How the VAT changes will affect your internet bill

Value Added Tax (VAT) as of late has been a topic spewing as much heat as the weather. Should we be worried though? Early on this month President Maithripala Sirisena himself told his Polonnaruwa gathering that he wasn’t fully on board with the revised rates which threatened to impose a burden on people.

What is this burden he speaks of you may ask? So did we, given the confusion that has now set-up camp around VAT related matters. According to our research, changes to VAT are two-fold. Firstly, the previous rate of 11% is to be increased to 15% by 2^nd May. Secondly, several services that were previously exempted from VAT are to be subject to it.
Click here for the current state of matters.

The Problem with the VAT:

Predictably the confusion is also two-fold. Originally we found the proposed budget for 2016 suggested two separate VAT rates- 8% and 12.5%. A few days after implementing these revised rates, this January the state instructed the public to abandon them, riveting back to the flat rate of 11%. Two apparently wasn’t better than one. Not confused yet? Give it time, there’s more.
In March PM Ranil Wickremesinghe announced the hike from 11%-15%, which was to now to affect areas like telecommunications, private education, and private healthcare. Interestingly in an attempt to exclude the low-income groups from the effects of heightened taxing, essential commodities were to be excluded.
In April, the State Minister for Finance once again blurred the lines by including ambiguously defined categories like ‘medicine,’ water and electricity as exempted from VAT.
What does all this have to do with you unless it’s time to pay bills? You might need to sit down before reading this next bit.

How Is This My Problem?

Telecommunication services are to be subject to more tax. This would include all the services any mobile carrier has on offer. In counting essential services, worthy enough of tax exemptions your mobile phone and internet connections haven’t made the cut.
‘But wait,’ some of you may wonder, ‘don’t I already pay tax’ for data charges and voice calls? The answer is yes. You do. Speaking with those in the telecommunications industry we learned that an ordinary voice call is taxed at 25% while data charges include 10% tax. With the proposed VAT increase, a voice call will be taxed at 54% and data at 33%.

If that doesn’t invoke an involuntary twitch, let’s consider the taxes already imposed on telecommunication services. The Telecommunications levy we were told was a means of simplifying the taxing system in 2011, amalgamating a host of taxes into one comprehensive unit. A notice on the Telecommunications Regulatory Commission’s website clearly spells out which taxes are already included in the all-encompassing Telecommunications levy. Click here to have a look.
We hope you caught ‘In lieu of 12% VAT’ among other taxes like the Nation Building Tax (NBT) and Environment Conservation Levy (ECL.) Settling your mobile and broadband charges post May 2^nd will inevitably mean paying up VAT, twice. Go on, take a moment to mourn the potential crater in your wallet.
There’s also much going on behind the scenes we’re told. Many non- profit making inter- carrier transactions are also to be taxed since they are recorded as revenue. This, in turn, could mean the services themselves-minus taxes- could become pricier.

Will It All Work Out In The End?

According to the International telecommunications Union (ITU) Sri Lanka’s mobile phone penetration was higher than global and regional averages in 2012. Although broadband usage was lagging behind other regional developing countries, Sri Lanka was doing relatively well against other low-lower middle income countries. The ITU also reported that much can be done to drive demand of broadband services.
We’ve covered some distance since this record, only last year ReadMe reported Sri Lanka’s milestone achievement with regard to internet speeds. Experts in the industry are however doubtful that the new taxing scheme will allow sustainable development. We’re asked to remember that in order to remain in business the service providers have to constantly offer competitive prices which tend to plummet lower than rise. For this reason professionals feel perhaps the government’s methods of generating revenue may not after all, yield much.

Update 1: May 3rd 2016

There have been some recent developments to this story. As such we are updating the article accordingly.

Things were going as planned.

A lot has happened since we reported our findings on the now effective VAT increase. Most notably of course, we find VAT is now imposed at 15% on products which were previously exempted, or deemed to have been taxed. If you haven’t noticed, for mysterious reasons the link we posted to the Ministry of Finance (MoF) website is currently inaccessible. Does this mean they’re reconsidering their plans? A little puff of hope however doesn’t follow the chaotic Pandora’s Box they’ve left open.

The Department of Inland Revenue came-in strong with their notice, released on 29 April. Confirming that the VAT rates will spike at the stroke of midnight on 2 May, it reiterates in a brief manner the notice previously displayed in the MoF’s web page. Lurking in the pages of daily papers on 2 May was this notice:

This notice clearly lists Telecommunications services as no longer spared from VAT exemptions.

Plot Twist:

Seems straightforward, right? Wrong.Certain news channels alleged that the Minister for Finance, Ravi Karunanayake has now decided to keep Telecommunications un-affected by the VAT increase.

Is This Good news?

Once that fleeting moment of hope passed, we were left with one thing- confusion. At this point it is unclear if the Minister of Finance intends to go back once again on tax increase with respect to telecommunications. At the time of writing the Minister was unavailable for comment.
With no official declaration addressing this confusion, we decided to see if the VAT change was in fact implemented. A quick round of calls confirmed that service providers have increased taxes as of yesterday.
Dialog confirmed a 49.735% increase on Voice calls and SMS services. Data taxing was yet to come in to effect.
Mobitel upped their taxes 49.4% on voice calls and 31.77% on data charges.
Hutch was among the service providers which also admitted to have amended their tax rates.