Uganda’s mobile money tax has triggered poor performance in excise duty collections generated by mobile money transactions in the past three years, as consumers avoided the service all together, serving hard lessons to policy makers and the telecommunications industry.

The tax was introduced in July 2018 to expand the tax base and generate more tax revenues required for financing large infrastructure projects as opposed to expensive, foreign commercial loans mainly sourced from China.

Initial enforcement of a multiple level, one percent excise duty charged on sending, receiving, withdrawals and mobile money deposits left many mobile money clients disgruntled after suffering huge user fees on various transactions.

For example, a mobile money transfer of Ush150,000 ($41) carried a transaction fee of Ush5,000 ($1.40) compared with Ush1,000 ($0.28) charged prior to introduction of the tax.

Although the excise duty rate was adjusted to 0.5 per cent in September 2018 and restricted to withdrawals, many consumers abandoned the mobile money platform for large transactions and opted for either hard cash transactions or agency banking that charge lower user fees.

Preliminary findings by a UN Development Fund study show that 62 percent of all surveyed users were opposed to the mobile money tax.

The study found that the total value of mobile money transactions dropped from Ush7 trillion ($1.9 billion) registered in May 2018 (before the tax) to Ush4 trillion ($1.12 billion) in July 2018, shortly after the introduction of the one percent excise duty rate.

But a quick review of the tax measure in September 2018 pushed the total value of mobile money transactions up to Ush6 trillion ($1.68 billion) in November 2018, a reflection of rebounding customer interest reacting to the lower tax.

Tax revenues collected from mobile money transactions stood at Ush160 billion ($44.8 million) in financial year 2018/19 against a target of Ush120 billion ($33.6 million).

In contrast, tax revenues collected from mobile money transactions stood at Ush100 billion ($27.9 million) in 2019/20 against a target of Ush160 billion ($44.8 million). Tax collections posted by mobile money transactions also recorded a 36 percent deficit between October and November 2020, according to Finance Ministry data — a consequence of the punitive tax regime and negative effects of Covid-19 lockdown measures that have affected several sectors.

“Strong uptake of online banking services during the lockdown period has encouraged banks to facilitate big money transfers and utility payments at no cost to their clients. Consequently, the mobile money tax has turned into a pain against financial inclusion efforts and hurt many poor people,” said Jet Tusabe, Tax Director at BDO Uganda.

Despite strong public grievances against the mobile money tax, the government is willing to retain this tax measure according to Patrick Ocailap, Deputy Permanent Secretary in Uganda’s Ministry of Finance, Planning and Economic Development.

Muhammad Ssempijja, tax partner at Ernest and Young Uganda, argued for the scrapping of the tax.

“The government should have looked at the long-term growth potential of mobile money transactions and their knock-on effect on economic growth and scrapped the tax,” he said.