Drop 0.5% on Mobile Money (MM)Tax

TAX

By Priscilla Naisanga

KAMPALA - Resulting from a public outcry and pressure, government has since tabled an amendment bill, Excise Duty Amendment Bill No. 2, 2018 to have the mobile money tax reduced to 0.5% and only limited to withdrawals.

A research carried out by civil society reveals a drop in sales, volumes of money transacted, and profits realised by the mobile money proprietors.

The survey, shows that out of the 48 respondents, 17 (35%) reported an average drop in transaction volumes of 75%. 43 out of the 48 respondents (89.5%) had an average drop in transaction values of 74.5%.

In terms of profitability, 36 (75%) out of the 48 respondents also had a 74.5% average reduction in profits.

Drops in MM sales, money volumes & profits after 1% tax on MM

The survey shows that reducing the transaction value tax to 0.5% only serves to reduce the impact on profits and transaction volumes by 50% to about 37.3%.

Thirty-five percent (17) of the interviewed proprietors had laid off some workers. 33% (16) of the proprietors reported to have closed business due to failure to meet some overhead costs like rent and facilitation of the people they employ in these several mobile money kiosks. 23% (11) had resorted to other businesses like pay way and only easy load. 4% (8) of the proprietors reported to have no coping mechanism but their affinity to closure was high.

Risk of loss of revenue collection and business transaction efficiency
Uganda may incur huge losses from the potential increase in tax revenue if the money collected from the 1% tax cannot compensate for the revenue realised from efficiency gains arising from the use of MM. 

Similarly, the introduction of this now proposed 0.5% tax has discouraged the use of MM for utilities payments. MM has increased transaction speeds and reduced outstanding credit times, minimising the time it takes to collect and inquire after payments.

According to the Bank of Uganda, the power company UMEME reported a 99.1% revenue collection rate in 2014 compared to 94% in 2012.

The increased revenue collection rate was partly attributable to increased MM payments.

Unemployment

The Kampala MM Dealer's Association revealed that by close of June 2018, there were 99,000 active agents countrywide operating Mobile money businesses as companies and the Association accounted for 41,000.

However, by close of July 2018, the Association had an active membership of only 28,700.

The difference (12,300 agents) have been closed (30%) in one month after the introduction of the transaction value tax. According to the Association, every agency/company employs 3 (three) workers on average.

With the closure of 12,300 companies/agents, a total of 36, 900 employees have been rendered jobless in Kampala alone. 

Slow innovation & Financial Inclusion

Taxing the movement of money discourages trade and commerce, it discourages the formalization of the economy and it interferes with financial intermediation.

Additional charges added to Mobile Money in particular threaten the survival of innovative companies in the digital payments space, and make it more difficult for innovators to create new solutions within that ecosystem.

The new mobile money tax services will encourage people to revert to cash decreasing the ability of government, businesses and individuals to monitor and account for economic activities.

Case of Kenya

Kenya has experienced a faster growth in mobile money, transfer services in the world, raised mobile money excise tax from 10% to 12% on withdrawal charges.

Uganda simply raised the tax without with any specific plans pegged to the additional revenue to be collected, Kenya plans to use the funds realized from the levy to fund universal healthcare program that aim to cover all households by 2022.

Recommendations

Introduce excise duty brackets in either of the following scenarios:
1) increase Excise Duty from 15% to 17.5% on all withdrawal fees. This would generate UGX 122bn.

2) Alternatively, instead of imposing a blanket charge, for purposes of equity, CSO's propose that the Government introduces progressive bands in the Excise Duty regime for tax on transaction charges as follows; UGX0-100,000 (10%), UGX 100,000 - 1,000,000 (15%) and UGX 1,000,000 and above (20%).

This will raise UGX 89bn with minimum impact on the poor (excise tax to remain at 10% for the lowest tier) in comparison with the 1% transaction charge on MM.

Introduce interest earns on MM account balances

1) Commercial banks hold escrow accounts with up to UGX 800bn, in order to promote income distribution, MM accounts should earn interest and government can levy 15% tax on the interest income.

2) In the scenario that Treasury Bill yield at 11% interest when banks invest the escrow funds, MM account users can earn interest and government can collect UGX 11bn from interest income on various users of MM accounts. 

Conclusion
Mobile money has facilitated easy movement of money across regions and individuals, introducing extra taxes undermines the progress and successes made in the country in respect of financial inclusion, it hurts the poorest most, therefore it is necessary for Government to salvage the economy by dropping these taxes and resort to other sources of revenue that have less pain on the citizens since these measures have since been found to be counterproductive.

The writer works with Uganda Debt Network.