Gains made to advance financial inclusion in Kenya will likely be erased as a result of continuous higher taxation of mobile money services according to Njuguna Ndung’u, former Central Bank of Kenya Governor.
In a paper released Tuesday by Brookings dubbed ‘Taxing mobile phone transactions in Africa Lessons from Kenya’ 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 payments and financial inclusion.
“A higher tax rate on low-level retail electronic transactions mostly levied on low-income earners that are sensitive to transaction costs may discourage the use of mobile phone-based transactions, incentivizing them to revert to cash transactions to evade taxes and so less tax revenue. This trend will deal a big blow to the financial inclusion success witnessed so far,” he said.
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According to Ndungu, any future review of excise tax rates on airtime and financial services should be preceded with a thorough analysis of optimal taxation excise taxes, the likely change in behaviour around financial services, and, above all, the marginal contribution to the tax effort that policy aims to raise.
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Kenya introduced tax on mobile phone-based transactions in 2013 via an excise tax rate of 10 percent through the Finance Act of 2018.
The excise tax on money transfer services through mobile phones and through banks was increased from 10 percent to 12 percent and 20 percent, respectively.
Thus, “The taxation policy on these micro-transactions has the potential to reverse some of the financial inclusion and overall financial gains as well as incentivize people to return to cash.”
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