Getting the price right for telecom consumers
In a price-sensitive market like Bangladesh, the price of telecom services quite often makes the headlines. Many feel that the price is too high for low-income customers to enjoy mobile connectivity and a decent digital lifestyle. Customers in particular complain about the price of internet packages. The price of telecom services in neighbouring countries are also brought up to emphasise the scale of our problem. These complaints, despite being leveled repeatedly, seldom trigger a deep dive into the cost structure of telecommunication companies (or telcos) to see how much it actually costs to run such a company in Bangladesh.
Imagine that an investor has Tk 100 to invest and has few investment options. Like any sensible investor, the incentive will be to find the option that provides the maximum return. Shareholders of mobile companies are no different. They decide on how much to invest depending on how much return these businesses can generate for them.
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In Bangladesh, if a telecommunications operator receives Tk 100 recharge amount from a customer, Tk 24.95 is contributed to the government exchequer (in the form of VAT, supplementary duty, and surcharge) which leaves them with Tk 75.05 as gross revenue. Of this, Tk 4.88 is paid to the BTRC as 6.5 percent revenue sharing payment. Then, Tk 37.52, or around 50 percent of the gross revenue, is spent as operating cost. After adding up BTRC revenue sharing payments and the operating cost and then subtracting it from the gross revenue, the operator is left with Tk 32.65 as EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).
A telco has to further account for depreciation and amortisation worth Tk 21.46 (depending on legacy payments as well as the latest investment commitments), Tk 5.64 on account of interest, foreign exchange, or other costs (subject to the nature of the capital structure), and Tk 3.48 for tax payment on the basis of two percent minimum turnover tax or 40-45 percent corporate tax, whichever is higher.
The summary of these calculations is that the investor is left with a very slim profit after tax of only Tk 2.07. So, would an investor be keen on investing their hard-earned Tk 100 on the telecom sector for Tk 2.07 profit, when they can earn a better profit margin elsewhere?
Examined closely, it's apparent that a significant part of the operating cost is related to government bodies (spectrum cost, license cost to BTRC, tax deducted at source for the NBR). Additionally, amortisation exposure is considerably higher in this industry compared to others, owing to the high cost of spectrum investment.
Therefore, it's evident that without more fiscal space for mobile operators, it is extremely difficult to drive the digital agenda under the Smart Bangladesh vision. In this regard, I would like to refer to the study titled "Review of mobile taxes and fees in Bangladesh" published by GSMA (a lobby organisation that represents the interests of mobile network operators worldwide) in April 2023. The report states that the tax contribution of the mobile sector in Bangladesh is significantly higher compared to similar markets in the region. This severely limits the capacity of the mobile industry to invest in the network. According to the report, in 2021, the mobile sector contributed five percent of the total government revenue while it represented only one percent of the economy.
The high tax burden on the mobile sector in Bangladesh is mainly driven by sector-specific taxes and fees, namely excise taxes (28 percent), regulatory fees (10 percent), and spectrum fees (four percent), which amount to 42 percent of the total tax and fee payments. General taxes represent the remaining 58 percent of all tax payments made by mobile operators to the government.
The mobile sector in Bangladesh is subject to the highest corporate tax rate for publicly traded and non-publicly traded companies (40 and 45 percent of profit), compared to the general corporate tax rate of 20 and 27.5 percent respectively. Furthermore, the mobile sector is also subject to the minimum turnover tax rate (two percent of gross receipts).
The combined sector-specific tax rate on mobile services in Bangladesh is one of the highest in the Asia Pacific region. After accounting for the effective VAT rate (17.25 percent), supplementary duty (15 percent) and surcharge (one percent), mobile consumers in Bangladesh bear a combined usage tax of 33.25 percent on mobile services. It's worth noting that India, Indonesia, Thailand, Singapore and the Philippines have no sector specific tax at all.
One may argue that if the government were to reduce consumer taxes for the use of mobile services, the revenue shortfall would be hard to manage. But a study jointly conducted by Earnst and Young and GSMA in 2018, titled "Reforming mobile sector taxation in Bangladesh", demonstrates that reduction of consumer taxes would generate higher government tax revenue and GDP for the country. The evidence presented in the report shows that the mobile sector in Bangladesh is subject to a significantly high and complex tax burden. These taxes constrain both the supply side and the demand side, potentially jeopardising progress toward digital transformation and inclusion.
By constraining the supply side with high taxes, we are constraining the ability of the industry to meet the price and quality of services demands of the consumers. On the other hand, by having high consumer taxation we are pushing up the price. This in turn is pricing out the unconnected (42 percent of the population, according to GSMA). In other words, by taxing the industry and the consumers heavily, we are in effect pursuing Smart Bangladesh vision through narrowband.
This taxation regime is the Achilles' heel of the telco cost structure. It's high time that a revision takes place so the industry players can get the price right for the consumers, to facilitate the goal of a Smart Bangladesh.
Sanjib K Ghosh is Executive Vice President & Head of Strategic Finance at Robi Axiata Limited.
Views expressed in this article are the author's own.
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