Former Central Bank of Kenya (CBK) Governor Njuguna Ndung’u has warned that taxes imposed on mobile money services and airtime could derail the financial inclusion gains witnessed in Kenya.
In a study, Taxing mobile phones transactions in Africa: Lessons from Kenya, Prof Ndung’u says that the Kenyan government has been pursuing tax increases in recent years. For instance, in addition to the 2003 excise tax on airtime, since 2013, Kenya has introduced and taxes on goods such as mobile phones, computer hardware, software, and recently retail financial transactions.
Recent adjustments in taxation in the Finance Act 2018 increased excise duty on money transfer services by banks from 10% to 20%, on telephone services (airtime) from 10% to 15%, on mobile phone-based financial transactions from 10% to 12%.
The report shows that “taxation on mobile phone airtime and financial transactions may not expand the tax base significantly but, rather, may reverse the gains on retail electronic payment and financial inclusion.”
In the study published by Washington, DC-based think tank Brookings Institute, Prof Ndung’u says that the high tax on low-level retail electronic transactions is levied mostly on low-income earners. This may, in turn, discourage the low-income earners from using mobile phone-based transactions because they are sensitive to transaction costs.
In this case, they may revert to cash transactions in a bid to evade the taxes and therefore lead to low tax revenues from mobile based transactions. If this trend may continue, it may deal a big blow to the financial inclusion witnessed so far in the Kenyan market.
When utilized well, mobile-based financial services serve as an economic driver, increase financial inclusion, encourage savings and credit, reduce poverty, and formalize transactions.
Prof. Njuguna Ndung’u who is the executive director of African Economic Research Consortium says that poorly designed tax policies will have poor outcomes on tax revenues.
He recommends that any future review of excise tax rates on financial services should be preceded with a thorough analysis of optimal taxation excise. In addition, the review should consider the likely change in behaviour around financial services and marginal contribution to the tax effort that the policy aims to raise.
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