The death of taxes: Could Africa earn more from mobile by charging less?

Some African countries are coming under pressure from the mobile industry to cut taxes on handsets, who say their coffers could benefit from such a move.
Written by Hilary Heuler, Contributor

There's little doubt the effect of Africa's mobile phone revolution over the past decade has been staggering, with telecommunications investment pouring in and new-found connectivity changing businesses and behaviours in ways no one could have predicted.

But, as telecom companies are quick to point out, Africa still has the lowest rate of mobile penetration in the world, with only 60 percent of the population using mobile devices. Now the industry is trying to tackle the question of tax to encourage more Africans to buy in to mobile, arguing that lower tax would benefit not only telecom companies but also consumers, the economy and, in the long run, state finances as well.

A 2011 Deloitte report (PDF) for the GSM Association (GSMA), which represents mobile operators worldwide, found that one of the biggest barriers to entry for most Africans was the cost of a handset, a cost that is often significantly higher than in the developed world due to import taxes and VAT. Africans pay the highest handset taxes in the world, according to the report, with taxes representing more than 30 percent of the cost in 13 African countries.

This, the GSMA concluded, has not helped the industry develop. "Mobile taxation represents a barrier to consumers' access to telecom services, a key problem in Africa," the report said. "Taxes on handsets are particularly inefficient as they increase the access barriers to consumption of telecommunications services, especially in developing countries."

Nor is it only telecommunication services that are being held back, according to the report. "Since handsets and smartphones may represent the only access to wireless broadband in the developing world, handset taxes may also lead to under-consumption of internet services," it said.

An end to VAT in Kenya

Calls to abolish handset taxes are nothing new. Kenya scrapped VAT on handsets in 2009, and since then penetration rates have skyrocketed from 50 percent to more than 70 percent. Another 2011 GSMA report entitled Mobile Telephony and Taxation in Kenya (PDF), also compiled by Deloitte, found that handset purchases went up by over 200 percent after the tax was dropped.

Apart from the obvious gains to the industry itself, increased mobile penetration has given a boost to the Kenyan economy on the whole, the report found. "As a result of improved coverage, quality of service and affordability, the productivity impact of mobile telephony on the Kenyan economy has increased by over 300 percent in the last five years," it said. "The contribution of mobile telephony to the Kenyan economy has grown by almost 250 percent, while mobile‐related employment has increased by over 30 percent."

More surprisingly from government's perspective, dropping handset taxes has also made a positive long-term contribution to Kenya's state coffers, since mobile products like airtime and internet are still taxed at comparatively high rates.

"The industry contributed a third more in taxes in 2011 than they did before the handset tax was abolished," a GSMA spokesman said. At 10 percent, Kenya still levies one of the highest airtime taxes in the world. Three of its East African neighbors are also among the top ten in terms of tax as a proportion of the total cost of mobile usage.

Uganda's tax

But in neighboring Uganda, similar proposals have gone nowhere.

The last time the issue of handset tax came before Ugandan lawmakers was in 2009 when parliament turned down a proposal to scrap the tax at the request of the finance minister, who claimed that government could not afford to spare the revenue. Since then telecom companies have renewed the call, but lawmakers have so far been unreceptive.

Lysandra Chen, marketing manager for East African mobile phone retailer Simba Telecom, says the discrepancy between the two countries is creating problems for dealers in Uganda, as handset smuggling is on the rise.

"We have been lobbying for removal of VAT on mobile phones in Uganda for the last two years," she says. "A lot of handsets are being imported from neighbouring countries like Kenya and Rwanda, where there is no duty or VAT on mobile phones, through back channels where importers evade taxes or pay very little tax. Therefore, official distributor and channel retail partners suffer as non-VAT paid mobile phones sell for cheaper on the Ugandan market.

"If VAT is removed from mobile phones in Uganda, prices will be more competitive. There will be a level playing field for everyone, and the general population could afford to buy basic handsets."

But Uganda's new 2013-14 budget, unveiled in June, holds out little hope for tax cuts. The finance ministry is under pressure to plug a $214m budget hole that was left when a number of international donors, reacting to a high-profile corruption scandal, suspended aid last year. The new budget raises taxes in ways some analysts have criticized as being potentially harmful to the economy, increasing VAT on fuel and levying new taxes on mobile money transfers. 

According to the GSMA, Uganda, like Kenya, would benefit if the government would use the power of its tax code to nurture the telecom industry over the long term.

"Given the large elasticity of demand for mobile phones, retailers would be kept busy by an increase in demand from consumers" if the handset tax were dropped, its spokesman said. "A 10 percent increase in mobile penetration increases GDP by 1.2 percent, and a doubling of mobile data usage further increases GDP by 0.5 percent. State finances would also be benefit as more handsets in the market would lead to an increased consumption of mobile services, which attract a VAT rate of 18 percent and an excise duty of 12 percent."

Along with Kenya, several other countries, including Senegal, have dropped or lowered handset taxes in recent years. But as most African countries have yet to be convinced of the benefits, further penetration is likely to continue to be a challenge.

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