‘Ncell won’t pay due capital gains tax on behalf of Telia’On Sunday, the Public Accounts Committee of Legislature Parliament revived the issue of capital gains tax on Ncell buyout deal by directing the Ministry of Finance to recover the due tax amount within three months.
On Sunday, the Public Accounts Committee of Legislature Parliament revived the issue of capital gains tax on Ncell buyout deal by directing the Ministry of Finance to recover the due tax amount within three months. The government has clearly said 25 percent of the profit made from the sale of Ncell should be deposited as capital gains tax. However, concerned authorities are yet to determine the exact tax amount on the deal in which Telia, a Swedish company, and SEA Telecom Investments BV sold 80 percent of Ncell’s stake to Axiata, a Malaysian telecom company. So far, Ncell has deposited Rs9.97 billion as 15 percent withholding tax, or tax deductible at source for capital gains, in the state coffers. Parliamentarians are now saying payment of the remaining tax amount should be used as a precondition to allow Ncell to roll out 4G service. Rupak D Sharma of The Kathmandu Post talked to Ncell Managing Director Simon Perkins about these issues and company’s future plans. Excerpts:
The Public Accounts Committee of Legislature Parliament this week directed the Ministry of Finance to collect applicable capital gains tax on Ncell buyout deal within three months. What’s your take on this issue?
We welcome the initiative taken by the committee to pursue the matter. I’m also pleased with the instruction, because it is now clear that the tax should be paid by the seller [of Ncell], which is Telia. We have wasted a long time on this issue, although it was clear that capital gains tax is applicable to the seller. We’re happy this fact has finally been understood by everyone. The concerned authorities can now initiate the legal process to obtain the due tax amount from Telia.
But the government has been saying it neither knows the former owner of Ncell, which is Telia, nor Axiata, the new owner of the telecom company. It only knows Ncell, a company legally established in Nepal.
I think most of the government officials know the difference between an operating company and its shareholders. It would be bit of a stretch to say that government officials don’t know Telia because the company was a majority shareholder in Ncell for so many years. So, maybe that’s just a misunderstanding.
However, Axiata definitely knows Telia, because it bought Ncell from that company. As a good corporate citizen, don’t you think it’s the responsibility of Axiata, and Ncell as well, to play a facilitator’s role in resolving this issue?
I think we’ve displayed that by paying 15 percent withholding tax on behalf of Telia. Ncell calculated the applicable capital gains tax on the deal based on financial information put on the public domain by TeliaSonera Norway. We did that although we were not a party to the transaction of shares of Reynolds Holdings Limited-the official owner of Ncell, which was sold by TeliaSonera Norway to Axiata Investment UK Limited of the Axiata Group. This very clearly displays the willingness of Ncell as well as Axiata to cooperate with the government here. But the remaining 10 percent of the tax should come from Telia.
Can’t Ncell or Axiata do more to resolve this issue?
Well, Telia has repeatedly said no tax is payable in this deal. And we cannot persuade them to say something else if that’s what they firmly believe. I think tax authorities here should pursue the legal process to collect the due tax amount from Telia.
The directive issued by the tax authority here to Ncell to deposit 15 percent of withholding tax and affirmative response made by the company clearly show that the government can tax the deal, isn’t it?
But I can’t convince or persuade Telia to do otherwise because they have been saying no tax is applicable in the deal. In the case of Ncell, we’ve complied with the domestic laws. That’s why we deposited the 15 percent advance tax on behalf of Telia on time. The remaining tax should now come from Telia.
That means Ncell won’t be paying the remaining 10 percent of the tax to the government, isn’t it?
The remaining tax is not Ncell’s responsibility. It is the seller’s responsibility. And it is well established international norm that capital gains tax, when applicable, should be paid by the seller that makes gains in the transaction. Since Telia made the gains, the remaining tax amount should come from that company.
