The burden of taxing ICTs

Kenya has in the past few years showed promise of renewed innovative capacity, especially in the Information Communication Technology (ICT) sector.  

But the new tax regime precipitated by the East African Community (EAC) tax harmonisation is about to reverse all the gains we have made thus far.  

New taxes on hardware especially are beginning to hurt, and multinational corporations (MNCs) that had started moving their headquarters to East Africa are reconsidering their decisions.

The grey market is beginning to pick up, and ultimately, as various studies have shown, tax collections will decline as a result.

ICTs are increasingly becoming a critical component of our economic growth. Several studies, particularly from the World Bank, show that for every 10 per cent penetration, the Gross Domestic Product (GDP) grows by 1.3 per cent.

Several studies link the level of ICT diffusion to economic growth. The strongest such claim came from the World Bank’s December 2010 Kenya Economic Update. The report basically argues that ICT has been the main driver of Kenya’s economic growth over the last decade.

Since 2000, Kenya’s economy has grown at an average of 3.7 per cent. Without ICT, growth would have been a lacklustre 2.8 per cent — similar to the population growth rate — and income per capita would have stagnated.  

So ICTs were responsible for 0.9 of the 3.7 per cent annual GDP growth, and for all of Kenya’s GDP per capita growth. Put another way, ICTs were responsible for roughly one-quarter of Kenya’s GDP growth during the first decade of the 21st century.

Several studies, notably the GSMA 2013 report “Taxation and the growth of mobile services in sub Saharan Africa”, have proven that tax receipts could be greater if mobile ownership-specific taxes, i.e., all non-VAT taxes relating to handsets, subscription and connections, were removed.

MOBILE NOT A LUXURY

For example, for the five-year period 2007-2012, the report estimates that tax receipts would increase by $930 million, rising from $28.9 billion to $29.9 billion, if the governments of Nigeria, Kenya, Tanzania, Cameroon, Ghana, Zambia, DRC, Republic of Congo, Gabon, Madagascar, Burkina Faso, Chad and Malawi removed all non-VAT mobile ownership taxes in 2007.

The report concludes that mobile phones are a vital socio-economic necessity in modern Africa. It is therefore incumbent upon governments to view their proliferation across all societies as a priority.

Imposing luxury taxes on mobile consumers is no longer appropriate. Poorer sections of society are hit hardest by the regressive taxes that widen the digital divide.

Governments that levy luxury taxes on mobile consumers should urgently review such policies in consultation with the industry and other economic and taxation experts.

By removing luxury taxes on mobile consumers and moving to a more optimal tax structure, many millions of Africans will be able to afford to connect to and communicate on mobile networks for the first time.

Governments will reap incremental increases in tax payments from the industry; and wider economic and social benefits will be enjoyed by all.

STALLING 'RAPID GROWTH'

This argument is also true for all other ICTs, including the Internet, which is increasingly becoming essential in all households. There is evidence from the World Bank as well as from the International Telecommunications Union that greater Internet penetration leads to greater economic growth.

Indeed, when Kenya removed taxes from ICT hardware in 2009, both Internet and mobile penetration accelerated. Within a five-year period, mobile subscribers jumped from 19 million in 2009 to 31 million in 2014.

Similarly, Internet penetration jumped from 21 per cent in 2009 to 45 per cent in 2014. This rapid growth that would have bridged the digital divide between urban and rural folks would stall if this tax harmonisation exercise is not stopped.

The affordability of ICT devices such as PCs, tablets and mobile phones are important contributing factors in evaluating the potential for broadband adoption and increased penetration.  

The market research firm IDC has undertaken an analysis of Colombia in which consumption taxes (including VAT) were reduced and the effects on PC adoption observed.

LAPTOPS AREN'T CIGARETTES

The results demonstrated a positive correlation between the reduction of consumption taxes (in fact zero-rating VAT for PCs below a particular price point) and a resultant increase in PC purchases. Throughout the period where consumption taxes (in particular VAT) had been reduced, the growth in PC sales for Columbia far exceeded the average regional growth.

Concerning the report "Digital Drag: Ranking 125 Nations on Taxes and Tariffs on ICT Goods and Services" released last week, Robert D. Atkinson, the president of the Information Technology and Innovation Foundation, said the following:

“It's one thing to tax things like cigarettes and alcohol at a higher rate because it makes sense for governments to want to limit consumption of these kinds of products. But to do this for one of the most important technologies to drive productivity and innovation is self-defeating, ” he told the New York Times.

The report, which ranks Kenya among the top 50 offenders, found at least 31 countries, most of which are in the developing world, are imposing high taxes on top of other sales or VAT.

AGENDA 2063

This is threatening to impede economic growth and slow consumers' adoption of smartphones and broadband Internet. This will also undermine the uptake of other essential hardware such as PCs and laptops when the country has been gearing up to enable each and every child in school to have access to such hardware. These finding mirror earlier findings by the Alliance for Affordable Internet.

