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Friday, September 30, 2005

Taxes and the Digital Divide - Serious Problems

By Rob Katz

As an economist and self-styled BOP researcher, I've always been interested in the effect of technology on efficiency, price competition, and cost-of-living at the BOP. WRI, through its now-sunset Digital Dividend project, studied the effect of technology on low-income communities for years, and results pointed to a consistently positive relationship between access to information and greater efficiency, lower COL, etc. Mobile phones, in fact, have always been a favorite technology around here - low start-up cost, relatively minor literacy barrier, shared-use potential, etc. A great BOP technology - and one that's growing fast.

So you'll understand my excitement when I ran across the GSM Association's report, "Tax and the Digital Divide." A robust, regression-based analysis of the effect of taxation on mobile phone penetration!? A BOP economist dream come true.

The report doesn't disappoint. Data and analysis by Deloitte and Touche, Pyramid Research, and Frontier Economics yield robust conclusions about 50 developing countries. Economist or not, the study is quite readable - econ folks will appreciate discussions of price elasticity and time-series regression, while others will glaze over the technical jargon and get excited by the country rankings. Browse the report for everything, but here's a quick summary of the key findings:

  • In 16 of the 50 developing countries in the study, taxes on mobile phones and services represent more than 20% of the total cost of ownership. In these 16 countries, which are home to hundreds of millions of people, the annual cost of taxes ranges from an average of US$24 to US$179 per mobile phone user.
  • Nineteen countries even levy additional taxes, on top of standard sales taxes on mobile phone users. Some of these additional taxes are telecom specific, such as service activation taxes. These special taxes average US$13 per annum per subscriber.
  • 39% of all handsets sold in the 50 countries in the study in 2004 were via the black market, representing a loss of US$2.7 billion in tax revenues.

At NextBillion, we talk a lot about how mobile phones - especially low-cost, pre-paid, shared-use mobiles - are changing the way BOP communities work, live, and interact. Is that true - absolutely. Just look at projects like WIZZIT in South Africa or SMART in the Philippines or Grameen Phone in Bangladesh and Uganda. But entrepreneurs and technology can take it only so far. For BOP communities to get the most out of the potential of low-cost connectivity via mobiles, governments should step up to the plate and engage in serious tax reform. Need proof? Read the report.


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