The new digital taxes

The projected revenues may not be realised yet the long-term effects created may be difficult to reverse

COMMENT | NATHAN WERE | The Parliament of Uganda recently passed the Excise Duty Amendment Bill, 2021 in which new taxes were introduced. One of such tax is on the internet requiring users to pay a 12 percent levy on internet data bundles. The new tax is regressive, will hurt internet-driven businesses, and slow connectivity.

The internet tax levy replaces the Shs200 per day Over-The-Top (OTT) services tax that many people had started evading through virtual private networks. At a time when businesses are struggling to remain afloat from the effects of Covid19, employers cutting back on wages and withdrawing benefits, the last thing government should be doing is to front-load citizens with new taxes.

The internet tax is particularly going to hurt internet users; especially enterprises whose business model relies heavily on the internet. It will slow connectivity and breed a culture of tax evasion as people find creative ways to beat this tax.

More than 75 percent of Africa’s population is still offline, according to the Alliance for Affordable Internet (A4AI), the global coalition working to drive down the cost on Internet in low and middle-income countries through policy and regulatory reform.

In Uganda, internet penetration stood at a paltry 24 percent as of January 2020 with about 10 million users. Therefore, to be making the cost of the internet high when nearly 75 percent of the Ugandan population is still offline is regressive.

In 2018 when the government imposed the daily fee of Shs200 ($0.05) on users accessing “over the top services” which included social media platforms, the taxes resulted in at least five million Ugandan internet users going offline. This was largely attributed to the economic burden that the new tax had introduced.

Around about the same time, I was leading a $4 million digital payment program that sought to support agricultural off-takers to transition from cash to mobile payments for farmers. This initiative would help create a digital payment footprint for farmers, build up a base of payment data that would then be used to craft credit scoring models, and improve input financing to smallholder farmers. The initiative would also cut back on costs agribusiness companies were incurring in administering cash payment to farmers and introduce more transparent and seamless payment options.

While the roll-out was going on, with agri-business companies signing-up to start using mobile money as means of paying farmers and farmers getting excited to receive money digitally, the government introduced a 1 percent mobile money tax. That new tax made it more expensive to withdraw mobile money. It forced every one of the farmers who had signed up for the digital payment program to opt-out. The three-year program that would have seen thousands of farmer data aggregated to enhance input financing through credit scoring was ended.

Even though the government later revised this tax, the impact had already been done, everyone had moved on and the donor funds meant for this program relocated to another country.

As the World is becoming a global village and the internet driving automation and innovation, the focus should be on building infrastructure and supporting an eco-system that drives easy access and use of the internet.

Making use of the internet expensive not only hurts innovation but could also widen the digital gender divide – the difference in internet access between men and women – which already stands at 18 percent for Uganda.

If the government is keen on expanding the tax base, then taxes on the internet are not the right path as these will keep away potential technology companies seeking to invest here, push those already here to markets where the eco-system is favorable and incentives are right. The long-term effects created by such taxes may be difficult to reverse and the intended tax projection may not be realised in the end.

Let us make the internet available, keep it affordable, and nurture an ecosystem that might see growth in technology-driven companies and businesses that will in the end become sources of tax for the government.

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Nathan Were is an Access to Financial Specialist based in Nairobi Kenya.

were.nathan@gmail.com