Nations that are digital leaders experience accelerated digital economic growth. Competition for investment and innovation to build a leading Digital Nation is intensifying across the region. For example, recently, India undertook major reforms to ensure the economic sustainability of the telecoms industry. Without a competitive tax framework, the Smart Bangladesh goal is at significant risk and is likely to fall short of its ambitions for a leading, innovative and inclusive digital economy.
Mobile connectivity is an important driver of economic growth across all sectors. In Asia, the International Telecommunication Union (ITU) estimates that a 10% increase in mobile broadband penetration would yield a 0.51% to 2.43% increase in GDP per capita, with the highest impact found in developing countries.[1]
In 2009, Bangladesh set out its vision to become a digital nation and it brought good results. However, progress has slowed in the 4G era. Despite the expansion of mobile coverage throughout the country and total mobile connections and mobile internet connections at 181 million and 124 million respectively as of December 2021, there remains a significant unconnected population in terms of unique subscribers. The GSMA estimates that about half of Bangladesh’s population (55% unique subscriber penetration) remains unconnected to a mobile network and only 31% population (unique penetration) are using mobile internet services. This is lower than the average in South Asia.
A conducive regulatory environment, especially the tax framework, is required to accelerate digital transformation and maximise the benefits of connectivity. This is particularly relevant as Bangladesh now faces the challenge of penetrating low-income groups to connect the unconnected. Further, Bangladesh needs to attract foreign direct investment (FDI) to create a robust 5G network and to spur innovation on that network through new services for consumers and industries to realise Smart Bangladesh. The GSMA recommends that the government aligns mobile sector taxation levels with the rest of the economy, reduce sector-specific taxes and streamline the tax assessment mechanism.
Mobile industry taxation: a few indicative numbers
The mobile industry in Bangladesh contributes heavily to the Government Exchequer. As per GSMA’s latest report, it contributes 50 out of every 100 taka of revenue to the Government in some form of tax or fee. This contribution has increased from 44% (2019) to 50% (2020) and is much higher than the Asia Pacific average (24%) and the global average (22%).
Well over half of this taxation (61%) is in the form of sector-specific taxes and fees, including consumer taxes making services less affordable at a time when digital inclusion is an imperative.
Corporate taxes and minimum turnover tax account for nearly a quarter (24%) of tax contribution by the mobile sector. These taxes for the mobile sector are the highest among all sectors in the country and stifle the sustainability of the sector.
Despite the already significant contribution to the exchequer, the mobile sector’s contribution as a proportion of total government tax revenue increased to around 5% (in 2020) from 4.4% (in 2019).
Why is tax reform for the mobile sector imperative?
The mobile industry is highly capex- and opex-intensive due to continuous investment on network expansion and high O&M (Operation and Maintenance) cost to ensure network operation throughout the country. The high tax burden on mobile operators constrains their capacity to make investments to improve Bangladesh’s telecommunication sector’s competitiveness and for the country’s digital transformation.
At a time when the COVID pandemic has impacted economies around the world, competition to attract foreign direct investment is increasing. Other countries are acknowledging the centrality of the mobile industry to their digital ambitions. India recently undertook several reforms to ensure the financial sustainability and operational efficiency of the mobile industry. If Bangladesh is to achieve its Smart Bangladesh vision by 2041, it needs a competitive tax framework to attract the necessary capital.
What steps can the government take to reform mobile sector taxation?
GSMA recommends tax reform in three key areas to accelerate the digital economy. First, the government should align mobile sector taxation levels with the rest of the economy. For example, it should remove the minimum turnover tax or reduce it from 2% to 0.5% initially and to 0.25% in a second phase to align it with the rest of the economy. It is to be noted that the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) also recently recommended to remove the minimum turnover tax. Further, it should reduce the corporate tax for non-public mobile operators from 45% to 30% and for public mobile operators from 40% to 22.5%.
Second, the government should reduce sector-specific taxes on mobile consumers by removing the SIM tax of 200 taka and eliminate the supplementary duty (15%) and surcharge (1%) on mobile internet as well as on the purchase of non-telecom services using airtime.
Finally, the government should streamline the tax assessment mechanism. Specifically, it should reform aspects of the tax system generating uncertainty, review the Alternative Dispute Resolution (ADR) mechanism, align with International Financial Reporting Standards (IFRS) and ensure the effectiveness of Double Taxation Avoidance agreement (DTAA). It should also treat CSR expenses as allowable expenditure.
[1] ITU (2019). Economic contribution of broadband, digitization and ICT regulation: Econometric modelling for Asia-Pacific