Kenya M-Pesa tax risks killing the goose that laid the golden egg

Higher taxes on mobile phone transactions may force low-income earners to revert to cash, according to Kenya’s former Central Bank governor, Prof. Njuguna Ndung’u.

• “The expansion of financial inclusion through mobile banking is under threat from the levying of taxes on mobile phone transactions,” writes Prof. Ndung’u in a policy brief for the Brookings Institute.
• “These taxes are targeting mobile transactions because of their high volume, but in reality, the value per transaction is so low that even a low tax has a disproportionate effect on the cost,” according to Prof Ndung’u.

East African countries have introduced higher taxes on mobile money transactions since 2013, faced with dwindling sources of aid and huge infrastructure budgets.

Kenya led the way that year, introducing multiple taxes on financial transactions as well as mobile and computer hardware, and software.

• Last year, Kenya increased excise duties on transactions by banks and mobile-phone based transactions. It also introduced a new 15 percent tax on internet data services and fixed-line telephone services, and removed the 2009 exemption on mobile phones.
• Uganda introduced a 10 percent excise duty on mobile money transaction fees in 2013. Last year, a consumer-led #ThisTaxMustGo protest brought Kampala to a halt after the government said it would introduce a 1 percent tax on all stages of mobile money transactions. While it lowered this to 0.5% and limited it to withdrawals, it kept a $0.05 per day levy on access to online services.
• Tanzania also introduced a 10% excise duty on mobile money transfer and withdrawals, and an 18% tax on bank fees and commissions.

Less use of mobile money, less revenue

The problem for governments is that while tax revenues from digital transactions may rise in the short term, further increases in the taxes past this optimal tax rate will result in less revenue.

• Mobile money taxes will force low-income earners to revert to cash as the costs are proportionally higher for them, while high-income earners may revert to lump sum transactions through RTGS and other forms of money transfer.

For consumers, the lingering concern about the introduction of different mobile money taxes in Sub-Saharan Africa is that governments are double-taxing and in some instances triple-taxing users. The result is that less and less people will use mobile money, and even other mobile services that are now taxed.

• After Uganda implemented a daily levy on internet access last year, the immediate effect was a drop in online users. Within the first three months, according to the regulator, internet users declined by 2.5 million, and taxpayers of over-the-top (OTT) media declined by 1.2 million users. The result was that tax revenue declined by $1.2 million.
• There is some evidence that the exponential growth of Kenya’s mobile money sector is approaching its peak. The total amount transferred via mobile money increased from 3, 638 billion in 2017 to 3984 billion in 2018, a 9.5 percent increase. Five years ago, the annual growth rate hovered around 18%.

To Prof. Ndung’u, this is not good news. “Kenya was moving into a cashless economy. This trend is now in danger of reversal.”

Bottom Line:  Raising taxes on mobile phone transactions in East Africa may run the risk of stalling progress in the region, while only delivering a small boost to tax revenues.