Last week the Kenyan government announced a plan to apply a 10% excise duty on the fees charged by MNOs for mobile money transactions. This action would risk jeopardizing the mobile money market because it would mean a significant increase of the cost of the services. The tax is introduced through an amendment to Part III of the Fifth Schedule to the Customs and Excise Act, which has been already passed by the Parliament and is now waiting for the presidential assent before entering in force.  The purpose of this post is to increase awareness of this issue and explain the potential implications for the consumer.

What is an excise duty?

An excise duty is similar to a VAT as its value is based on the price of the service. However, unlike VAT, excise duty is applied on the amount sold by an operator, as opposed to being applied to the retail price.

This difference is important because from the perspective of the consumer, the tax is not distinguishable. Operators will be required to pay this tax directly based on the revenue generated by the transactions.

How could this impact the market?

As the operator pays the tax directly, the operator could decide to take the tax hit completely, leaving retail prices unchanged, and to absorb this extra cost entirely, but this would significantly harm its profitability and in the medium term prices would have to rise. Alternatively, the operator could pass part of this cost through, and the burden of the tax will be reflected in a proportional increase of the price of mobile money services for the customer.

Therefore, in general, excise tax either:

• Makes the market less profitable for a provider which would decrease their willingness to invest and develop, e.g., products and distribution networks
• Makes the market prices higher, increasing the barrier for customers to use the service.

Is the transposition of the excise duty on the consumer legal?

The Kenyan Finance Minister Njeru Githae has declared that the duty will not affect the consumer, adding that it will be paid by the service providers.  He went further to warn operators that the government will monitor the mobile operators to ensure they don’t make any secret adjustments to transpose the cost to the customer.

While I am sure that the Ministry will check collusive pricing behaviour, the Minister shall be aware that it would be perfectly rational and economic for operators to increase retail prices by the same amount of the new tax, as it is a legitimate cost increase they are facing. This transposition would be legal.

What’s next?

Mobile money transfer services in Kenya are an integral part of the country economy, with almost 20 million Kenyans using this service. The Central Bank of Kenya estimates that in the first half of 2012 KES 726.23 billion (approximately USD 8.6bn) were transferred through the mobile money platform. It’s hard to understand the rationale of this new tax on a service that is greatly benefiting the whole Kenyan society. Voice services in Kenya are taxed at a rate of 26% ( 16% VAT + 10% excise Duty). Adding this new 10% tax on mobile money transactions will stifle a nascent and important driver of commerce and socio-economic development. Unfortunately there was no consultation or engagement with stakeholders before the amendment was introduced.

The President must assent to it for the tax to become law. Our hope is that he will deny his assent.