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Government and Policy

KRA’s New Taxation Strategy On M-Pesa Paybills And Its Economic Repercussions

BY Steve Biko Wafula · October 11, 2024 06:10 am

KEY POINTS

Taxation via mobile payments would necessitate access to sensitive financial data, raising concerns about how this information will be managed and protected. The KRA’s existing track record on data handling has not been free from scrutiny, and this new policy could put millions of Kenyans' financial information at risk, potentially violating their privacy rights.

KEY TAKEAWAYS

The Tax Procedures Act stipulates that taxpayers must have the right to dispute assessments and demand clarifications. If M-Pesa users are taxed without adequate recourse, they may find themselves in a legal limbo with no avenue for redress, further straining public trust in the tax system.

The Kenyan government’s recent announcement to convert M-Pesa Paybills into Kenya Revenue Authority (KRA) tax registers by December 25 presents a significant legal and economic concern. This move appears to be aimed at enhancing tax compliance and broadening the tax base by directly targeting mobile money payments. However, this approach risks infringing on several legal provisions and could harm Kenya’s economic landscape, especially within the digital and mobile finance sectors that have become critical for business and daily life in the country.

First, there are questions about whether this mandate aligns with constitutional requirements around taxation. The Constitution of Kenya mandates that taxes must be levied fairly, equitably, and transparently, yet imposing tax requirements on M-Pesa paybills without a comprehensive legislative framework may contravene these principles. Tax legislation is designed to go through Parliament to allow public participation and scrutiny. Bypassing this process could be seen as undermining democratic principles and infringing on Kenyans’ rights to participate in decision-making, especially on financial matters that affect their daily lives.

Further, such a policy may disproportionately impact small and medium enterprises (SMEs), many of which rely on M-Pesa paybill numbers to handle transactions. SMEs form the backbone of Kenya’s economy, and additional financial burdens in the form of tax requirements could drive many out of business. The Economic Crimes Act and the Fair Administrative Action Act emphasize the need for fairness and proportionality in government actions affecting individuals and businesses. Applying tax register requirements to M-Pesa payments risks being seen as a punitive measure, especially for small businesses that may lack the capacity to meet additional regulatory demands.

Read Also: Tax Appeals Tribunal Upholds KRA’s Withholding Tax Demand Against M-Pesa Foundation

From a privacy perspective, using M-Pesa paybills as tax registers could conflict with the Data Protection Act, which was enacted to safeguard personal information from misuse. Taxation via mobile payments would necessitate access to sensitive financial data, raising concerns about how this information will be managed and protected. The KRA’s existing track record on data handling has not been free from scrutiny, and this new policy could put millions of Kenyans’ financial information at risk, potentially violating their privacy rights.

This policy could also lead to economic distortions by pushing more Kenyans towards cash transactions to avoid the KRA’s scrutiny. By making mobile money payments synonymous with tax tracking, the government risks creating a disincentive for digital transactions. This shift could erode the progress made in financial inclusion over the years, undermining efforts to digitize the economy. If businesses and individuals revert to cash, the resultant decline in digital payments could reduce transactional transparency, making it harder for the KRA to track actual income.

Furthermore, the mandate could infringe on contractual freedoms. M-Pesa, as a private entity under Safaricom, offers a service based on agreed terms between the company and its users. Imposing tax register requirements could alter these contractual terms without adequate consultation or consensus from the users. This could set a worrying precedent, where the government interferes in private contracts without due process or justification, undermining the rule of law and creating uncertainty for investors and service providers.

The economic consequences could be far-reaching, impacting sectors that heavily rely on mobile payments. From e-commerce to agribusiness, M-Pesa is deeply embedded in Kenya’s economic ecosystem, facilitating seamless transactions. This policy could introduce friction in payment systems, potentially leading to a slowdown in economic activities. Higher transaction costs and increased regulatory burdens could be passed down to consumers, exacerbating the cost of living for ordinary Kenyans already grappling with economic hardships.

Additionally, there is the question of whether KRA has the capacity to manage and oversee millions of additional tax registers from M-Pesa paybills. The organization has historically struggled with its mandate, and expanding its reach without building adequate capacity could lead to administrative inefficiencies. Poor implementation could lead to inconsistent tax collection, increasing frustration among taxpayers and creating avenues for corruption and abuse.

Kenya’s taxation laws also emphasize a progressive system where those with higher incomes bear a greater tax burden. Applying tax regulations to mobile transactions indiscriminately could end up taxing low-income earners, thus contravening the principle of progressive taxation. This policy risks hurting the very people it purports to help by widening the tax base without considering the unique challenges faced by lower-income populations who rely on mobile money for everyday transactions.

The policy’s timing, right before the holiday season, may exacerbate the economic impact as Kenyans traditionally engage in heightened economic activity during this period. Many businesses rely on increased sales in December to boost their annual revenues. Implementing such a policy during this peak period could disrupt business operations and reduce consumer spending, impacting the broader economy. This move could also foster resentment toward the KRA and the government, as it may be perceived as an opportunistic ploy to capitalize on holiday spending.

Moreover, the lack of a clear appeals process for taxpayers affected by this policy raises concerns. The Tax Procedures Act stipulates that taxpayers must have the right to dispute assessments and demand clarifications. If M-Pesa users are taxed without adequate recourse, they may find themselves in a legal limbo with no avenue for redress, further straining public trust in the tax system.

Read Also: KRA Intercepts Smuggled Ethanol Worth Ksh 5.5 Million In Mumias

The ripple effects of this policy could extend beyond Kenya’s borders, as the country has long been a leader in mobile money innovation. This mandate could create a precedent that other countries in the region may follow, potentially stifling the growth of mobile money across Africa. Such regulatory approaches risk discouraging innovation and deterring foreign investment in the digital finance sector, which has been a hallmark of Kenya’s economic success.

The ambiguity surrounding the exact implementation mechanics of this policy creates further complications. If this mandate is to succeed, clear guidelines are necessary to outline how transactions will be monitored, what thresholds will trigger tax obligations, and what recourse users have if they encounter errors or disputes. Without such clarity, this policy may lead to chaos in the mobile money ecosystem, disrupting services for both businesses and individuals.

Legally, this policy may face challenges on the grounds of lack of public participation, breach of privacy, and disproportionate application of tax laws. Stakeholders, including mobile service providers and civil society, may challenge the policy in court, seeking injunctions to halt its implementation. If such legal challenges arise, the government could find itself embroiled in lengthy litigation that further disrupts its tax collection efforts.

The broader impact on financial inclusion efforts cannot be overlooked.

Read Also: KRA’s VAT Refunds Processing Timeline Reduces By 60%

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters. He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com

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