Bharti, Hutch may leave Sri Lanka due to highest taxes in Asia: Fitch

EconomyNext - New taxes imposed by Sri Lanka may force Hutchison and Bharti Airtel to sell their local loss-making units in what is one of the most overcrowded mobile phone markets in the world, Fitch Ratings said.

The rating agency has revised its outlook on the sector to negative from stable, saying the one-off and recurring taxes in the government budget raise regulatory risks and would lead to lower profitability and higher financial leverage for Sri Lankan telcos. 

"If enacted, we believe the proposals may hasten consolidation as two loss-making smaller operators could exit the industry, leaving three remaining," a statement said.

The 7 February interim budget proposes a one-off "super gains" tax of 25 percent on profit, and a tax of 250 million rupees (1.8 million US dollars) on each mobile operator. 

The proposals, to be effective from 1 April 2015, also shift the burden of a recurring telecom levy of 25 percent and 10 percent on prepaid voice and data revenue, respectively, on to telcos from consumers.

Operators can no longer pass these taxes on to consumers, as changes in retail prices require approval from the telecoms regulator.

The rating agency said the new taxes would reduce profit margins of the two biggest operators, Sri Lanka Telecom and Dialog Axiata, by 400 basis points and 800 basis points, respectively. 

"Smaller, loss-making telcos including Hutchison Lanka and Bharti Airtel's fully owned subsidiary, Airtel Lanka, may consider exiting the industry as most of their revenue is pre-paid," it said. 

"We believe that market leaders Dialog and SLT could acquire the smaller operators to reduce price-based competition and consolidate spectrum assets." 

A one-off tax of a billion rupees (7.5 million dollars) is also proposed on companies offering satellite direct-to-home (DTH) TV with more than 50,000 subscribers. 

Fitch said Dialog will be more affected than SLT by the taxes as 38 percent of its 2014 revenue was from prepaid services, compared with 21 percent for SLT. 

Dialog will also pay a billion rupees as the sole DTH operator with over 50,000 subscribers.

A shift in the burden of the 25 percent telecom levy from consumers to telcos is likely to incentivise consumers to increase voice and data usage. 

However, Fitch said this increase will be only gradual - and insufficient to offset the impact of the absorption of the telecom levy.

"Sri Lanka's telco market is one of the most overcrowded markets in the world, with five mobile operators serving a population of 21 million.

"If the proposals are implemented, Sri Lankan telcos will pay one of the highest taxes as a percentage of revenue among Asia-Pacific telcos." 

SLT and Dialog will pay about 28 percent and 36 percent of their respective 2015 revenue in taxes, fees and levies, up from 12 percent and 17 percent in 2014.

"This is much higher than the case for India's Bharti Airtel and Indonesia's PT Telekomunikasi Indonesia, which paid about 20 percent and 17 percent of their 2014 revenue in similar taxes and levies to their respective governments."