The Sri Lankan government’s interim budget has proposed sharp increases in one-off and recurring taxes, which Fitch Ratings believes could speed up operator consolidation, with the number of mobile players possibly falling to three from five.
The rating agency said two smaller, unprofitable operators — Hutchison Lanka and Airtel Lanka (a subsidiary of Bharti Airtel) – could exit the industry. It believes that market leaders Dialog and Sri Lanka Telecom could acquire the smaller operators to reduce price-based competition and consolidate spectrum assets.
The government’s proposal, which is scheduled to go into effect on 1 April, calls for a one-off “super gains” tax of 25 per cent on the profit of all companies generating income of more than LKR2 billion ($14.6 million) and a tax of LKR250 million on each mobile operator.
More controversially, the proposal aims to shift the recurring telecoms levies of 25 per cent on prepaid voice and 10 per cent on data revenue on to the operators from consumers.
The new measures would also mean any increase in tariffs would need to be approved by the telecoms regulator.
Since the 25 per cent tax is a one-time fee charged on a company’s profit rather than revenues and applicable across industries, operators are not that opposed to it, said Rohan Dhamija, a partner and head of India & South Asia at Analysys Mason.
But shifting the usage tax burden to operators is a different matter. “This one really is the killer tax for operators as it’s applicable only to a couple of sectors and is a direct tax on revenues rather than on profits,” said Dhamija, who agreed it could drive consolidation, with the smaller, less-profitable operators looking to sell out to the larger ones.
With more than 90 per cent of the voice market prepaid and most of the operators’ revenues coming from voice, he said the government is looking to add a 25 per cent tax on almost all of the operators’ revenues. This will be tougher on the less-profitable players.
He said the word on the street is that this specific charge might go away after a year.
Impact on margins
The proposed taxes, Fitch said, raise regulatory risks and could result in lower profitability and higher financial leverage for all Sri Lankan operators. The agency has revised its outlook on the sector to negative from stable.
Fitch said market leader Dialog’s stand-alone credit profile would come under pressure if it were to pay the additional recurring and one-off taxes proposed. Its operating EBITDA margin is forecast to decline to 23-24 per cent this year from 33 per cent in 2014.
But its market position would probably strengthen following the tax changes as smaller operators that are unprofitable could look to exit. Fitch expects Dialog’s revenue to rise by a high single-digit figure due to increased voice usage driven by consumers paying less tax as well as fast growing data services.
It also believes Dialog’s leverage would also start improving from 2016, and the operator would reduce its capex in response to the additional taxes. Its capex/revenue ratio, however, will remain high at around 25-30 per cent due to the required network expansion.