GRAPHIC: Top 50 Nations that are undermining their economies through taxes on ICTs

East African states belong to the African Union (AU), which is seeking to find ways of leveraging ICTs to achieve its Agenda 2063 Aspirations. During the Africa ICT week in 2012, African heads of state and governments of the African Union adopted Agenda 2063, which contains seven aspirations for "the Africa we want"

1. A prosperous Africa based on inclusive growth and sustainable development

2. An integrated continent, politically united and based on the ideal of Pan-Africanism and the vision of Africa’s Renaissance.

3. An Africa of good governance, democracy, respect for human rights, justice and the rule of law

4. A peaceful and secure Africa

5. An Africa with a strong cultural identity, common heritage, shared values and ethics

6. An Africa where development is people-driven, unleashing the potential of women and youth

7. Africa as a strong, united and influential global player and partner

COSTLY VACILLATIONS

Almost three years since the resolutions were adopted, the African Union Commission (AUC) is now seeking stakeholder input and comments on how the "ICT Sector" would contribute to these aspirations:

1. How ICT can contribute to each aspirations

2. How to set up a regular AU and the African stakeholders coordination mechanism to develop and monitor continental projects

3. How to tap on our own African (financial) and human resources to implement our continental programs

Stakeholder contributions will form part of the final documents for the AU Summit.  

My only fear is that this may turn out to be another frustration like the one we went through in trying to connect Africa to the rest of the world through fibre. Africa’s ICT infrastructure was debated for more than 40 years.  

Africa spent millions of dollars in discussions that far exceeded the cost of connecting the continent to the rest of the world. We are champions when it comes to beautiful reports that rot on the shelves unimplemented. We need not repeat such vacillations.  

In building of the TEAMS cable, Kenya overcame the indecisiveness that had afflicted Africa at the risk of antagonising its neighbours, but the outcome was excellent and one that helped create the confidence to see more cables link to the region.   

DECISIONS, NOT DISCUSSIONS

This was a bold decision we took with Hon Mutahi Kagwe, by booking a meeting with President Mwai Kibaki along with the then Finance Minister, Hon Amos Kimunya. We told them we should break away from the East African Submarine System (EASSY) and do our own thing.

This was incredibly risky — it would expose us to more cost and could annoy other countries in the region. The President asked us to explain our ideas to a bigger group — focusing on how better access to the Internet could build the economy. We invited him to this meeting too, and to our surprise he stuck around for the whole meeting!

We received formal backing to look at new options. We packed our bags and flew to the Middle East to look for partners. Within two years — by mid-2009 to be precise — we had landed the TEAMS cable that provided the vital bandwidth that Kenya needed.

The AU Commission does not need many contributions to table in the next summit.  They need just a few words, such as “Member states should desist from undermining ICT growth through punitive tax regimes”.  

ENVIABLE LEADERSHIP

I have demonstrated the positive effects of supportive policy frameworks with a liberalised market that in the years after the TEAMS cable came on stream, we more than doubled the number of Internet users in the country.

Since then, our policies to increase bandwidth even further, drive down prices and stimulate relevant local content have seen Kenya become one of the most connected countries in Africa.  

Today, Kenya has the largest amount of international bandwidth per user in Africa, with 24 kilobits per second per user; South Africa follows at 19 kilobits per second per user. This is an enviable leadership position that we must not undermine through retrogressive taxes.

ICTs have brought unimaginable efficiencies in our economy. Mobile money has greatly reduced poverty at the bottom of the pyramid as it enables new enterprise opportunities.  

Just a few days ago President Kenyatta launched cashless payments for the matatu industry. Although this would greatly benefit KRA in improved tax collection on matatus, a tax on enablers in this sector goes to undermine the trajectory the President put the country on.  

ELDORET GREY MARKET

I find this incredibly frustrating: that on one hand we want to do things that will change the entire world, while on the other hand we make every effort to undermine every good intention.  

When the Agenda 2063 aspirations were being read in Addis, we all applauded, but we came home to set the stage for effectively destroying the goose that lays the eggs through taxation.  

We must lead East Africa in showing that taxing the ICTs would be counterproductive. The studies have shown that taxing ICTs undermines efficiencies and growth, but more importantly we are watching as the grey market takes root through Eldoret.  

It is my considered prayer that our leadership reconsider the ICT tax issue and reverse the policy.

As Albert Camus said, “Note, besides, that it is no more immoral to directly rob citizens than to slip indirect taxes into the price of goods that they cannot do without.”

Bitange Ndemo is a senior lecturer at the University of Nairobi's School of Business, Lower Kabete campus. He is a former permanent secretary in the Ministry of Information and Communication. Twitter: @bantigito.