The 3 percent increase of excise duty on airtime in the 2010-11 financial year, as spelt out in the recently read budget speech is likely to have a negative impact on the cost of airtime, mobile operators have warned.

This follows an announcement by John Rwangombwa the Finance Minister excise duty on airtime would increase from 5 percent to 8 percent in the new financial year.

The Minister argued that while the increment is projected to generate an additional Rwf2 billion of revenue, the move is inline with harmonizing with the tax regime in the region.

"To better align with taxes in the EAC we will continue to progressively raise excise duty on airtime,” Rwangombwa said.

However mobile operators in the country, specifically Rwandatel and MTN Rwanda have expressed reservation over the increment.

While the telecom companies "welcome” the decision by government to exempt Value Added Tax (VAT) on mobile handsets and SIM cards, the operators argue that the increase in excise duty on airtime creates an additional cost.

"The question remains as to whether communication is a luxury or a basic need for people. It is a basic requirement and therefore the taxes on this should be minimal,” David Gaitho Rwandatel’s, (with largest internet subscriber) Chief Financial Officer (CFO) told Business Times in an interview.

Acknowledging that the VAT exemption on mobile handsets will increase mobile penetration, Gaitho said the additional cost is a challenge for the operators.

"The mobile handset dealers may be unable to claim all their input VAT, and as a result may attempt to pass on this additional cost to their customers,” he said.

The CFO said an alternative proposal towards making the mobile handsets more affordable would have been to zero rate the items.

"This would allow suppliers to recover all the in put VAT related to the supply of the product and minimize the additional cost arising from non-recoverable VAT.”

According to officials of MTN Rwanda which is the largest by market share taxation of the mobile industry increases the cost of mobile ownership and usage creating dampening effect on demand for mobile services.

Whilst increasing excise duty will increase tax collections in the short run, MTN’s Chief Finance Officer, Richard Tusabe observed that it is likely to have a negative impact on tax base in long run.

"It will reduce the tax base in long run by affecting the demand for mobile services both in terms of the number of consumers taking mobile services and the usage of mobile services by existing customers,” Tusabe said.

According to a 2007 report by Delloite, a global consultancy firm from a study commissioned by GSMA, the industry’s lobby group, mobile consumers in East Africa are taxed at some of the highest levels world-wide.

Yet by lowering the excise duty on mobile services the report said, governments would expect higher level of tax and extend the essential mobile franchise to poorer sections of society.

But according to a recent budget analysis report by PriceWaterHouseCoopers (PWC) despite the increment excise duty on airtime in Rwanda remains the lowest within the region.

This is compared to the 10 percent charged in Kenya and Tanzania while Uganda charges 12 percent.

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