Are Zimbabwe’s ISPs overtaxed?

Tawanda Musarurwa

THE country’s internet service providers (ISPs) are stuck in a taxing predicament.

With levies and taxes piled on from every direction, local ISPs are finding themselves in a financial chokehold, and they are not being shy about voicing their displeasure.

Briefing the media earlier in February, TelOne chief executive officer Engineer Lawrence Nkala said high taxation was impacting the business’ cash flows.

“Around 37 percent of our revenue is tax.

“Specifically, for TelOne, we have value added tax (VAT) at 15 percent, special excise duty at 10 percent, income tax at 8,5 percent, and monthly licence fees at 3,5 percent; in total it’s 37 percent,” he said.

“So, for every dollar, 37 percent goes to taxes, then we remain with 63 cents that we have to share in terms of investing into the network, payment of our suppliers, payment of staff, and so forth. This is a very huge challenge.”

Let us break it down.

Notwithstanding the standard 25 percent corporate tax, which is already significant in itself, ISPs have their own unique bundle of taxes, which – in combination – are quite hefty.

Local internet access providers have also complained about the 2017 introduction of the 5 percent special health levy, which was added to the initial 5 percent excise duty on airtime that had been introduced in 2014.

The special health levy is meant to support the country’s healthcare system.

And on top of that, telecommunications regulator, the Postal and Telecommunications Regulatory Authority of Zimbabwe (Potraz), decided in June 2022 to add on yet another charge.

Their latest invention, the Telecommunications Traffic Monitoring System, came with a fee of US$0,06 per minute on incoming international calls.

It is sold as a way to monitor call traffic, but in reality, it is another tax by a different name.

But that is not the end of the line.

There is also the 2 percent levy on electronic transactions, which further nibbles at any profits ISPs or internet access providers (IAPs) might have left.

And during Potraz’s Telecommunications Indaba this month, players in the industry raised concerns about approaches by the taxman for ISPs to withhold non-resident tax on payment for imported bandwidth.

A regional oddity

In comparison to some of its neighbors, Zimbabwe’s taxation system for ISPs looks like a bad deal.

South Africa’s corporate tax may be slightly higher at 27 percent, but its ISPs are not hit with the same barrage of additional levies.

Meanwhile, Zambia’s 16 percent VAT on telecommunication services is certainly kinder than Zimbabwe’s 15 percent plus a long list of extras.

To this extent Zimbabwe’s taxation regime makes it a challenging operating environment for existent ISPs, and a tough sell for potential new entrants.

Ultimately, it is the consumer that suffers, because all these taxes and fees do not just sit with the ISPs.

They are passed down the line to local consumers.

The country’s ISPs, faced with high operating costs, have little choice but to bump up prices, making internet access a luxury many cannot afford.

This is perhaps where the bigger problem lies.

As the world increasingly moves online, affordable internet access is crucial for development.

But when prices are too high, the uptake of internet services can stagnate.

Zimbabweans have long complained about expensive data packages and slow

internet speeds.

A rule of thumb when it comes to internet speeds is, at least 100Mbps (megabits per second) for good download speed and at least 10 Mbps for good upload speed.

According to the Londa 2023 Digital Rights and Inclusion in Africa Report, “median country internet speeds for mobile released by Ookla’s Speedtest Global Index in November show that the average download speed (for Zimbabwe) is 32.41Mbps, an increase from 10.88Mbps in the same time in 2022, upload speed is 14.95 Mbps, an increase from 6.06 Mbps.”

Stifled competition

Although various other factors may come into play to explain the limited number of ISPs in the country, a high-tax environment is a major turn-off for potential competitors.

In industries such as telecommunications, competition is a driver of better service and lower prices.

But, it seems as if existing ISPs have little motivation to innovate or lower their rates, ostensibly knowing that the barriers to entry will keep their competitors at bay.

Competition aside, the country’s ISPs are financially hamstrung to re-invest in enhancing their capacities.

Potraz’s 2023 fourth quarter report showed a quarter-on-quarter decline in the revenue-to-costs ratio and the total profitability of the country’s internet access providers.

Compared to the previous quarter, growth in revenue was outpaced by growth in operating cost as indicated by growth rates of 28,2 percent and 69,1 percent, respectively.

While stunted revenue growth may have been caused by factors such as inflationary pressures and reduced demand, a friendlier tax structure would help these companies be more resilient.

As the TelOne CEO pointed out, for every dollar the company makes, the firm is left with 63 cents to meet all their other obligations, including reinvestment.

For TelOne, a State-owned converged telecommunications operator, re-investment in both software and physical infrastructure has added significance, insofar as the company contributes to Zimbabwe’s backbone network.

According to the African Development Bank (AfDB)’s 2019 Zimbabwe Infrastructure Report, the country requires around US$400 million to enhance its backbone network infrastructure between 2018 and 2030.

“The main item is the expansion of the fibre optic backbone network, although the private sector has made significant investment in the backbone network, much investment is still required, specifically to extend universal access across the country,” reads part of the report.

“The estimated investment cost (as provided by TelOne) needed to extend the backbone network in Zimbabwe will require an estimated US$400 million.”

The bottom line

Zimbabwe’s ISPs are not crying wolf.

The current tax regime – corporate tax, VAT, health levies, Universal Service Fund contributions and transaction levies – is literally a death by a thousand cuts.

The result is a stifled telecommunications sector, with less competition, higher prices for consumers and a sluggish digital economy.

While taxes are fundamental to a functioning society, the authorities should aim to create a more balanced environment; one where ISPs can flourish, competition can grow and consumers can access affordable services.

Reducing taxes can be beneficial for companies in the technology space.

For example, observers such as the Tax Foundation, say when the United States’ federal corporate tax rate was reduced from 35 percent to 21 percent under the 2017 Tax Cuts and Jobs Act, it allowed tech companies to retain more profits for reinvestment in research and development, innovation and expansion.

Zimbabwe’s current tax structure may be holding back its internet economy.