Government and the telecom companies go to war over CST

The recent increase in the communications service tax from 6% to 9% has ignited a feud between government and the telecom companies that has subsequently degenerated even further into an ugly political tussle between the two major parties as well. TOMA IMIRHE and DUNDAS WHIGHAM examine the positions of the warring parties and the fate of telecom service customers in this imbroglio.

Mobile Networks

Over the past couple of months, the Ghanaian citizenry have been treated to a very public spate between their government and one of the biggest, most vibrant and most widely patronized sectors of the national economy – the telecommunications industry.

Initially a two way dispute between the two parties, it has since grown into a three way fight, with the political opposition having  thrown its hat into the ring, not exactly siding outright with the telecom companies, but doing so indirectly in order to score points against the incumbent government ahead of the electioneering campaign for the 2020 general elections.

The immediate cause of the imbroglio is the increase of the Communications Service Tax – popularly known as the talk tax – from the erstwhile six percent to none percent as announced by Finance Minister Ken Ofori-Atta in July during his mid year budget review presentation to Parliament, which the legislature has subsequently approved. The increase became effective from October 1, despite spirited protestations from the telecom operators through their industry grouping, the Ghana Chamber of Telecoms, including warnings that if implemented, its members would stop absorbing the tax as they had been doing since it was first introduced in 2008.

Government went ahead with its plans and the telcos went ahead and carried out its threat. Since then both sides have engaged in a propaganda war aimed at convincing the public that it is the other side that is responsible for a nearly 10 percent increase in the cost of using both voice and data services provided by the telcos, easily the largest single tariff hike by an industry that only rarely increases its tariffs at all.

To be sure government has good reason for implementing the increase in the Communications Service Tax from six percent to nine percent. Simply put, it is desperate for the money.

Government’s budgetary fiscal deficit target for 2019 is 4.2 percent and even though it is no longer under the direct supervision of the International Monetary Fund, having successfully completed the Extended Credit Facility programme in April this year, there are several reasons why that target needs to be kept to.

Firstly, the international financial community, on which Ghana depends heavily for the financing and refinancing of its inordinate public debt is watching closely to see if government will retain its fiscal discipline now that it is no longer directly answerable to the IMF. The timing is made all the more important by the fact that next year is a general elections year, and Ghana has a poor record in such years with regards to fiscal discipline.

Alongside this is the fact that this year’s fiscal deficit target is larger than last year’s, the first such increase since Ghana commenced its latest IMF macro-economic stabilization programme in 2015 with fiscal consolidation as its centre piece. The widened target is being seen as evidence of government’s commitment to supply side economics which has caused tension with the IMF that favours a more demand management focused approach.  While Ghana’s foreign partners are accommodating government’s strategy, any overrun of the widened fiscal target will set off alarm bells in the world’s major financial capitals.

With government thus under pressure, the wider than anticipated fiscal deficit for the first half of 2019 – caused primarily by a 9.5 percent shortfall in revenues – convinced it to push through several tax hikes, including the 50 percent increase in the CST that has ignited the ongoing controversies.

The conventional wisdom is that government has been opportunistic, reaching for the low lying fruit that it sees the telecoms companies to be, with their huge cashflows and consistent profitability. Indeed, this is why the telcos have had so much support from a large proportion of the general public despite the sharp tariff hikes they have instituted.

However, in actual fact, government is guilty of miscalculation rather than opportunism – they mis-read the reaction of the telcos to the CST hike.

Because the telcos had absorbed the original six percent CST from when it was first imposed, government had thought that at worst, they would pass on only the three percent increase, when it was increased to nine percent. Government calculated that a three percent increase in tariffs would not ignite much public disaffection, and any angst over tariff increases of such magnitude would be so minor that the public revenue gains would be worth facing it.

However, the telcos rather opted to pass the entire tax – all nine percent – onto consumers, resulting in by far the biggest tariff hike for both voice telephony and data in recent memory. The situation was made worse by the fact that the tariff hikes were coming barely a year after a smaller tariff increase was instituted, brought about by government’s  policy decision to treat the National Health Insurance Levy and the Ghana Education Trust Fund Levy as separate from the Value Added Tax to which they had hitherto been attached for ease of collection.

The telcos, through their Chamber, were quick to explain that the only tariff hikes implemented by the industry since the beginning of this decade were thus both as a direct consequence of government’s tightening of the fiscal regime within which they operate.

Thus, the message was clear – blame government for the higher cost of mobile telecoms services.

Taken aback, government sees the decision to pass on the entire CST, inclusive of the original six percent that the telcos had been hitherto absorbing, as a deliberate effort to make it the villain, especially since the telcos have openly blamed it for the entire tariff increases.

Government points out that if the telcos were acting in good faith they would have continued to absorb the original six percent CST rate, but have opted not to – just to make their customers angry with the government for causing the sharp rise in their telecom costs.

Indeed, some government officials and their proponents assert that the telcos have simply taken advantage of the situation to widen their profit margins by reducing the tax obligations that come out of their own cash flows. The telcos respond by pointing out that since the CST is a consumption tax government meant for consumers to pay it and that is what the telcos are now making to happen.

Last month, the Chief Executive Officer (CEO) of the Ghana Chamber of Telecommunications, Mr. Ken Ashigbey cautioned government against excessively taxing businesses in the communications sector, stating that the industry – which already operates under deflationary services because of intense competition – may be forced to relocate to other destinations where the tax regime is much lower and therefore more welcoming.

