TO GO WITH Lifestyle-IT-India-business-village FEATURE by Ammu Kannampilly In a picture taken on November 18, 2010 a neigbhourhood shopkeeper writes down transaction details after transferring money for customers using text commands on a mobile phone in New Delhi. India’s hunger for new technology is as sharp in its countless small villages as in its shiny office towers or shopping malls — and businesses are waking up to an area of massive potential growth. Specific designs being aimed at Indian villagers include a mobile phone cash-transfer system, robust low-energy refrigerators and a clever twist on the humble kitchen stove. AFP PHOTO/Manpreet ROMANA (Photo credit should read MANPREET ROMANA/AFP/Getty Images)
“I, therefore, propose to levy tax on the transfer of money between Mobile Money Transfer Agents and Recipients.” This was said by Finance and Economic Development Minister Mthuli Ncube in his 2019 Mid-Year Budget Review and Supplementary Budget presented last week.
The levy he was talking about is the 2 percent Intermediated Money Transfer Tax that is levied on most electronic transactions, mobile money transactions included.
However, before the latest changes, cash-in and cash-out transactions conducted through mobile money transfer platforms did not fall within the above criterion, hence the tax was not deductible. But all that is set to change and a tax will now be levied.
In his justification, Minister Ncube said “the majority of illegal foreign currency transactions are being conducted through this platform, thereby evading payment of tax and sustaining parallel market activities”.
He could be right. After all mobile money dominate most of electronic transactions, including trading of foreign currency, being conducted in the country at the moment.
But what could be the ultimate impact of such a move?
Lessons from Kenya
Some countries in sub-Saharan Africa view mobile phones as a booming sub-sector easy to tax due to the increasing turnover of transactions and the formal nature of such transactions by both formal and informal enterprises.
The taxation on mobile phone-based transactions and on airtime has already been introduced in Kenya and is spreading to other African countries. Uganda did the same in August last year when Government imposed a 0,5 percent levy on all withdrawals on mobile money and the reaction was negative. There was a drop in transaction volumes to Shs14,8 trillion.
The increasing tax burden on the sub-sector and the consumers, though, has raised concerns that the massive gains made in financial inclusion in developing countries made possible by retail electronic payments platform via mobile phone transactions may be reversed — resulting in a return to cash transactions, wrote Njuguna Ndungu.
In a paper titled “Taxing mobile phone transactions in Africa: Lessons from Kenya” Ndungu wrote that taxation on mobile phone airtime and financial transactions may reverse the gains on retail electronic payments and financial inclusion.
“A higher tax rate on low-level retail electronic transactions mostly levied on low-income earners that are sensitive to transaction costs may discourage the use of mobile phone-based transactions, incentivising them to revert to cash transactions to evade taxes and so less tax revenue.”
This trend will deal a big blow to the financial inclusion success witnessed so far, wrote Ndungu.
He argued that poorly designed tax policy will have poor outcomes on tax revenue and market distortions will drive consumption behaviour on an undesired path.
“So any future review of excise tax rates on airtime and financial services should be preceded with a thorough analysis of optimal taxation excise taxes, the likely change in behaviour around financial services, and, above all, the marginal contribution to the tax effort that policy aims to raise.”
According to the paper, taxation on mobile phone airtime and financial transactions may not expand the tax base significantly.
“The data so far available shows that the contribution of mobile money-related taxes is less than 1 percent of total tax revenue, a negligible contribution to Kenya’s total tax income, at high economic costs. These lessons are not just relevant for Kenya but also for other countries in Africa with such tax propositions,” reads the paper.
Ndungu said introducing and increasing taxes on mobile phone transactions may risk stalling progress on digitisation and fiscal policy design as well as revenue administration.
“No doubt, African governments need to raise taxes and broaden their tax bases, but they must approach tax policy with a discerning eye,” reads his paper.
Taxes have effects on behaviour outside the immediate monetary transactions. Most excise taxes have a Laffer curve, that is, as tax rates increase beyond the optimal tax rate, tax revenue actually declines, and the potential for distortion in the market increases.
Economist Arthur Laffer argued that changes in tax rates have two effects on revenues: the arithmetic effect and the economic effect. The arithmetic effect is the static effect and is what everyone thinks of when considering a change in tax rates; that is, an increase in tax rates is expected to generate more tax revenue. The economic effect is less obvious, as it considers the incentives and disincentives the change in tax rate creates around related economic activities.
Therefore, a major concern around taxation on mobile phone-based transactions is the potential for a reversal of the gains of financial inclusion and the creation of an incentive for cash transactions in order to circumvent this taxation, Ndungu claims.
He argues that poorly designed tax policy or, really, any poorly designed policy will lead to poor outcomes. As noted above, once the optimal tax rate is reached, a further increase in the excise tax rate generates less and less tax revenue.
We already have several examples in Kenya, where an increased tax results in less and less tax revenue as well as a distortion in the market.
This is food for thought for Minister Ncube.