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.