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EDITORIAL: Why Uganda needs to rethink mobile money tax

Saturday July 14 2018
By The EastAfrican

As the week closed, Uganda was moving to write legislation that would review, by half, the one per cent levy on mobile money transactions that came into force with the start of the new fiscal year.

Coupled with a $0.05 daily Over the Top Tax (OTT) on the use of popular social media services such as WhatsApp and Facebook, the twin fiscal moves attracted an immediate backlash that occasioned both a drop in usage of mobile money services and a rise in popular protest against the revenue measures.

Mobile money has become a key economic enabler, increasing the velocity of money circulation in the Ugandan economy and by extension the earnings of telcos and revenues accruing to the Treasury.

According to the Bank of Uganda, $14.5 billion was transacted through mobile money during 2017, making the telecoms industry the country’s largest taxpayer.

It is that success that perhaps made the industry the target of the new taxes amid suspicions that the telcos were under-declaring revenues.

Yet the economic fallout from the measures was immediate. By some accounts, transaction volumes dropped by as much as 70 per cent within 24 hours of their implementation.

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Although commentators had warned the OTT tax would trigger a migration to Virtual Private Networks (VPNs), regulators had remained adamant until the consequences materialised.

According to a VPN comparison site, the number of Ugandan visitors to one such site rose almost 1,600 per cent between June 30 and July 1.

Faced with the risk of subsequent political fallout, President Museveni ordered a downward revision of the mobile money tax.

The unpopular measures reflect two salient facts: One is the limited understanding of the digital economy by policy makers in many parts of the world and the other is the complexity involved in extracting financial value from new, innovation-driven industries.

It is not so long ago that the French government lost a case in domestic courts to Facebook, when it tried to impose value added tax on the social media behemoth. In Europe, there are calls to redefine these new global digital products and their civil obligation.

Although it was not until May that the wider Ugandan public got to know of the new taxes, the tax on mobile money had been on the cards since January, generating intense debate and opposition within the government.

For instance, the Bank of Uganda is understood to have been opposed to the tax on mobile money because with an informal sector that represents two-thirds of the economy and huge infrastructure deficits, mobile money had become the bridge to financial inclusion of the large unbanked population.

In such a scenario, monetary policy tools are blunted by the large pool of money circulating outside the formal financial system.

Mobile money was launched in Uganda in 2009 but it was not until 2013 that the Bank of Uganda issued its first guidelines to manage relationships between the vendors and consumers of the service.

Though this approach has been criticised by advocates of regulatory control, the central bank adopted a stance that mitigates risk while allowing innovation to thrive and bring new products to consumers.

It now seems regulators will have to allow these innovations to evolve to a point where they can be brought into the tax loop with minimal consequences.

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