Tanzania: Tax On Mobile Money Transactions - the End Does Not Justify the Means

Last week, the government's proposal to impose a tax on mobile money transactions came into effect, causing an outcry from the public. In explaining the government's decision, the Minister for Finance and Planning, Dr Mwigulu Nchemba, focused on the services that would be provided using the revenues so generated.

They include health insurance for all, providing running water to all schools, and enabling more students to get college education. Nchemba suggests that taking Sh10 from someone who is able to send 1,000 shillings, for example, is a minor cost to pay, considering that Sh10 could end up saving someone's life. It would be hard to find anyone who would be against the government expanding access to health care, clean water, higher education and other social services. However, when it involves a tax on mobile money transactions, the end does not necessarily justify the means.

Listening to Dr Nchemba's interview on KIBWE TV, two things stand out. First: the apparent assumption that money transferred using a mobile device is an individual's "excess reserves." With that mindset, if the government takes Sh10 out of Sh1,000, or Sh9,400 out of Sh1 million, that is a very small price to pay to expand social services.

But we don't know the circumstances of the people sending or receiving the money. For all we know, the person sending Sh1 million is repaying a loan and is short of what they were supposed to pay back... So every shilling counts. Moreover, with this approach, one could extrapolate that the government will end up taxing ALL savings!

Second, this tax is a form of community fund-raising activity for development. Somehow, people should feel good and proud of their contributions. If that tax were truly a community fund-raising initiative, it would have been voluntary, with no pre-determined deductions. There is no reason why people should feel good about a tax on mobile money transactions any more than they would feel about other taxes... Unless they were told that tax revenues from other sources are not put to good use.

Note that there is double taxation on some of these mobile money transfers. Imagine a public-school teacher working in Dar es Salaam with a sick parent up-country.

The teacher's salary is taxed - as it should be. Out of her meagre take-home pay, she sends money using mobile telephony to her parent to help with medical bills.

But the government comes and taxes her a second time. Is that fair?

It is not clear how much empirical work has been done to determine the potential impact of this tax on mobile money transfers. A recent study by the Global System for Mobile Communications (commonly known as 'GSM Association: GSMA')titled 'The causes and consequences of mobile money taxation: An examination of mobile money transaction taxes in sub-Saharan Africa' points out some of the consequences of such taxes. Among them is the following: "Many mobile money users belong to marginalised societal groups, and the negative impact on financial inclusion and broader development goals is significant. This user profile - and the fact that these taxes don't extend to the banking sector - strongly suggests that they are regressive in nature, undermining the fundamental concept of tax equity."

In other words, this tax would increase income inequality. While GSMA is not necessarily a neutral party, its conclusions should nonetheless inspire the government to conduct a thorough study on the short-run and long-run impact of levies on mobile money transactions, in the context of the whole tax system.

The economy is integrated. An increase in tax, or an introduction of a new tax in one area will, inevitably, have an impact on other sources of tax revenues.

The government must strive to increase and otherwise improve social services. This requires careful examination of where it has placed its budgetary priorities, and where it can reduce wasteful spending. It could also require overall higher taxes.

However, while high taxes on mobile money transactions may be a convenient tax window, it may lead to a slowdown in economic activities - and exacerbate inequality in the country.

Richard E. Mshomba is Professor of Economics, La Salle University, Philadelphia, Pennsylvania, U.S.A.

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