US embassy cable - 05DHAKA3178

C O N F I D E N T I A L SECTION 01 OF 02 DHAKA 003178 
 
SIPDIS 
 
EB - AMBASSADOR DAVID GROSS; EB - ANDREW HYDE 
 
E.O. 12958: DECL: 07/06/2015 
TAGS: KMCA, ECON, KSCA, ECPS, EFIN, ETRD, PGOV, TSPL, BG 
SUBJECT: CELLPHONE CONNECTION TAX CHOKES SECTOR GROWTH 
 
 
Classified By: A/DCM D.C. McCullough, reason para 1.4(d). 
 
1. (SBU) SUMMARY: The BDG has attempted to squeeze private 
cellphone providers with a new tax on SIM/RIM cards.  The 
four largest cellphone providers, already in control of the 
most lucrative portion of the cellphone user market, have 
balked, leading to a new tax that will be passed along to the 
consumer, putting telephonic connectivity further out of 
reach of the average Bangladeshi. END SUMMARY. 
 
2. (SBU) Until June, the BDG had an import duty on cellphone 
handsets of 1500 taka (USD 25).  However, they only collected 
the tax on about 10 percent of the handsets imported into the 
country due to a healthy gray market.  The ease of 
circumventing this tax put handsets within the economic means 
of a fairly large portion of the Bangladeshi population, 
leading to the rapid spread of phones throughout the country. 
 GSM phones were the most popular gray market imports, making 
GSM network providers the option of choice for consumers. 
The illegal spread was so helpful to GSM providers that the 
head of CityCell, the only CDMA-based provider in the 
country, admitted to EconOff, before removal of the handset 
tax, that he was working to create a gray market for CDMA 
sets. 
 
3. (U) On June 9, the BDG in its new budget opted to lower 
the handset tax to 300Tk but announced a new tax of 1200Tk 
(USD 20) on SIM and RIM cards, which allow a cellphone to 
connect to the service provider's network.  This puts the tax 
burden at a stage where it directly impacts the network 
providers. 
 
4. (U) In an atypical display of unity, the four largest 
cellphone service providers (GrameenPhone, Banglalink, 
CityCell, and Aktel) attempted unsuccessfully to lobby the 
BDG to remove the "connection" tax on SIM and RIM cards. 
They spoke with the National Board of Revenue (NBR); the 
Bangladesh Telecommunications Regulatory Commission (BTRC); 
the Ministry of Post and Telecommunications (MOPT); and 
Saifur Rahman, the Minister of Finance (FinMin). 
 
5. (U) According to the Big Four, in the absence of a 1200Tk 
SIM/RIM card tax, the cellphone market could be expected to 
grow 400 percent per year faster than with this tax.  If 
taxes on the purchase of a cellphone and its components were 
kept at 300Tk, the average Bangladeshi would be more likely 
to be able to pay the tax and would therefore be more likely 
to actually do so.  The Big Four pointed out that if the 
cellphone market were allowed to grow at the higher rate and 
the government collected no SIM/RIM "connection" tax, the BDG 
would, in fact, collect approximately 2.95 billion taka more 
than otherwise, via the VAT tax, the 300Tk handset tax, and 
taxation of the additional net profit of the cellphone 
service providers.  The Big Four also made note of the fact 
that, with a more affordable SIM/RIM card, an additional 15 
percent of the total population would be able to purchase 
cellphones. 
 
6. (C) The NBR reportedly was willing to remove the 
connection tax.  However, GrameenPhone CEO Erik Aas told 
EconOff that the Finance Minister did not respond positively. 
 He stated that "clearly, for (Rahman), it was personal," 
implying that he was making money off of the SIM/RIM tax.  As 
a concession to the Big Four, the BDG decided to lower the 
SIM/RIM tax to 900Tk.  This level of taxation is still likely 
to be a significant obstacle to cellphone ownership for the 
majority of the population. 
 
7. (SBU) Aas also explained that it was his impression that 
the BDG was hoping that the Big Four cellphone companies 
would, in the name of profit, essentially subsidize 
Bangladeshi consumers and pay the SIM/RIM tax for them.  As 
the Big Four do not expect the remaining section of the 
impoverished population to be lucrative customers, it would 
not make business sense for them to invest an additional 13 
USD (900Tk) in each new customer when it already costs them 
100USD in hardware and network preparation to set up a new 
account.  He offered no opinion on whether other members of 
the Big Four would eventually change their mind on 
subsidizing the 900Tk to win market share. 
 
CHAMMAS