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Understanding the Consequences of Mobile Money Taxes in Uganda

  • August 29, 2018

  • Kampala, Uganda

Anna Ferracuti, Knowledge Management and Communication Consultant for MM4P


Contact: Karima Wardak, Knowledge and Communication Manager for MM4P, karima.wardak@uncdf.org

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“Financial inclusion is improving in Uganda […]. The improvement mainly came from the uptake in mobile money, and more work needs to be done to broaden the scope of financial services.”

Excerpt from the National Financial Inclusion Strategy 2017–2022, published in October 2017.

It’s Wednesday morning, 11 July, and there are people protesting in the streets of Kampala. They say that #ThisTaxMustGo. The same day, the Government of Uganda announces that it will revise the taxes introduced on 1 July.

What happened?
To meet the U Sh16.2 trillion (US$4.3 billion)(1) revenue target for the 2018/2019 fiscal year, the Government introduced a 1 percent tax on mobile money deposits, withdrawals, transfers and payments(2). When the Excise Duty Act came into force on 1 July at 12 a.m., many Ugandans soon discovered that mobile money transactions had become more expensive.
In contrast, a 10 percent excise duty introduced in 2013 (amended in 2014) on mobile money transaction fees brought tax revenues without causing major changes in the demand for these services. This time, though, it was different. The Government proposed not only to tax the transaction fee but also the transaction value.
A public opinion survey of nearly 3,000 people conducted two weeks after the introduction of the tax revealed that, of the 93 percent of respondents who had used mobile money in the last six months, 44 percent transacted less in July and 47 percent stopped using mobile money completely after the tax was introduced(3). They reverted to using banks and cash. Respondents resoundingly disapproved of the tax: 89 percent and 98 percent of all respondents, respectively, said they did not support or strongly opposed the social media and mobile money tax.
What had been introduced as a tax-boosting measure was endangering the existing tax base.
The day after the survey results came out, the Government clarified that there had been a miscommunication around the mobile money tax. In turn, the Cabinet communicated a decision on 16 July to limit the mobile money tax to withdrawals and to halve the tax to 0.5 percent of the transacted value and sent its proposal to Parliament on 19 July (see the figure for a timeline of events)(4).In other words, if you’re a mobile money user, you’d be good until you withdraw. In that case, you’d receive 99.5 percent of your money.
The Parliamentary Budget Committee is taking 40 days to consider the proposal and, if approved, to send it to Parliament. Since the excise duty was already passed into law, Parliament would have to debate the proposal and pass an amendment to revise the tax to 0.5 percent. It will likely be September before Parliament would discuss and perhaps pass the amended act. In the meantime, mobile money users are still paying the 1 percent tax.

What is at risk?
We at UNCDF have supported the development of digital finance in Uganda since 2013, working with all stakeholders in the country (central bank, mobile network operators, banks, microfinance institutions, agro-processors, etc.). Great progress has been made in the market, with new services launched to answer specific needs in rural areas.
We asked our partners who are using mobile money payments in agriculture, energy and education, among other fields, how their businesses have been impacted since the tax was introduced. The impact has been significant. Here are some stats they shared with us for the first two weeks of July 2018.


Agriculture payments
A growing number of agricultural commodity traders have opted to pay smallholder farmers with mobile money. The payment often represented the farmer’s first use of mobile money and alleviated the pain of handling and waiting for cash payment for both the off-taker and the farmer.
Yo! Uganda, a payment aggregator, has been facilitating mobile payments to coffee, seed oil and dairy farmers since 2015(5). In July, Yo! Uganda saw reductions of 33 percent (value) and 39 percent (volume) in bulk payments to farmers. Aside from bulk payments to farmers, Yo! Uganda noted decreases of 60 percent (value) and 64 percent (volume) in face-to-face merchant payments through Yo! Payments.
McLeod Russel, a major tea grower and processor, has been making digital payments to its estate workers since July 2017 through the mobile network operators Airtel and MTN while taking care of cash out and bulk payment fees. When the 1 percent mobile money tax was introduced, the cost of digital payments became much higher than cash. The company has gone back to flying the money by helicopter to its six estates.


