Lower taxes for higher revenues in Bangladesh?

Details: Michael Schwartz; Category: Trends & Forecasts; 26 May 2006; 10812 views

Governments in some developing countries may be working against their own interests by taxing and regulating the mobile industry as if it were supplying luxury goods rather than essential communications tools, according to two recent studies.

Lower tax

The government in Bangladesh could increase its overall tax revenue by removing specific taxes that hinder the uptake of mobile phones and services, according to a study by Frontier Economics. "Taxation and the Development of the Mobile Market in Bangladesh" was carried out in cooperation with the three major mobile operators in Bangladesh: GrameenPhone, Aktel and Banglalink, which account for 95% of the mobile market in the country. It was designed to establish the extent to which there is scope to improve the current tax regime.

Specifically, within three years of removing taxes on new handsets and connections, the study estimates that the number of mobile users in Bangladesh could rise by an additional 2.5 million, producing a net overall increase in tax revenues. Net tax revenues would be boosted further by the positive knock-on effects in the wider economy, as more Bangladeshis benefit from the productivity gains offered by telecommunications.

Regulatory Reform

The Bangladesh economy would also benefit from the reform of the country's telecommunications regulation, which is currently orientated towards subsidising usage of fixed-line telephony. This is according to a second report, published by Ovum: "Economic and Social Benefits of Mobile Services in Bangladesh". This document examines the policy barriers which prevent the full benefits of mobile services from being realised and makes recommendations for change.

Ovum's report highlights three specific regulatory and policy barriers that are curbing mobile and economic growth in Bangladesh:

the interconnection regime (i.e., the system that controls payments between operators for connecting calls) subsidises the current fixed line services at the expense of the more productive and cost-effective mobile industry;
political and regulatory pressure to reduce mobile prices, based on the misconception that mobile services in Bangladesh are relatively expensive; and
the block on mobile operators handling international calls.

Despite these obstacles, the mobile industry is already a major generator of employment in Bangladesh, Ovum found. The report concluded that the industry has created almost 250,000 new high-paying, urban jobs in Bangladesh and contributes US$650 million per annum to the economy.

"Mobile phones are the only fast, practical and cost-effective way to connect millions of Bangladeshis. In a developing country that is eager for economic development it makes no sense to tax vital mobile handsets and subscriptions as if they were luxury goods," believes Tom Phillips, Chief Government and Regulatory Affairs Officer of the GSMA. "As these studies show, removing mobile specific taxes would actually generate higher overall tax revenues, as well as driving economic growth, a win-win for government and consumers."

The link between mobile phone penetration and economic growth in developing markets is well established, with a recent study by the London Business School suggesting that an increase of 10 mobile phones per hundred people typically boosts GDP growth by 0.6% per annum in developing nations.