Many are saying the Nepal Telecommunications Authority (NTA), the telecom sector regulator, is delaying the process of extending 4G license to Ncell because of capital gains tax issue. Is that so?
During a recent Public Accounts Committee meeting, NTA chairman said that the government has not given any instruction to him to bar Ncell from obtaining 4G license unt-il the tax issue is settled. So, I don’t think that’s the case.
You must have been holding talks with NTA officials as well. What do they say is the reason behind the delay in extension of 4G license to Ncell?
In a recent media interview, NTA chairman said he intends to extend 4G license to Ncell together with the spectrum. It’s difficult for us to operate 2G, 3G and 4G services in the limited spectrum that we have. I think the NTA is trying to find out how to extend the spectrum to us so that we can provide quality 4G service.
You had previously said data costs would come down considerably once 4G service is launched. How low can the costs come?
We are going to bring down the price of data service anyway-with or without 4G network. Data services cost here is too high and this has prevented many people from surfing the internet. I’ve been talking about reducing data prices for months and I actually wanted to do that together with the launch of 4G service. But I can’t wait any longer. So, we will improve our 3G network considerably and reduce data prices by half very soon.
Will data prices be reduced across the board or on certain packages?
In about a week, we’ll be launching new data packages, which will lower data prices for daytime surfing by 50 percent and night-time surfing by 25 percent. Under the new scheme, customers will be able to surf internet for as low as 13 paisa per MB, including taxes. This rate will be applicable during the day time from 5 am to 5 pm. We will also bring down night-time surfing tariff to 7 paisa per MB, including taxes. This rate will be applicable from 11 pm to 5 am. We are reducing the prices because we want more people to use data.
Is this an acknowledgement that voice market has saturated in Nepal?
Voice [market] has not saturated; it’s still growing. But it will definitely start saturating in the next one to two years. And you have to embrace that and give customers what they want. If they want good quality data service at a lower price, then that’s what we have to deliver.
So, you’re expecting data market to grow rapidly in Nepal?
In two year’s time, our revenue from data services will be the same as that from voice services. Currently, a bigger chunk of our revenue comes from voice services, [whereas data contributes to around 17 percent of income]. Cambodian income level is similar to that of Nepal. But data services [in the Southeast Asian country] already make up half of telecom companies’ revenue. This is because of pricing.
What do you think are the key drivers for rise in data consumption? Is it just lower data prices or availability of cheaper smartphones as well?
Price of smartphone is also the key to higher data consumption. Prices of smartphones manufactured in China and India are now pretty low and are further coming down. Along with this, availability of quality 3G and 4G services nationwide would be crucial to increase the number of data users.
Your third quarter report says smartphone penetration rate in Nepal grew by 3 percentage points to 39 percent in just three-month period between July and September. How rapidly will smartphone penetration rate grow in the coming years?
The smartphone penetration rate will go up to 70 percent in the next two to three years. This is because the smartphones are becoming cheaper and widely available. On top of that everybody wants those handsets. But many people here who carry smartphones do not use data. We hope the reduction in data cost will encourage them to use data services.
Lastly, what is your outlook on Nepal’s telecom sector?
Our business is very much dependent on performance of Nepal’s economy. A slow economic growth tends to affect our business, while faster growth provides us an opportunity to grow in a rapid manner. Economic growth rate in the last fiscal year was too low. But the growth forecast for this fiscal year is much better because of good agricultural production, higher spending in post-earthquake reconstruction works, revival in tourism business and slow but steady rise in remittance income. All these factors will indirectly benefit us, because higher economic growth will enhance spending capacity of people. From the strategic point of view, we are now putting more emphasis on expansion of data services. This is because the telecom industry worldwide is moving towards data. People these days, for instance, use WhatsApp not only for text messaging but to make calls as well. And to operate over-the-top (OTT) applications, like WhatsApp, a good data connection is required. So, with reduced cost and better packages, we expect more people t o use data services.