When the National Treasury scrapped the value added tax (VAT) on mobile phone handsets in June 2009, a number of tax experts questioned the ingenuity of letting a possible growth area of the economy off the hook.
Data gathered at the time by audit firm Deloitte however shows the move precipitated a ‘revolution’ as handset purchases soared 200 per cent that fiscal year.
That tempo has never changed; and the Treasury is apparently earning its dividends back as nearly every Kenyan spends on airtime.
The excise tax on airtime grew by 13.4 per cent to reach Sh14.9 billion in the year to June 30, the Kenya Revenue Authority’s (KRA) 2015/16 year-end performance report shows.
The figures come just weeks after the Communication Authority of Kenya released its first quarter data showing that mobile subscriptions hit 38.3 million at the end of March.
It is estimated that an increase of 10 mobile phones per 100 people translates to Gross Domestic Product (GDP) growth of up to 0.6 per cent per year. Studies also indicate that people at the bottom of the pyramid (low income earners) tend to overspend on airtime.
Experts say the 10 per cent excise duty on mobile phone usage is counterproductive as it burdens the poor rather than sharing out the weight with rich households.
“This form of tax is regressive,” said Deloitte East Africa tax director Nikhil Hira. “Generally, it is unusual to levy taxes on services but in Kenya we have the levy on money transfer, banking and airtime usage,” he added in an interview with the Business Daily.
However, according to the KRA financial statements the excise tax on airtime outperformed the Sh9 billion that the taxman collected from a similar levy introduced on financial services a few years ago.
“The recent introduction of the 10 per cent excise tax on airtime may not have dampened the mobile phone usage so far because there has been a compensating tariff fall, but you can be sure the affected firms are not generating enough to invest on development,” Mr Hira pointed out. He added: “If the government believes that mobile phones have a role to play in the economy, then it will have to rethink the tax on services.”
Earlier lobbyists had used the same argument to block a proposal by a taskforce led by former Kenyan assistant minister Kilemi Mwiria which sought to raise billions of shillings for free primary education by taxing mobile airtime and fuel.
Apart from airtime, the KRA raised Sh9.01 billion from the excise levied on bank services, a growth of 57.5 per cent over the previous year.
Generally, KRA collected Sh1.211 trillion just Sh6 billion below the Treasury target. The taxman collected a total of Sh810.3 billion from domestic sources with payroll and VAT remains the largest components.
The government netted Sh312 billion from formal sector workers (Pay As You Earn) while other incomes grew by a modest 7.9 per cent to Sh246.6 billion.
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Credit: Business Daily