Talk tax cut improves business cost competitiveness

The four per cent reduction in the Communications Service Tax (CST) from nine per cent to five per cent which took effect on Tuesday, September 15, has had an immediate positive effect on the cost competitiveness of many businesses in Ghana, entrepreneurs and corporate executives alike are claiming.

Entrepreneurs and corporate executives alike have welcomed the implementation of the cut, especially as it has come at a time that digital channels of communication and data transfer have become bigger components of overall cost structures of businesses due to the impact of COVID 19, which has made digital channels the preferred way of doing business.

Indeed, the tax cut has already business strategists to work on how to increase the digital components of their respective business activities in order to maximize the benefits of the four percent reduction in terms of their overall business costs.

The reduction in the tax, popularly known as ‘talk tax’ was announced by Finance Minister Ken Ofori Atta during his presentation to Parliament of government’s 2020 budget mid-year review in July.

The reduction in the tax has resulted in a commensurate four per cent fall in telecom charges. Some business owners and managers had hoped that the reduction would be bigger, hinging their expectations on the possibility of the telecommunications companies all agreeing to absorb the five percent CST that is left.

Prior to the increase of the tax from six to nine per cent a year ago, the telcos were all absorbing all six percent as a favour to customers even though, as a consumption tax they are supposed to pass it on to their customers.

However, following the increase in the CST to nine per cent last year, the telcos, acting in unison under the umbrella of their industry association , the Ghana Telecommunications Chamber, decided to pass on the entire tax – existing six and the added three per cent – to their customers, claiming that this was in protest against government’s failure to engage with them before deciding to increase the tax rate.

However this has not happened; the telcos are already struggling with rising operational costs and new investment requirements as surging demand for their services, resulting from the rising popularity of digital channels because of COVID 19 is stretching the capacities of their respective networks.

But corporate Ghana appears highly appreciative of the four per cent cost reduction they have got, which instructively reduces the CST to its lowest level since it was first introduced in 2008. Service sector companies are enjoying the biggest beneficial impacts of the reduction and this is the sector that contributes the most to Ghana’s GDP.

Some economists reckon that the four per cent cut in the CST could translate into as much as a one per cent reduction in the overall operating costs of some heavily digital reliant service companies.

“While one per cent may seem small, if your profit margin is 10 per cent, a one per cent fall in your total operating costs means your profits go up by one-tenth” said one enthused business owner in Accra yesterday.

But even more importantly, the tax cut is serving as a veritable further incentive for businesses to turn even more to digital channels for consummating their activities.

The cut in digital costs is coming at a time when headline inflation is 10.5 per cent according to the latest figures, for August, from the Ghana Statistical Service. This means digital operating costs have gone down at a time that physical operating costs are rising significantly.

However this may be a temporary respite. The industry regulator, the National Communications Authority has already served notice that it will impose minimum tariffs that the dominant network operator, MTN Ghana can charge as it stops the telecoms market leader from offering cheaper rates on services wholly within its network than on services that require interconnection with a competing network.

These are part of the regulatory actions the NCA is empowered to impose now that it has classified MTN as a Significant Market Player, which allows the regulator to take steps to curb its market dominance. Indeed, the delay in its enforcing these new regulations is only because the NCA wants the legal action taken against it by MTN over the SMP classification to be resolved first.

An Accra high court has already dismissed MTN’s case, but the network operator has subsequently taken its case to the Supreme Court. No timelines have yet been set for hearing the case.

However if the NCA wins again, it opens the door for it to enforce its intended regulatory actions which would force MTN to increase its tariffs and thus enable its competitors to do likewise without becoming price uncompetitive.