With the increase in the cost of the internet, its penetration levels will be greatly affected, and so will digital innovation and employment – particularly for the self-employed young generation
MPs have proposed an amendment in the Finance Bill 2021 that could see the cost of internet and calls go higher if the tax policy is passed by July 1.
In the report tabled by the departmental committee on finance and national planning, the committee proposed an excise duty increase on telephone and mobile data services from 15 percent to 20 percent. This was not included in Ukur Yatani’s Finance Bill of 2021.
The unwelcome move comes barely two years after the government amended the rate of excise duty on telephone and internet services in the Finance Act 2018 where it was increased from 10 percent to 15 percent.
Telecommunication companies and internet service providers, in response to the amendment, increased the cost of the services to factor in the taxes.
Given that government services such as drivers’ licenses, land transfers, parking, and license fees, among others must be done online, many people seeking such services will be greatly affected. With the increase in the cost of the internet, its penetration levels will be greatly affected, and so will digital innovation and employment – particularly for the self-employed young generation relying on the internet to make ends meet.
Notably, the cost of airtime will also go up and unfortunately, customers will shoulder the burden.
On Tuesday, Safaricom said that it would increase airtime and Internet charges if the President backs the MPs’ proposal to raise excise duty by five percentage points.
“This being a consumption tax, the burden, unfortunately, has to be absorbed by customers,” Peter Ndegwa, the Safaricom CEO, said.
“Our plea to the government is to rethink this tax increase given the current economic environment. Mobile services have come to support a majority of people who have been negatively impacted by the Covid-19 pandemic relying on mobile services to work from home, learn or earn a living. The increase will thus only intensify the negative impact on our people,” Ndegwa added.
All this is done by the government in a bid to raise at least 8 billion shillings from Safaricom, Airtel, and Telkom Kenya. . But the question remains, is levying more tax on telephone and internet services a viable policy for revenue increase?
It would seem that the government has not weighed in all the risks involved. It is true, the success of financial inclusion in Kenya has largely been driven by mobile phones’ entry into the financial services ecosystem. Most retail electronic payments are done using a mobile phone, which has, incidentally become the main entry point for the unbanked.
Telephony use has expanded to become a platform for transactions, given the need for financial inclusion and ease of these transactions, the Kenyan economy has progressively moved to cashless transactions across all market segments.
Over the past few years, institutions in East Africa have advocated for financial inclusion as a measure to promote inclusive growth and financial development – a perfect and sustainable path to poverty reduction. But this expansion is under threat from heavy taxes levied on mobile phone transactions.
According to a viewpoint published by Foresight Africa in 2019, African governments need to raise taxes and broaden their tax bases, but they must approach tax policy with a discerning eye.
“Taxes have effects on behavior outside the immediate monetary transactions. Most excise taxes have a Laffer curve, that is, as tax rates increase beyond the optimal tax rate, tax revenue declines, and the potential for distortion in the market increases,” states the report.
Former CBK Governor, Prof. Njuguna Ndung’u, in a 2017 study noted that a poorly designed tax policy or any poorly designed policy will lead to poor outcomes.
“A VAT increase tends to have no or little impact on telecom revenue, as the tax tends to be passed on to the consumers and relatively small effective price increase tends to be absorbed,” Prof. Ndung’u said.
Experts also argue that such taxation policy on micro-transactions carries the potential to reverse some of the financial inclusion and overall financial gains as well as incentivize people to return to cash.
For one, the taxation on airtime and mobile phone financial transactions is double taxation as airtime is required for mobile money transactions. Consequently, as tax rates increase, they raise the potential for distortions in the market, and tax revenue will decline once the optimal tax rate threshold is surpassed. The demand elasticity, in the short term, may not change and the desired tax revenue might be achieved. But further tax increases can also push taxpayers to look for alternatives to escape the burden causing the government to net less and less revenue.
Kenya introduced an excise tax on airtime in 2003, and since 2013, it has introduced and reworked taxes on various goods and services including mobile phones, computer hardware, software, and, more recently, retail financial transactions.
The proposed amendment will further increase the cost of using a mobile phone and will significantly make things harder for everyone depending on the same. Coupled with the proposed fuel increase as well as the gaming and money transfer taxes revision to 7.5 percent and 12 percent, respectively, Kenyans are bound to have some stressful months henceforth.
Evidently, the proposed amendment was not preceded by a thorough analysis of optimal taxation for an excisable product and the likely change in consumer behavior for the financial services. Moreover, the bill did not factor in the marginal contribution to tax effort it is geared to raising. Otherwise, it would have known the risks to stall progress on digitization are high while the scope to boost total tax revenue increase is limited.