Kenya’s mobile sector has experienced significant changes in taxation in recent years, impacting both consumers and the government’s revenue. The excise duty on mobile services has steadily increased, making Kenya’s tax rates among the highest in Sub-Saharan Africa (SSA). Recently, an analysis looking specifically at Mobile money revealed that Kenya’s taxes on the sector are one of the highest.
A broader analysis of the mobile sector in Kenya reveals that the country’s taxes are quite high across the sector. In 2018, the excise duty on mobile services rose from 10% to 15%. Further, a revision on the same taxes was done in 2021 and it was increased to 20%.
To paint a picture in terms of revisions, Kenya has made 7 changes to taxes affecting the mobile sector in just 5 years. 4 of the revisions have led to an increase in tax rates on the mobile sector. For instance, in 2021 the Government of Kenya (GoK) did not stop an excise duty increase. In the same year, GoK increased Corporate Income Tax (CIT) on industry operators from 25% to 30%.
Mobile Sector Contribution to Kenya’s GDP
Mobile sector-specific taxes play a crucial role in Kenya’s overall tax payments. In a sample of countries included in a GSMA survey, Kenya ranks fourth in terms of sector-specific taxation on the mobile market. Approximately 14% of revenue from the mobile sector goes to taxes and fees. Safaricom for example, paid KES 132.6 billion in taxes, duties, and license fees in the last financial year. This indicates that the mobile sector contributes significantly to Kenya’s GDP, accounting for about 3% of the total GDP. The sector alone contributes 5% of the taxes collected by the Government of Kenya.
Kenya, along with Chad and Zambia, imposes the highest excise tax on all mobile usage at 20%. When accounting for Value Added Tax (VAT), consumers in countries with excise levies on mobile usage face a combined usage tax averaging 27% across the region. Kenya imposes the highest combined usage tax on mobile usage at 36%, followed by Tanzania at 35%. On the same metric, Burundi and Uganda tie at 30% indicating the East African Community is heavily taxing its mobile sector.
The Consequences of Tax Increases
These tax hikes have had consequences, including higher prices for mobile services, decreased usage, and lower-than-expected revenues for the government. Increased taxes contributed to higher prices for mobile services, reducing their affordability for many Kenyan citizens. Data shows the usage of mobile services declined in certain segments. For example, in 2021 revenue collected from airtime tax reduced by 20%. The upward trajectory of mobile subscriptions in Kenya was also halted after the introduction of the excise duty in the third quarter of 2021.
In contrast, the number of broadband subscriptions saw a surge after the onset of the COVID-19 pandemic and continued to rise until the second quarter of 2022. This growth was driven by a strategic decision by service providers to absorb the tax increase on data bundles, rather than transferring it to consumers. However, the growth has since stagnated.
Mobile Money taxes are also impacting the sector that has been growing steadily in the last 3 years. While data is not out, recent reports indicate that clients are voting with their feet and returning to cash payment. This was after Mobile money operators passed on the tax increase through increased rates by both Airtel Money and M-Pesa for the case of Kenya. The trajectory is the same for the Tanzania mobile money market.
Affordability on Internet-enabled Mobile Phones
Furthermore, consumer taxes affect the pricing of handsets and mobile services, creating significant barriers to affordability. In Kenya, the price of a basic internet-enabled mobile phone has been affected by these taxes. Recently, during the launch of a smartphone assembly plant in Kenya, industry stakeholders attributed high prices to 60% of Mobile subscribers in Kenya using feature phones. In a previous event, Safaricom’s CEO Mr Peter Ndegwa had attributed low user numbers on the Safaricom app to the high price of 4G phones. Despite these high numbers, GoK went ahead and increased the levy on mobile handsets from 5% to 10% after enacting the Finance Bill 2023.
The taxation of the mobile sector in Kenya is a complex issue with wide-ranging implications. While governments seek to increase their revenues, it is essential to strike a balance between taxation and affordability to ensure that mobile services remain accessible to all citizens. As the digital economy continues to evolve, Kenya and other SSA countries must adapt their taxation strategies to remain competitive while fostering economic growth and inclusivity.
Re-evaluate Mobile Sector Taxation
Usually, tax increases are implemented with the expectation of boosting government revenues. However, they have not yielded the anticipated results. The reduction in usage and the resulting decrease in revenues highlight the need for a re-evaluation of mobile sector taxation in Kenya.
The government is also relying on the digital transformation of governments to facilitate efficient service delivery and improved revenue collection. Through the digitization of payments made by motorists, the Kenya National Transportation Safety Authority (NTSA) experienced a notable surge in monthly revenue. In July 2015, their revenue stood at USD 1.1 million, but by October 2016, it had significantly risen to USD 2 million. This example could make the case that having more people adopt mobile money naturally expands the tax base through effective revenue collection.
As numbers are proving, direct levies on the mobile sector are having the opposite effect.