kampala)
Phillip Nabyama
20 August 2007
Kampala — Uganda's high tax regime on the telecommunication sector does not only continue to stunt penetration levels and affect profits but is also inefficient, a new study reveals.
Commissioned by industry regulator, Uganda Communications Commission (UCC), the study shows that low-tax regimes boost mobile phones ownership which in turn boosts economic growth.
The 2006 study conducted over a three month period from September to December aimed at reviewing Uganda's tax policy with a bias to telecom services. The study assess the impact of tax related price increases on penetration, traffic volume, total turnover and investment.
It comes up with some interesting recommendations on how modest changes in tax policy can improve the general levels of the mobile telephony.
With a 1% per year reduction in taxes on mobile telephone airtime over the period 2007 to 2010, the report, finds would reverse the current declining trend in demand for the telecommunication services.
"In particular, such a tax policy would translate into a 30% increase in the minutes of use as opposed to a 9% reduction over the same period under the current tax policy," the report says.
Over the past couple of years, the sector has become a key source of revenue for the government, and today usage tax on pre-paid mobile services stands at 30%. Broken down, VAT accounts for 18% while excise duty, 12%.
On the other hand, a gradual reduction and eventual elimination of excise duty on mobile telephone airtime would result in a 56% increase in demand over the period 2007 to 2010, compared to a base case reduction of 9% over the same period.
"The 30% tax on services is certainly high by any standard. In fact this ranks Uganda as second highest service taxes on mobile phone usage internationally, placing it only behind Turkey." the 42 page report by Makerere University's Faculty of Economics and Management says.
It goes on to say that a 1% per year reduction in taxes on fixed line telephony airtime over the three years in question would result in a 4.2% increase in demand for fixed line services as opposed to a 38.4% decline over the same period, all tax factors constant.
Perhaps the recommendation of a 1% per year reduction in the cost of telephone airtime over the three years would allow Ugandans talk some more on their hand sets.
A gradual and eventual elimination of excise duty by 2010 would result in a 34.3% increase in the penetration as opposed to a 6.7% change predicted by the base case scenario over the same period, the study says.
The study that comes on the back of other studies that have also pointed a blaming finger at taxes, found that due to the high taxes, there had been a slow down in uptake of mobile phone services over the recent past.
This, the report said, resulted in a significant discouraging effect on uptake and consumption of services evidenced by the plunge in minutes of use over the past five years from seven in 2001 to three in 2006.
The high costs of mobile telephony have also eaten into their profits, swayed customers towards using pay phones as a cheaper substitution, affected preparation of reliable business plans and revenue forecasts and therefore making it difficult to raise funding and increasing the risk factors to their lenders.
"In addition, high taxes have reduced profit margins of the operators as they strive not to transfer all the tax to consumers," the lead consultant, Dr. Eria Hisali said at the launch of the report at Kampala's Grand Imperial Hotel last Wednesday.
The trends, according to Dr. Hisali show that the current sector taxation policy is inefficient.
Government in the 2005/6 budget increased Value Added Tax (VAT) and excise duty on mobile phone airtime from 17% to 18% and 10% to 12% respectively to raise Ush36 billion ($21.17million) and Ush5.2 billion ($3.05million).
Reacting to the increase then, the telecoms upped their call rates on July 1 2005 and today for every Ush20,000 ($11.76) of mobile phone airtime purchased, Ush6,000 ($3.52) of it goes to treasury.
The three mobile phone companies (MTN, Celtel and uganda telecom ) combined have over 3.5 million mobile lines in the country up from about 400,000 in 2002.
Their infrastructure investment has reached over Ush133.5 billion ($72.1 million) up from Ush27.9 billion ($15.1 million) in the early years of the service.
Not yet satisfied, Uganda's finance minister, Dr. Ezra Suruma slapped a new excise duty of 5 % on landlines and public pay phones to generate Ush2.9 billion ($1.65 million) for the exchequer in the 2006/7 financial year.
Unlike the telecom companies that are elated by the study, Uganda's finance ministry is not exactly comfortable with the findings.
"Research should inform policy. I do not think that I can take a decision based on this study because it seems biased.
There is need to expand the scope away from taxes," Mr. Francis Twinamatsiko, a tax expert at the finance ministry said at the report launch.
"Telecommunications is one of the easiest way to collect taxes. We can not do minus taxes because there are obligations that have to be met by government," Dr. Eng. Godfrey Kibuuka, the director for communication at the ICT ministry said.
The telecom executives, much aware of where their bread is buttered did not take Twinamatsiko's remarks lying down.
"Excise tax targets discouraged consumption. As corporate citizens, we have played our part and paid other taxes," MTN Uganda corporation secretary and legal manager, Mr. Anthony Katamba said.
Katamba's equivalent at uganda telecom, Mr. Donald Nyakairu told East African Business Week that the telecoms (they all fall under top 60 taxpayers in the country) lost about 2 -3% of their profits because of the current tax regime.
Although in some countries the mobile phone is regarded as a luxury item, experts argue that governments should adjust their tax policies to encourage, rather than constrain, mobile usage.
A 2006-2007 global mobile review commissioned by the GSMA and carried out by financial analyst Deloitte also shows that Uganda comes second to Turkey where the cost of mobile ownership is over 2.5 times the global average.
Deloitte's report shows that in Turkey, 44% of the cost of owning a mobile phone is due to taxes.
In tow are Uganda, Brazil, Dominican Republic, Zambia, Ukraine, Ecuador, Tanzania, Greece and Kenya.
The UCC study reinforces previous GSMA research, which concludes that in a developing country an increase of 10 percentage points in mobile penetration will lift that country's annual economic growth rate by 1.2 percentage points.
For example, if the proportion of people in an economy with a mobile phone grows at 4% a year, then rises from 10% to 20% will boost the economic growth rate to 5.2% a year.
The World Bank's director of Global Information and Communication Technologies, Mr. Mohsen Khalil believes that any taxation policy should be designed in a way that does not add any further barriers to access and add to the cost of service provision for the poor.
"The indirect benefits to the economy of having affordable access to telecommunications services far outweigh any short-term benefit to the budget," Khalil was quoted in the Deloitte study.
Regionally, the industry employing about 500,000 people accounted for 5% of Kenya's GDP, 3.5% of Rwanda's GDP, 4.6% of Tanzania's GDP and 3.6% of Uganda's GDP.
Mobile phone services, according to Deloitte account for more than 93% of the total telecommunications connections in the four countries.
While 70% of East Africans live in areas with mobile coverage, only 12% are actually connected. But new competition in the sector is likely to change that statistic.
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