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The Bangladesh telecom market is plagued with taxation issues, and high tax on SIM cards has adversely affected its growth. The Tk 800 SIM tax has been the main stumbling block in the acquisition of new subscribers.

Industry experts believe that high taxes on SIM have resulted in sluggish growth of the industry in Bangladesh for more than a year.

From the market perspective, in the last three years since SIM tax was introduced, customer growth has dropped from 66% to only 18%. Operators demonstrated less aggression due to absorption of the high tax, which was not being passed on to customers in order to maintain affordability.

Shrinking Marketplace
The growth of the sector has come to a halt due to increase in taxes. It is a negative proposition all around, as consumers lack access to mobile devices, the government loses with lower tax collection as the number of users decline, and mobile operators have diminishing customer base. Commenting on the same, Michael Kuehner, CEO, AKTEL says, "The Tk 880 SIM tax is a stumbling block to the rapid development of telecommunication in Bangladesh. It has increased the total cost of ownership for new subscribers, especially the marginal new subscribers. Due to low ARPU, operators are reluctant to continue subsidizing SIM tax as they face risk of not recovering the cost. Additionally, it is an upfront cost payable upon distribution of the SIM card and not activation/sale to end users so there are cash flow implications as well."

According to ITU statistics for the year 2009, increased mobile penetration in the recent years has given rise to not only voice communication but data access to the Internet to rural areas, which were beyond reach otherwise. Today mobile penetration in Bangladesh is close to 32%, but despite this significant growth Bangladesh remains below its neighboring countries in terms of mobile and Internet penetration. Moreover, mobile adoption growth rates have been consistently falling and now stand below 3% per quarter, which can be directly attributable to this damaging taxation.

The SIM card tax of Tk 800 per connection of each new subscriber is blocking new investments in updated mobile networks that provide broadband via mobile infrastructure. High tax in the form of indirect taxation is one way to tax customers who purchase mobile connectivity, especially in the growing telecom market. It is not an ideal tax structure as it has become less affordable to new customers, most of whom are now in the low income group. Hence, SIM tax now hampers further growth in the industry. As tariffs are also very low, operators continuing to subsidize SIM tax may have to direct their resources to this cost and away from investment in rural areas, introducing innovative products and services and further improving network and service quality. The ideal structure would be a form of direct taxation on operators' profit.

Ground Reality
According to Bangladesh regulatory watchdog Bangladesh Telecommunication Regulatory Commission (BTRC), by the end of December 2009 the total mobile subscribers reached 52.43 mn. Currently, mobile operators are providing SIM tax subsidy of Tk 800 for each connection. Whereas the operators' revenue earnings from each prepaid subscriber is calculated to a range of Tk 100-150 with the gross margin of about 50% or Tk 50-75. And it took about ten to sixteen months for the operators to recover the cost of SIM tax alone in addition to the recovery of their other operating and capital expenditure costs.

According to industry sources the government revenue from SIM' tax was Tk 426 crore in the first quarter of 2008, but it dropped to Tk 147 in the first quarter of 2009 as operators withdrew subsidies in sales of SIMs after facing losses. It is also expected that this downward trend will continue if the government is not reducing high taxes on SIM cards.

Several times operators and BTRC approached the government to waive SIM tax, but the government always turned down the request saying that tax waiver will put a negative impact on government's revenue sharing. The government also feels that reduction of the SIM tax could be anti-competitive and would also hamper the level playing field in the telecom sector.

Government's Initiatives
Since the imposition of Tk 900 tax on SIM connection in the 2005-06 budget, mobile operators have been taking the entire burden of this taxation as they anticipated that the government would eventually withdraw the tax. But the government never withdrew it. All it did was to reduce the tax to Tk 800.

The top-end of the mobile market is almost saturated and the remaining potential market lies at the bottom of the pyramid. High tax is neither fair to this financially constrained segment nor viable for operators to subsidize. In order to maintain and stimulate growth in the market, SIM tax should be completely waived or at least reduced to a level affordable by low income or marginal hubs. Failing that, the tax should be charged upon activation and sale to the end users. Talking about the government initiatives Kuehner says, "Yes, the government is paying due attention to this SIM card issue. The government is currently studying this matter and monitoring teledensity. They will revisit the SIM tax issue in the next budget review. We are confident that the government will take the right decision so that consumers are not burdened with high entry cost."

With the SIM tax in place and 25% tax on import of handsets, further investment and growth in the sector will suffer badly. The government needs to understand that the telecom market of Bangladesh has tremendous potential and elimination or reduction of SIM card tax is essential to set the country's telecom industry on the growth trajectory again-and fullfill the dream of digital Bangladesh.

Arpita Prem
arpitap@cybermedia.co.in

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