Kenyan Government Risks Squandering The Long-Term Potential Of Mobile Transactions In The Hope Of A Little Extra Tax Revenue

from the laffer-curve-is-no-joke dept

Back in October last year, Techdirt wrote about some unfortunate developments taking place in the African digital world. Governments across the continent are bringing in levies and taxes on Internet use, making it more expensive and thus harder for ordinary people to access the Internet at a time when the digital ecosystem in Africa is starting to take off in a big way. In February of this year, we reported on some evidence that the social media tax in Uganda was indeed causing fewer people there to use the Internet, and for the total value of mobile transactions to drop. Quartz Africa has a post about a new report from Brookings on the steep rise in taxes on mobiles and data in Kenya, and the harms it is likely to cause. Here's how things have gone from bad to worse:

In June 2009, the Kenyan government, recognizing the importance of enhancing access to mobile telephony, exempted mobile handsets from the VAT. This move increased the affordability of the handsets and made possible the more than 200 percent increase in handset purchases and a 50 percent to 70 percent increase in penetration rates (Strusani and Solomon, 2011). In turn, the use of mobile phones and related services such as mobile money deepened, and Kenya's total mobile subscribers almost doubled from 17.4 million in June 2009 to 29.8 million by March 2013. Then, the VAT Act 2013 paved the way for the taxation of previously exempted goods such as mobile phones, computer hardware, and software. Now, mobile phone users in Kenya had to pay a 16 percent VAT [Value-Added Tax] on the purchase of a mobile handset in addition to the 10 percent excise tax on airtime, which had been introduced earlier in financial year (FY) 2002/03.Further, in FY 2013/14, the government introduced an excise tax on retail financial transactions at a rate of 10 percent. The Finance Act 2018 then increased the excise tax on money transfer services by banks from 10 percent to 20 percent, on telephone services (airtime) from 10 percent to 15 percent, and introduced a 15 percent excise tax on internet data services and fixed line telephone services.

The report notes the many benefits of promoting mobile payments -- things like serving as an economic driver, and encouraging savings and credit. Particularly important for developing countries is the how mobile-based services increase financial inclusion, providing access to banking for even the poorest sectors of society, which can help to reduce overall levels of poverty.

The authors of the study point out that the tendency of taxes to operate on a Laffer curve means that as rates increase, tax revenue from mobiles and data use may decline at some point, making such moves self-defeating. Moreover, if people start to turn back to cash to avoid increased costs of mobile payments, the benefits of digital transactions are lost, including the ability for governments to track and tax transactions more easily, leading to further revenue losses. The report concludes:

The tax policy and design of taxes on retail electronic transactions as well as bank transactions has the potential to reverse the gains that technology has pushed Kenya to the frontier of electronic payments and financial inclusion and back to cash preference and financial exclusion for low-income earners.

The same applies to other African nations that think taxing mobile services is an easy way to raise a little extra revenue. As this new report emphasizes, they may find that that they inflict considerable harm on their digital economies for very little financial benefit.

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Filed Under: africa, kenya, mobile, tax