Mobile phone-based financial services have produced celebrated economic outcomes for Kenya and other African countries, enabling completely cashless transactions across entire market segments of Kenya’s economy. The need to raise additional tax revenues to finance economic development has motivated governments to begin taxing mobile transactions. As mobile banking now takes hold in Africa, the consequences of this policy are concerning.

Raising taxes and broadening tax bases is necessary for governments, but they must also evaluate the negatives of such actions. As tax rates increase beyond the optimal rate, tax revenue declines and the potential for distortion in the market is raised. Excessive taxation on mobile phone-based transactions could potentially reverse the gains for financial inclusion and create an incentive for cash transactions that escape taxation.

Figure 2.6 shows that the growth in electronic payments in Kenya seems to follow economic cycles but has generally slowed from an annual average of 12.2 percent from 2010 to 2013 to an annual average of 7 percent from 2014 to 2017 after the introduction of the excise tax on financial services.

Figure 2.6 Growth in electronic payments in Kenya

The number of mobile phone transaction accounts has been steadily increasing, rising from 1.4 million in December 2007 to 44.3 million in September 2018. Figure 2.7 shows that the number of mobile phone transactions has increased correspondingly over the same period. However, the average value of mobile phone transactions has remained stagnant after the sharp decline noted between 2007 and 2008. The high volume but low average values of mobile phone transactions show that the platform is largely used by low-income earners who mostly transact in small values and are sensitive to transaction costs.


Figure 2.7 Mobile phone transactions in Kenya


Figure 2.8 shows that mobile phone payments are actually a very small proportion of total electronic payments, meaning that they offer limited scope for significantly expanding the tax base. Instead, increasing the rate of taxation on retail transactions coming from low-income earners, who are sensitive to transaction costs, may result in less tax revenue in the future as these earners revert to cash transactions to avoid taxation.

Figure 2.8 Composition of electronic payments in Kenya


A tax on mobile phone-based transactions was first introduced in 2013 via an excise tax at a 10 percent rate. In 2018, the Finance Act increased the excise tax on money transfer services through mobile phones and banks from 10 percent to 12 percent and from 10 percent to 20 percent, respectively. Additionally, the excise tax on telephone services (airtime) was increased from 10 percent to 15 percent.

Levying an excise tax is premised on the assumption that demand elasticities will not change after the tax and so may raise the government’s targeted tax revenue. In most cases, excise taxes are imposed on the strong belief that the product in question is price inelastic. However, time and technological changes show that price can only be inelastic in the very short term. In the medium- to long-term, the structure of demand is likely to change, as will the nature of tax revenue anticipated; as a result, governments may receive less tax revenue and there will be a cost of price distortion in the economy.

For this reason, excessive tax increases beyond the optimal rate may push taxpayers to prefer alternatives to escape taxation, resulting in lower tax revenue for the government. To avoid such effects, analysis of optimal taxation for an excisable product should precede such tax policies.


Source :

Keywords : Africa, News, Economy, finance economic development, mobile transactions, mobile banking