Last week the Ugandan Finance Minister, Ms Maria Kiwanuka announced that Uganda is considering introducing a 10% tax on all mobile money transaction fees.  The government said to expects to generate Shs32 billion (US$12 million) annually from the tax.  Despite the potential revenue gains for the government, this tax risks doing more harm than good.

Uganda is a highly competitive market for mobile money, with over 9 million registered clients and six mobile money deployments. How would this policy, if eventually enacted, affect mobile money customers? We can draw some hypotheses based on what happened in Kenya where a similar taxation was introduced earlier this year.

In January 2012 the Kenyan government introduced a 10% excise duty on the fees charged on money transfer services in Kenya. In February Safaricom passed it on its 19 million customers increasing proportionally the fees for most of the M-Pesa transactions. What was the impact of this increase of the mobile money transfers?

Data from the Central Bank of Kenya show that mobile phone based transactions across all networks were worth KShs 142.653 billion. In February, the value dropped to KShs 141.126 billion. This fell again at the end of the quarter to KShs 134.446 in March. This month on month drop does not reflect what happened in the same period last year, when the value increased month on month significantly in Q1. This drop in value is a slight concern as it coincided with M-PESA‘s increase in charges due to the government’s introduction of the new tax. In April the value of the transactions moved through the mobile money platforms started to increase again (KShs 142.609), but it is still below the figure of three months earlier.

Mobile money and MNOs have contributed significantly to increase the number of access points to financial services in Uganda, is helping to achieve the financial inclusion goal, and is contributing towards greater government efficiency (by using mobile technology for the payment of public employees’ salaries and to make social payments, and also by reducing the cost of cash management). If the proposed tax will be applied to mobile money services, it is unlikely that the providers would decide to leave retail prices unchanged and to absorb this extra cost entirely themselves, because this would significantly impact profitability and so we would expect to see a decrease in investments and development of products and distribution networks. The burden of the tax will be probably reflected in a proportional increase of the price of mobile money services for the customer. The proposed 10% tax on mobile money transactions in Uganda risk being a headwind against the development of such a promising nascent market.