Unfair Charge

Telecom analysts pointed out that at one network where the average spend per pre-paid user was just 311 rupees, taxes would take away 110 rupees.

Hakeem told parliament that a 7.5 percent proposed charge had now been increased to 10 percent following discussion with President Mahinda Rajapaksa last night and the fixed levy had been abandoned.

"I think that the removal of the regressive tax is a great benefit for the bottom of the pyramid, but of course the government should not be taxing industries just because they do well," says Rohan Samarjiva, a former telecom regulator who led a campaign against the levy.

"And government should not discriminate between mobile and fixed telecommunications."

The government already charges value added tax on phone calls.

Samarajiva in his 'Choices' column on Lanka Business Online (See Choices - Goose or Eggs) said that the unfair levy would prevent the spread of phones to the poorest segments of Sri Lankan society where higher income persons already own phones.

"The regressive, fixed tax of 50 rupees per SIM is absolutely wrong," he wrote.

"Taking 50 rupees from a person paying 311 rupees per month as well as from a person with a 5,000 rupee phone bill is unfair.

"The effect is a 16 percent tax on the low spender and a 1 percent tax on the high spender. That is why these kinds of taxes are called regressive."

Extravagant Government

Sri Lanka's cash-strapped government which hired 42,000 new staff into its already bloated public sector and is planning to hire 20,000 more this year, is now hard pressed to find cash to foot the bill.

State salaries and pensions ate up 57 percent of tax revenues in the first five months of 2007.

Sri Lanka also spends billions on various politically motivated subsidies including energy and fertilizer. Subsidies and transfers now consume the equivalent of 5.4 percent of the economy, a minister told reporters today.

Another bill introduced in parliament this week jacked up a levy on vehicles from 2.5 to 5.0 percent. The tax came just months after the government allowed 28,000 public servants to import tax-slashed vehicles.

Sri Lanka's politicians led by the Marxist nationalist Janatha Vimukthi Peramuna who engineered an expansion of the public sector and unprecedented energy subsidies oppose increases in value added tax (VAT).

The party has also publicly opposed the new telecom levies, as has the main opposition United National Party which has a reputation for fiscal prudence and low inflation. The party originally brought in the 2.5 percent usage charge on mobile phone bills.

Tax Mess

Since 2004, when Sri Lanka's fiscal policy started to go off the rails, inflation has been touching the high teens and the rupee has been steadily falling as the government printed increasingly large volumes of money to fund its unsustainable budget deficit.

Sri Lanka's VAT framework is now convoluted, loaded with exemptions and multiple rates ranging from 18 percent to 5 percent.

As a result the finance ministry is now resorting to cess levies and other turnover based non-recoverable taxes such as the 10 percent telecom levy.

"The fairest way to collect these taxes is by increasing the VAT rate and removing exemptions, not by imposing various kinds of unfair and counterproductive taxes on arbitrarily selected industries and customers," Samarajiva pointed out.

In another irony, while the poorer prepaid mobile users are getting slapped with new taxes, a consumer lobby took the largest fixed operator in the country to court and extracted an 8 percent reduction on fixed access bills.