Energy payments
Mobile money has been a major driver of pay-as-you-go financing of solar home systems, placing modern energy within reach for those who have had no or unreliable modern power in their home(6). Since the tax, pay-as-you-go solar providers have seen an average 10–15 percent reduction in mobile money transactions (volume) per customer. Customers want to pay in cash or demand that the system be taken back, putting the sustainability of the pay-as-you-go business at risk and potentially affecting repayment rates and sales volume.


School payments
Mobile money has saved many parents the inconvenience of queuing for several hours to pay schools fees at the bank. Being able to pay school fees on time helps prevent absenteeism since children are sent away if their parents haven’t paid by the deadline. School Pay is a mobile money payment platform that enables payers to use a payment code to pay school fees that go straight to the school bank account. Total transactions passing through the School Pay platform dropped 80 percent in the first two weeks of July and plummeted from 300,000 to 50,000 transactions per month. Transaction value also dropped 10-fold, from U Sh50 billion (US$14 million) in June to U Sh5 billion (US$1.4 million) by mid-July. School fee product innovations such as save-to-pay, loans and pocket money for students are all on hold.


Other payments
Further at risk are 12,000–15,000 daily micro-loans to farmers and 40,000–50,000 monthly transfers to refugees, not to mention the 60 percent of national electricity and water collections that are conducted via mobile money as well as the deposits and micro-loans that some 5,000 savings and credit cooperatives collect and disburse using mobile money.
Where to from here?
Measures that were devised to collect more tax revenue are at risk of endangering potential tax collection in coming years. People are resorting to insecure cash dealings that increase risks, such as losing the ability to track transactions. The cost of doing business in agriculture, utilities, trade services and other industries will increase. What’s more, in excess of 150,000 mobile money agents, especially female and youth agents, are at risk of losing their job. They will lose transaction volumes and ultimately commissions.
While the 0.5 percent tax on mobile money withdrawals could incentivize the circulation of mobile money and deter cash-outs, the digital marketplace in rural Uganda is not mature enough for people to keep money digital. It may even prevent rural people from going digital in the first place for fear of losing money at the point of withdrawal.


If anything, strong public sentiment and steep dips in transaction figures in July show that, in a span of five years, social media and mobile money have evolved into indispensable tools of the trade for everyday Ugandans, especially lower-income people who otherwise would be socially and financially excluded. For women specifically, mobile money has been a safe way to store earnings away from the eyes of family members (7) and to have financial and occupational goals for themselves (8). It remains to be seen how the tax will impact the digital financial service landscape currently served by telcos, banks and fintechs. Let’s hope that it’s for the best and it won’t undo the standing of Uganda as having the second highest rate of financial inclusion in the East African Community.

(1) Conversion rate: US$1 = U Sh3698.5 (Source: https://treasury.un.org/operationalrates/OperationalRates.php, 1 August 2018). Note: This rate is used throughout the article whenever United States dollar equivalents are provided for Uganda shillings.
(2) Eronie Kamukama, ‘New mobile money tax hits agents,’ 3 July 2018. Available from http://www.monitor.co.ug/News/National/New-mobile-money-tax-hits-agents/688334-4644788-fn61wjz/index.html
(3) Anne Whitehead, ‘Uganda Social Media and Mobile Money Taxes Survey Report’ (n.p., Whitehead Communications Ltd, July 2018). Note: All statistics cited in this paragraph are from this source.
(4) The East African, ‘Mobile money tax to be charged on withdrawals only,’ 17 July 2018. Available from http://www.monitor.co.ug/News/National/Mobile-Money-tax-charged-withdrawals-only/688334-4668082-ffr7d2/index.html
(5) Karima Wardak, ‘Uganda Testing Digital in Tea,’ 10 August 2017. Available from http://www.uncdf.org/article/2435/uganda-testing-digital-in-tea
(6) Richa Goyal, Arne Jacobson and Robin Gravesteijn, 'Spotlight: Does PAYGO unlock energy access and financial inclusion?' Available from https://spark.adobe.com/page/iGBgXjIQIGG9F/ (accessed 23 August 2018).
(7) Sabine Mensah and Lara Gilman, 'The gender impact of digital payments,' 17 October 2017. Available from http://www.uncdf.org/article/2702/gender-impact-digital-payments
(8) Tavneet Suri and William Jack, 'The long-run poverty and gender impacts of mobile money,' Science, vol. 354, No. 6317 (9 Dec 2016), pp. 1288–1292
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