Does It Make Sense to Levy Excise Tax on Telecom Services?

The recent news that Nigeria is considering the introduction of excise tax on telecommunication airtime charges, in a bid to raise additional revenues, has prompted stakeholders to question whether excise taxes are actually appropriate for this sector.

‘Last year, we found that 51 (out of 54) countries in Africa have excise on airtime charges, so we are looking at that as well as an area to tax,’ announced Ben Akabueze, Director-General of the Budget Office of Nigeria, during a World Bank event in Abuja.

But objections to these plans have been raised by the Association of Licensed Telecoms Operators of Nigeria (ALTON), whose members don’t understand the purpose of introducing excise tax on telecom services.

ALTON Chairman, Gbenga Adebayo, told The Guardian Nigeria: ‘it will be understandable if the federal government decides to introduce an excise tax on tobacco products because it wants to reduce the consumption of tobacco in Nigeria because of the health implications, but it will be out of place for government to introduce an excise tax on telecoms airtime’.

So, what does drive governments to levy excise tax on telecoms?

To answer this question, let’s turn to a 2017 working paper from the International Monetary Fund (IMF) entitled ‘Taxing Telecommunications in Developing Countries’.

The paper states that excise taxes are usually confined to goods such as alcohol, tobacco and petroleum products, which are price-inelastic and have negative externalities (ie. are deemed harmful or costly to society). Given that telecom demand is not always inelastic and has positive rather than negative externalities, telecom services do not conform with the standard requirements for an excisable good.

This being said, the justification for levying telecom excise tax is that it provides a good ‘tax handle’ on an industry that can otherwise be difficult to tax, explains the paper.

Excise taxes are relatively easy to administer, making them especially important to countries with low administrative capacity. Telecom excise taxes function in a similar way to royalties in the extractive (mining) industries.

Royalties are levied as a percentage of output value or fixed charge per unit, and are used to raise revenue from the start of production. Because they tax gross revenues, rather than net income, royalties are much less vulnerable to tax evasion than, say, corporate income taxes.

These different advantages have led many countries, especially in sub-Saharan Africa, to introduce telecom excise tax to ensure a significant, upfront revenue yield with lower administrative requirements.

What is specifically taxed?

The biggest telecom excise revenues come from telephone services, especially domestic phone calls, but some countries also impose excise tax on handsets and initial connection (eg. the purchase of SIM cards). In addition, high excise rates on international calls are particularly prevalent in sub-Saharan Africa, where at least 16 countries have imposed them, with significant short-term revenue benefits, states the paper.

The paper warns, however, that excise taxes on phone acquisition and initial connection are particularly harmful. This is because they risk preventing telecom network access altogether, especially in low-income countries, thereby reducing the size and value of the network for all users. What’s more, high excise tax (or customs duty) on small, portable items like cell phones can promote smuggling.

If one also bears in mind that, unlike excise tax on telecom services, taxes on handsets and initial connection seldom raise significant revenues, such taxes should be eliminated, advises the paper.

Extension to internet calls

The higher service prices resulting from telephone excise tax have accelerated the trend toward VoIP (Voice over Internet Protocol, which allows the user to make voice calls over broadband internet, rather than through a traditional, copper-wire telephone connection).

The move towards VoIP illustrates the fact that excise taxation is less effective where substitution options increase tax base elasticity. However, many countries have responded to this by extending their telecom excise base to include internet data.

Illicit activities and how to deal with them

The IMF paper points out that call volumes have shifted toward the internet, not only through the use of VoIP, but also through illegal means, in the form of ‘SIM boxes’. This involves the use of local SIM cards to transform international internet-carried calls into local phone calls.

In Ghana, for instance, 2014 figures from the GSM Association (which represents the interests of more than 750 mobile operators worldwide) estimate that 10% of international calls were re-routed through SIM boxes.

Authorities around the world have consequently responded to this threat by deploying sophisticated means to track SIM boxes and their owners.

For instance, the CSG Illegal Bypass Detection solution allows operators to identify and eradicate illegal SIM box numbers. It generates end-to-end controlled test calls from abroad into targeted mobile networks, where test nodes are placed. The CLI (Caller Line Identity – ie. the number displayed on the handset being called on), is then inspected, with a local CLI normally indicating a SIM box number.

Another form of illicit (or rather noncompliant) activity involves the underreporting of revenues on telecom services by network operators. However, one country that has implemented measures to prevent such activity is the Democratic Republic of the Congo, which includes telecom services in its fiscal control programme.

In 2018, the country enacted a new tax law for applying a fiscal marking mechanism to a broad range of excisable goods, such as tobacco, alcoholic beverages, fuels, soft drinks, drinking water, vehicles, cosmetics, body care, and household goods. The law also imposed excise tax on telecom services, specifically data transmission, internet, voice calls and SMS.

In 2020, DC Congo’s Ministry of Finance issued a decree establishing the system and appointing the General Directorate for Customs and Excise (in French, ‘DGDA’) to oversee its implementation. A 10-year contract was signed by the DGDA with SICPA for the provision of the technology solution and its operation.

With regard to telecom services, the solution consists of a monitoring mechanism which processes, in near-real-time, the call detail records submitted by telecom operators. Since this is a passive system, the technology does not provide any access to conversation content and personal information, nor does it disturb or impact local networks. Only logs generated by the equipment used by telecom operators, including call date, time, duration, service, incoming/outgoing caller ID, tariff, etc. are tracked.

The solution then calculates the taxes due by the operators from subscribers and cross-charged fees with other national and international carriers. It also precisely compiles all taxes, duties, licence fees and other contributions required from the operators.

SICPA also offers a module for allowing tax authorities to monitor mobile money transactions as well as the mobile phone market by providing real-time visibility on all active mobile phones in the country and by electronically collecting any outstanding levies during use. Since the solution detects every active phone, it also allows actions to be taken by regulators on phones reported as lost or stolen, and not compliant with national standards.