Estimating the impact of Value Added Tax exemptions on smartphone penetration in Colombia using the synthetic control method

Device affordability is one of the key barriers to Internet access and use in most low- and middle-income countries. Reducing or eliminating taxes on devices has emerged as a major way to make devices more affordable. However, the empirical evidence on the impact of tax reductions on device access remains limited. To help fill this gap, this study estimates the impact of Colombia's Value Added Tax (VAT) exemption, announced in late 2016, on smartphone penetration rates. Using the Synthetic Control Method (SCM) applied to country-level panel data from 2009 to 2021, our study finds that smartphone penetration in Colombia reached 66.8 % by the end of 2021, an increase of 7.6 percentage points over the 59.2 % level of its synthetic counterpart, which represents a 12.8 % relative increase. These results were validated through placebo tests and other robustness checks. A preliminary, illustrative cost-benefit analysis suggests that the broader economic growth driven by increased smartphone penetration could plausibly offset the VAT revenue loss over time. These findings confirm that reducing or eliminating taxes on smartphones improves smartphone penetration and contributes to bridging the digital divide. The work can be extended by exploring VAT exemptions in other countries and reductions on other forms of taxes. • First study to isolate the impact of Colombia's VAT exemption on smartphone penetration. • First to use Synthetic Controls to assess how VAT exemptions affected smartphone penetration. • First to validate the positive correlation between tax exemptions and device penetration through various robustness tests. • Estimates a 7.6 percentage point increase in Colombia's smartphone penetration attributable to the VAT exemption by 2021. • Presents a rough estimate that economic growth from higher smartphone use may offset VAT revenue losses over time.