We have previously highlighted the potential negative effects of tax policies implemented in Kenya, Uganda and Tanzania. Mobile money taxes imposed in these countries have been burdensome for the industry’s development and mobile money users, having raised the transaction cost for low-income customers. As a result, the GSMA Mobile Money programme believes that such taxes should be replaced with an alternative approach where taxes should:
- Be proportionate and broad-based rather than sector-specific: Around 26 per cent of taxes and fees paid by the mobile industry related to mobile money taxation rather than broad-based taxation.
- Consider sector and product externalities: In Tanzania, the overall consumption tax rate is 28 per cent; for the tobacco industry, this rate stands at 27 per cent.
- Be simple, understandable, and easily enforceable: In Uganda, multiple taxes compounded the burden on users and created confusion. Public protests, petitions to parliament and industry appeals led to a reduced and simplified tax.
- Avoid any regressive impact on users: In Uganda, after a drop of 50 per cent, it took at least a year for peer-to-peer transaction values to recover to their pre-taxation level.
Our most recent research on mobile money taxation explored the topic from a development angle. Governments’ desire to impose mobile money taxes is largely driven by the need to widen the tax base and raise revenue. However, many governments in low- and middle-income countries have experienced weaknesses in how they formulate and administer tax policies. In addition, capacity constraints within policy research units and the lack of national policy frameworks have led to inadequate assessments of the full impact of mobile money taxes. Collectively, this has led to a negative impact on mobile money users, agents, and mobile money providers business models.
Users on lower incomes are disproportionately affected by mobile money taxes. Based on how these taxes are designed, no allowance is made for an individual’s income status – all users pay the same rate. Resultantly, mobile money taxes end up indirectly taxing income already considered low by national tax legislation. In addition, mobile money taxes can lead to multiple deductions given how transactions flow through the system. For example, an employee receiving their salary net of taxes via mobile money may carry out a range of transactions, e.g., a transfer to a relative, a bill payment or a cash-out. At each stage, the original sum is taxed.
Mobile money taxes can have a noticeable impact – both direct and indirect – on financial inclusion objectives. Direct implications include reduced demand for mobile money services and the likelihood of poorer people resorting to using cash. A key indirect impact is the removal of active mobile money agents, as highlighted by our research in both Uganda and Congo. Mobile money also supports inclusion in other sectors, such as agriculture, education, energy and health. Imposing a transaction tax is likely to have a negative impact on each of these sectors. In addition, within countries that impose mobile money taxes, humanitarian organisations that rely on mobile money for cash transfer payments have expressed reservations about continuing to use the service.
Taxation remains an ongoing area of interest to the mobile money industry at large. Governments have more to gain by supporting the growth of the mobile money sector than by taxing it without understanding the impact of these taxes. For instance, mobile money taxes may affect providers’ business models and profitability. Lower profitability may lead to diminished investment and delayed expansion plans. Given mobile money’s influential role in driving financial inclusion, national financial targets risk being hit by a double blow: reduced demand for mobile money services and lower infrastructural availability for digital financial services. Lower profitability may also shrink the tax base and lower tax collections, frustrating government revenue projections. Overall, inadequate taxes can prevent individuals, businesses, and economies from realising the benefits of mobile money services and limit progress towards achieving development goals.
Find out more about our research on mobile money taxation here.