In July this year, following the proposed increment in the communications service tax from 6 percent to 9 percent, Mr. Ashigbey, indicated the Chamber’s readiness to meet with government to explore other alternative measures aimed at generating revenue in the sector instead of increasing taxes on an already tax-burdened sector.

He reiterates that telecommunications companies already pay some 40 percent of their income as taxes to the government. Worse still, he claims, they were blind-sided by government with regards to the latest tax increase.

According to the Chamber, the increase by 50 percent of the erstwhile CST announced during the 2019 mid-year budget review by Finance Minister, Ken Ofori-Atta came as a shock to the entire industry players.

Mr. Ken Ashigbey says that there exists a tax dialogue procedure and mechanism where the Ministry of Finance, the Ghana Revenue Authority (GRA) and sections of taxpaying entities converge together to deliberate and make key inputs into any intended tax policy.

However, government did not follow the tax dialogue procedure prior to the reading of this year’s mid-year review budget and this came as surprise to them further adding that the Chamber and sector players were not expecting communication services tax to go up especially under a government that has been pushing for the digitalization agenda.

“Telecommunication services tax impacts on everybody in the economy. In increasing CST, bear in mind last year there was an increase of the taxation on telecom services consumers and you go further to slam this on them”, he fumes.

Indeed, Chamber chieftains privately claim that it is this perceived disrespect by government, in not bothering to consult or even simply forewarn them,  that persuaded the telcos to pass the entire nine percent CST onto consumers knowing that it would anger consumers. If this is indeed true then the Communications Minister is correct in alleging that the telcos have deliberately moved to put government in bad light.

However, there is also the possibility that the telcos simply have taken advantage of the situation to widen their profit margins although if this is indeed true, none of their chieftains can be expected to own up to their deeds.

Government has attempted to hit back by painting the telcos in a bad light in the eyes of their customers in retaliation for what it sees as a similar effort by the telcos themselves. To this end government has insisted that the telcos stop the upfront deductions of the CST from the value the customers pay for when they buy prepaid cards. Here government argues that since the CST is a consumption tax it must only be deducted at the point the value is used, not when it is purchased in the form of a prepaid card.

This has become a major bone of contention in itself. The telcos argue that they have to deduct the tax at the point of prepaid card purchase in order to meet the Ghana Revenue Authority’s deadlines for remitting tax obligations. They further argue that the law allows for deductions in this way.

Actually, a few customers support the manner in which the telcos deduct the CST arguing that this makes for transparency – the customer can see how much has been deducted; but if the tax was deducted at the point of actual service usage it would be difficult for the customer to ascertain the tax rate actually being applied.

In turn however government points to the situation with data usage, where most networks set expiry dates after which the data paid for can no longer be used. It argues that upfront tax deduction by the telcos, amounts to deducting tax on a service that may eventually not be used. Therefore, continues government’s argument, expiry dates should not be applied; rather data not used by such dates should be carried over and added to the value a customer acquires the next time a prepaid card is purchased.

The refusal of the Mobile Telecommunications Companies (Telcos) to implement the directive from the Ministry of Communications to halt upfront deduction of the CST means tax paid by consumers is still being deducted upfront.

This measure has largely resulted in some form of displeasure and protest from some sections of the public since the tax was implemented earlier this month.

Importantly, the public outcry concerning halting of the upfront deductions also falls in line with the kind of modality the Communications Ministry wanted the CST to be carried out with. The Ministry believes the tax should only be deducted when consumers make use of services like calls and Internet usage, similar to the way other taxes are treated. This has created a standoff between the telcos and the Ministry.

A statement from the Ministry this month concerning halting the upfront deductions reads as: “To minimize the negative impact of the current mode of deduction of the CST, the Ministry of Communications hereby directs the immediate implementation of the following measure:

CST should be treated the same way VAT, NHIL, GETFUND levy and all other taxes and levies imposed on entities doing business in Ghana are treated. These extraordinary upfront deductions of CST and notification of same to the subscribers must stop with immediate effect,” the Ministry of Communications directed.

However, the telcos have responded that the Ministry of Communications must give them at least six to eight weeks – that is up to two months – to comply with the directive. According to them, the time extension they have asked for would enable them reconfigure their systems in order to comply with the directive and bring the situation to normalcy.

But the Communications Ministry and some sections of the public view their response as mischievous, in the sense that, as the sector Minister, Ursula Owusu-Ekuful recently asserted, the reconfiguration of their systems can be done in just two days.

Unsurprisingly, the dispute has taken on a political dimension with the opposition National Democratic Congress taking on government. The resultant dialogue has sometimes been raw and uncouth. Recently, in an official correspondence, Communications Minister Ursula Owusu-Ekuful, in her usual combative way, told minority spokesperson on Finance and Member of Parliament, Cassiel Ato Forson that she would not take lessons on morality from a brothel; this in response from the latter’s attempts to challenge her ministry’s stance on the matter. In reply Ato Forson told her that he will not follow her into a brothel.

Interestingly, Finance Minister Ken Ofori-Atta has stayed out of the fray. He is only interested in getting the tax revenue required to cut his fiscal deficit over-run and the increase in the CST is contributing to this considerably.

But he seems to be the only person satisfied in an imbroglio that still has the potential to boil over into a conflict that no-one really stands to benefit from.