Sri Lanka telco outlook upgraded after scrapping of punitive taxes

ECONOMYNEXT – Fitch Ratings said it had upgraded the outlook for Sri Lanka telecom operators to stable from negative after the current administration decided not to proceed with a tax that could have undermined the sector.

"We believe that Sri Lanka Telecom’s (SLT) and Dialog Axiata Plc’s 2016 credit profile will now remain intact – given the ratings headroom to absorb margin dilution and lower cash generation," Fitch Ratings said in a statement.

A high tax on international incoming calls, which when passed on to customers, could drive more users to applications like skype and facebook, Fitch said.

The punitive taxes on telecoms included a 25 percent super gains tax supposedly to recover ‘ill gotten gains’ during the ousted Rajapaksa regime, a 250 million tax on each telco, a billion rupees tax on direct-to-home satellite firms with more than 50,000 subscribers.

There was also a proposal to shift a 25 percent turnover tax to the firms from consumers.

The one-off tax on satellite direct-to-home TV operators and the recurring tax on prepaid services have been scrapped.

Sri Lanka Telecom and Dialog had paid 1.02 billion and 2.04 billion rupees on one-off taxes Fitch said.

The two firm’s earnings before interest tax depreciation and amortization would fall by about 0.1 to 0.2 percent after the budget. If all the taxes were implemented sector profits would have been down by 6 to 7 percent.

A budget for 2016 also proposed to separate, fibre, tower and spectrum owned by telcos to a joint venture company regulated by the Information Communications Technology Authority.

"The impact of such a structural separation on telcos is uncertain as the regulator is yet to disclose the finer details of such asset separation," Fitch said.





A tax on 50,000 rupees per tower is not likely to have a major impact on the credit profile of Dialog or SLT, Fitch said.

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