Corporate Tax Hike for MFS Players: Throttling industry growth for nothing

Don't kill the goose that lays the golden eggs -- suggests the famous Greek storyteller Aesop. And looking at Finance Minister AHM Mustafa Kamal's proposed tax measures for the mobile financial services operators for the incoming fiscal year, one cannot help but recall the famous fable.

Introduced around the turn of the last decade as part of the Bangladesh Bank's financial inclusion agenda, the platform has been the perfect propellant of the Digital Bangladesh vision.

What was historically a long-winded exercise became an illustration of how technology can make people's lives simpler and better: by way of MFS, rural people, who mostly remain out of the purview of formal banking channels for geography and a lack of a business case, could receive money from their friends and family in cities -- within moments.

But, MFS is more than just a conduit for urban-rural remittance -- and it is this latent potential that came to the fore during the global coronavirus pandemic.

Because of the contactless nature of its transactions, the platform came in handy for making payment at point-of-sale terminals, servicing utility bills and salary disbursements as fear of the coronavirus, which lingers on surfaces for hours, reigned supreme.

And because of the ease with which such transactions could be made, person-to-person transfers within the system took off in a big way amid the pandemic, going neck-and-neck with cash-out transactions, long the most common MFS transaction -- and giving wings to the cashless society dream.

Yet, nothing impresses more than the platform's ability to deliver social safety net allowances to the rightful beneficiaries.

To avoid queues at union parishads amid the pandemic, the government last year began social safety net disbursement through the MFS players on a pilot basis to 50 lakh beneficiaries.

A common allegation of social safety net programmes -- which are anchored on cash transfers -- is that the system can be gamed, with the money ending up in the hands of those who do not need it. The rightful beneficiaries get shafted aside by the middlemen, who tend to be local political operatives.

But in one fell swoop, the MFS players bumped off the middlemen from the carousel.

The starting point for the MFS players -- bKash, Nagad, Rocket and SureCash -- was the list provided by the finance ministry.

They cross-checked the mobile numbers with the NID database of the Election Commission to ensure the same person did not get credited more than once -- a phenomenon that allegedly takes place during cash transfers.

The sifted numbers were sent to the Bangladesh Bank to check whether there were any national savings certificates bought with the NIDs. If there were, the numbers were struck off the list.

By dint of the vetting process, the initial list of 50 lakh was narrowed down to 35 lakh, and the amount meant for the 15 lakh beneficiaries was sent back to the finance ministry -- something unheard of until then.

In short, the process became effective with minimal waste.

Buoyed by the success of the pilot, the government ramped up the deployment of MFS for its disbursal purpose. So far, about 3 crore received their allowances through the platform.

The episode informs social safety net disbursement can be a well-oiled, efficient machinery -- if done entirely through the MFS operators.

But for that to happen, the industry needs to develop much and its technological backbone and logistical infrastructure enhanced manifold. In short, a vast amount of investment is needed in the sector.

As of April, which is the latest available data from the central bank, there are 9.6 crore registered MFS accounts but just 38.5 percent of them had made transactions in the past 90 days. A year earlier, there were 8.5 crore registered accounts and 2.8 crore active accounts.

At present, there are 15 MFS players -- with bKash, Nagad and Rocket ruling the roost.

None of the players is logging in profit, meaning the 32.5 percent corporate tax -- which is a tax on the profits of a corporation -- for MFS players brings nothing to the state coffer.

Despite that, bafflingly, in the proposed budget for fiscal 2020-21, the corporate tax was raised. For non-listed MFS players, it would be 40 percent and for listed ones, 37.5 percent.

This begs the question: what was the point of hiking the rate when the outcome would be the same as before?

The only impact it would have is scare away foreign investors -- at a time when the industry was becoming attractive to them given the robust growth seen in the last few years.

And this is not the first time that the government has arrested the growth of a highly promising industry.

When the mobile industry was revving, the government had encumbered the operators with the highest tax burden in the world -- to the point that the industry failed to draw in much foreign investment after that and also saw a few big names pack their bags.

Ultimately, the mobile users are the losers as they have to make do with substandard service.

A similar pattern is now being witnessed in the case of the MFS industry, which is still in its fledgling state.

And it is not that that National Board of Revenue is not getting anything from the MFS industry at present: it gets 15 percent value-added tax and 12 percent advance income tax from the transactions on the platform as well as 0.6 percent of the loss-making players' gross revenue as turnover tax.

In the first 10 months of fiscal 2020-21, total transactions on the platform stood at Tk 552,375.7 crore, up 46.5 percent year-on-year.

A 40 percent corporate tax is not a small amount and is in the range of banks and non-bank financial institutions, which have plenty of profit-making options.

What's worse is the corporate tax is immaterial -- for the foreseeable future.

Is it not in the best interest of the government to nurture the industry and see it blossom to its full potential? Why nip it at the bud?