In this post, I look at the effect this has had on Internet adoption, how people use the Internet in Kenya and broader economic development.
The opposite of what was intended
Recent statistics from the Kenya National Bureau of Statistics, reported by Business Daily Africa, reveal that tax collections actually decreased by 20%, instead of the predicted increase of 22%. Interestingly this is the opposite of the effect when a previous increase from 10% to 15% in 2018 saw tax revenue increase by a massive 60%. However, that came at a time of rapid growth in Kenyans getting online, which has now slowed, and it occurred during a period of economic growth.
Despite a trend of prices declining year-on-year generally, the tax-inspired higher prices in 2021 came at a time of economic shock during the pandemic, which affected the earnings of many Kenyans and led to consumers limiting their calls and Internet usage.
This in turn caused the revenue growth of telecommunications companies to slow and reduced tax collections.
The reason for excise duties
Excise duties are generally seen as “sin taxes” with the dual aim of reducing demand for products that have negative social or environmental impacts and generating revenue that can be used to fund activities to offset such negative social or environmental impacts. Typical excise duties cover alcohol, betting, or tobacco products across the world, though in Kenya (and many other countries) they have been applied for airtime and also mobile money transactions, even though these overwhelmingly have positive social and economic impacts. Indeed, they stimulate economic growth and create indirect social and environmental benefits.
In fact, in Kenya, airtime and data have become the biggest source of excise taxes ahead of beer, spirits, cigarettes, bottled water, and financial transactions. This is in addition to multiple other taxes on ICT, particularly the burden of paying VAT (currently 16%, though it was reduced to 14% for a year during the pandemic). VAT is also applicable to electronic devices, along with a further 2% Railway Development Levy and 3.5% Import Declaration Levy.
There is also a 12% excise duty on mobile money payments and various license fees on telecommunications companies.
Negative impact
Such taxes not only hinder usage but can also stifle innovation and overall development, as growth in ICT usage correlates with economic growth. In a wide-ranging study, the International Telecommunications Union (ITU) found that an increase of 10% in mobile broadband subscriber penetration yields an increase of 1.5% in the gross domestic product (GDP).
The impact of mobile broadband is more powerful still in developing economies at 2%.
Moreover, ITU economists have more recently established that higher mobile adoption also mitigated the most damaging economic impacts of the COVID-19 pandemic.
The ITU found that an increase of 10% in mobile broadband subscriber penetration yields an increase of 1.5% in GDP.
During the pandemic, the ICT sector was one of the few sectors in Kenya that saw growth in 2020 (ICT was the second fastest growing sector in the economy that year), and played a crucial role in enabling Kenyans to work, trade, study, and get health information online. Yet in 2021, the telecommunications industry’s growth slowed to 9.7% from 12.6% in 2020 (source, Table 2.4) – the increase in taxation that came into effect from July 2021 is a likely contributing factor to this trend.
As Business Daily reports, “Safaricom said although its data income grew impressively by 8.1% to Sh48.4 billion (approx. US$411.2 million), the growth was dampened in the second half of its financial year to March due to the new taxes. ‘Data performance in the first half of 2022 was weighed down by absorbed excise duty adjustments from August 2021, which slowed down industry momentum and price rationalisation,’ Safaricom CEO Peter Ndegwa said in the investor briefing.”
A March 2020 study by GSMA reports that Kenya’s mobile industry and consumers, despite being seen as a frontrunner in Africa, are one the region’s most heavily taxed, inhibiting its potential to grow further and support other economic sectors. It states that while mobile market revenue accounts for 3% of Kenya’s GDP, the sector’s tax and fee payments account for around 6.5% of the government’s total tax revenue.
At the time, GSMA analysed the potentially detrimental effects of a hypothetical increase of the excise duty on mobile services from 15% to 18%, finding that by 2025, tax revenue would decline by US$24 million, and wider investment would decline by US$59 million, subscriber numbers would be 950,000 lower than otherwise, the sector revenue would be US$83 million lower, and GDP would be US$268 million lower.
Last year in Kenya, the 5% tax increase led to a drop of US$63 million in mobile services excise tax revenue compared to 2020.
Last year in Kenya, the 5% tax increase led to a drop of US$63 million in mobile services excise tax revenue compared to 2020.
Increasing taxation on mobile and Internet services is a common trend in Africa. In Uganda, excise duty on airtime as well as Internet data is 12%, in addition to 18% VAT. In Tanzania, excise on airtime and Internet is 17%, in addition to 18% VAT. However, recent increases in mobile money taxes were watered down after public pushback, and in 2021 the Finance Minister proposed removing VAT on smartphones, “to encourage the use of telecommunications services to achieve the target of 80% of Internet users by 2025 from the current 46%.”
Hopefully the evidence from Kenya—and maybe similar evidence related to smartphone sales that may come out of Tanzania—will make countries think twice about whether and how they tax mobile services and devices, particularly if it may conflict their strategies for achieving digital inclusion or a digital economy.
In fact, there is growing economic evidence that the social benefits of digital economic development and closing digital divides exceed that of private sector benefits. The current best practice in policy discussions is for governments to increase support for digital infrastructure rollout and adoption through fiscal instruments.
Slowing growth in mobile Internet adoption
When COVID-19 hit in Kenya, there was initially an increase in mobile broadband connections (up by 8% from March 2020 to September 2020) and smartphone connections (up by 20% from March 2020 to September 2020), compared to their trend line of around 5% growth. But today, only around 60% of Kenyans use mobile broadband on a smartphone, with the high cost of smartphones frequently cited as the biggest barrier.
The price of smartphones has not declined significantly in Kenya over the last several years, having reached a limit of how much cheaper they can be manufactured from their component parts. It might be that only variable costs, such as shipping, distribution, marketing, or taxation can be reduced to make smartphones more affordable. Taxation must be seriously considered.
Even as broadband connection growth stagnates, data usage is also very low in Kenya, with the primary limiting factor being cost. For example, Safaricom is the largest mobile network operator in Kenya, with around two-thirds of the market share. Of their 33 million active data customers, only 12.5 million use more than 100 MB a month including 7.7 million who use 1 GB a month. These statistics are per month, not per day, which might shock many people who would easily use 100 MB a day, and in some cases, 1 GB a day.
This is particularly noteworthy when the vast majority of mobile users do not have a fixed Internet connection at their home or workplace (though some may use data from other networks on a second SIM card), and thus this mobile data usage is their entire usage. Even though Safaricom and other operators are reducing data costs year on year, the costs are still too high for many, with taxation a key part of this.
High taxation on airtime, Internet data, and smartphones is a critical factor restricting deepening penetration, faster growth, and the greater impact of broadband in Kenya. The result is that those who could benefit most from using the Internet — those in more remote areas, those who cannot afford transport, those without employment, those without choice in buying goods and so on — are unable to afford smartphones and unable to use as much Internet as they would like, and are thus unable to improve their lives or contribute to overall economic growth.
When considering taxation, it is crucial to identify an approach that balances economic growth, quality of life, and tax revenue.
This story by Adam Lane, the Deputy CEO, Government Affairs, Kenya at Huawei, originally appeared on Huawei Blog on May 27, 2022.
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