NCPA - National Center for Policy Analysis

CUTTING TAXES ON MOBILE PHONES

November 2, 2005

In the developing world, mobiles phones are powerful tools in the fight against poverty. They reduce transaction costs, facilitate entrepreneurship and substitute for slow, unreliable transport and postal systems. A new article from the GSM Association -- a worldwide trade association of wireless system operators -- reports that taxes are preventing the spread of mobile phones in these countries.

Mobile phones are taxed in many ways. Most countries charge value-added tax on handsets and tariffs on imports. Subscribers may face further taxes when they sign up as well as VAT on calls. Some nations have special telecom taxes as well. All of these taxes add up, say the authors.

Moreover, they note, taxing mobile phones is convenient because the job of collecting taxes is passed on to network operators. They are also lucrative -- mobile phones are often the top source of tax revenue in developing countries.

The authors argue that lowering taxes would boost subscriptions and broaden the tax base, which would offset lost revenue. They estimate:

  • Every reduction of 1 percentage point in sales taxes on mobile services would result in a 2 percent increase in mobile penetration between 2006 and 2010.
  • Scrapping all import duties and sales taxes on low-cost handsets (those costing below $30) could prompt 930 million additional sales by 2010.
  • Although this would dent tax revenues in the short term, these new subscribers would pay an additional $25 to $45 billion in usage taxes over the same period.
  • Cutting taxes and tariffs on handsets would also expand the tax base by increasing the proportion of legitimate handset sales -- currently 40 percent are bought on the black market.

Some countries have had success:

  • India reduced its handset import duties over the past three years and boosted penetration from less than 1 percent to more than 5 percent.
  • In contrast, monthly subscriber growth in Bangladesh fell from 11 percent to 7 percent after the introduction of a $14 connection tax.

Source: "Making the connection -- Mobile phones and taxation," Economist, October 1, 2005; based upon: "Tax and the Digital Divide," GSM Association, 2005.

For text (subscription required):

http://www.economist.com/displaystory.cfm?story_id=E1_QQGVJPG

 

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