Mobile phones and taxation
Making the connection
Sep 29th 2005
>From The Economist print edition
>http://www.economist.com/finance/displayStory.cfm?story_id=4465936
A new study examines the impact of taxation on mobile-phone adoption
THE global march of the mobile phone passed another milestone last month, when
the number of devices in use worldwide went beyond 2 billion, according to
Wireless Intelligence, an industry body. In a few rich countries, mobile
devices now outnumber people. In the developing world, things are very
different. Mobile phones are increasingly recognised as powerful tools in the
fight against poverty, since they reduce transaction costs, facilitate
entrepreneurship and substitute for slow, unreliable transport and postal
systems. Annual subscription-growth rates of over 100% in many countries
reflect the strength of demand. But the proportion of people with mobile phones
is still very lowaround 5% in India and sub-Saharan Africabecause phones are
still beyond the means of the vast majority.
The mobile-telecoms industry, which is looking to developing countries for its
next billion customers, is doing its best to cut prices. The price of a basic
handset will have fallen from $50 at the start of 2004 to below $30 by next
January, and below $20 by 2007.
But as prices fall, another barrier to adoption becomes more apparent: the
taxes on mobile phones in many developing countries. A study released this week
by the GSM Association, which promotes the use of the worlds dominant
mobile-phone standard, details the variation in tax policies and examines their
effects. (The study was the work of four consultancies, Pyramid Research,
Frontier Economics, Deloitte & Touche and Tarifica, and is endorsed by the
International Telecommunication Union and the World Bank.)
Phones are taxed in many ways. Most countries charge value-added tax on
handsets. Many also impose customs duties on imported phones (45.6% in Syria,
for example, 33% in Ghana, 27% in Uganda, and $5 per handset in Bangladesh).
Subscribers may face further taxes when they sign up ($14 in Bangladesh, $8 in
Pakistan and Senegal, $24 in Turkey), as well as VAT on calls and, sometimes,
additional telecoms-specific taxes too. All these taxes were added up, assuming
average usage levels and a three-year life for each handset, to work out the
tax paid each year by an average user in each of 50 developing countries. This
figure, presented as a share of GDP per head, gives an indication of the burden
of mobile-phone taxes.
Hardly surprisingly, developing countries with high mobile taxes generally have
far fewer mobile phones per person than those with low taxes (see chart).
Cutting taxes can boost adoption: India has reduced its handset import duties
over the past three years, helping to boost penetration from less than 1% to
more than 5%. Raising taxes can slow adoption: monthly subscriber growth in
Bangladesh fell from 11% to 7% after the introduction of a $14 connection tax
in June.
Of course, governments have to tax something, and mobile phones are convenient.
The job of collecting taxes can be passed on to network operators, who already
have to keep track of their customers usage in order to charge them properly.
In developing countries, mobile phones are often the top source of tax revenue,
notes Ben Soppitt of the GSMA. But the cost of the taxes, in social, economic
and developmental benefits forgone, is high. Most governments say they want to
extend access to communications and close the digital divide. Special
mobile-phone taxes have exactly the opposite effect.
So what is the best policy? The study makes no specific recommendations. But it
does model the effects of various changes in tax policy. Scrapping all import
duties and sales taxes on low-cost handsets (those costing below $30), for
example, could prompt 930m additional sales by 2010. Although this would dent
tax revenues in the short term, these new subscribers would pay an extra $25
billion to $45 billion in usage taxes over the same period. Less drastically,
every reduction of one percentage point in sales taxes on mobile services would
result in a 2% increase in mobile penetration between 2006 and 2010 in a
typical developing country, the study predicts. Again, although tax revenue
would be lost in the short term, it would rise eventually as more subscribers
signed up. Cutting taxes and tariffs on handsets would also expand the tax base
by increasing the proportion of legitimate handset sales; now, 40% are bought
on the black market, according to Mark Williams of Frontier
Economics.
But it is the special taxes on mobile phones, particularly on connections, that
do most to deter adoption. Cutting these boosts subscriptions, broadening the
tax base and offsetting the states loss of revenue, Mr Williams remarks. It is
short-sighted to single out such an important agent of development with
punitive taxes, says Mr Soppitt. Taxes today or growth and perhaps even more
taxes tomorrow? That is the choiceand the opportunitythat mobile phones
offer.
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