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Raising taxation on Internet slows economic growth

Monday September 16 2019

By BITANGE NDEMO
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There is a strong relationship between good fiscal policies and economic growth. This isn’t an opinion but a view supported by several research initiatives.

It is also something that I have experienced in the past as a policy maker.

Two new reports, WHEN THE PEOPLE TALK: Understanding the impact of taxation in the ICT sector and Understanding Women’s Experiences of Social Media Taxation in East and Southern Africa, released by the Alliance for Affordable Internet (A4AI) in March and May 2019, conclude that Africa is taking a wrong tangent regarding policies in the Information and Communications Technologies (ICTs).

Several African countries have imposed, or are in the process of introducing, taxes on over-the-top (OTT) platforms such as Facebook, Twitter and the like. The impact of such taxes is such that mobile Internet becomes expensive and unaffordable.
Owing to the central role that the Internet has come to play in many people’s lives, consumers are fighting back.

An attempt by the Benin Government to introduce a tax on already burdened citizens, led to large-scale online protests that forced the government to reverse the tax proposal.

The report on the impact of taxation says that the “protests helped influence the government’s decision to not implement the tax.”

At the time of introducing new taxes, “the price of a 1GB data plan relative to average monthly income was 7.8 percent, well above the two percent affordability threshold.”

The flipside of increased taxes is that it leads to decreases in the number of active mobile broadband users by at least 20 percent, as the case of Benin shows.

The report estimates that this situation would have led to a $40 million (Sh4 billion) loss in taxation and other revenues across the economy. High tax rates do not always lead to higher tax collection and in some cases, they may undermine economic growth.

Perhaps the key takeaway from the study was the fact that between 2016 and 2018, prior to the introduction of new taxes, network traffic and mobile Internet subscribers increased while prices declined.

This suggests that some policy interventions especially fiscal policies have an adverse effect on revenue and by extension economic growth. There are lessons we can learn from the past, especially where the report correctly notes that “government has had to balance the objectives of collecting taxes, on the one hand, and economic growth, job creation and inclusion of the poor into the information society, on the other.”

AFRICA TRAILING

Disparities in gender incomes and social marginalisation of women have led to Africa trailing other countries on Internet connectivity.

The A4AI study on women has shown that the “greatest barriers to getting people online in Africa is cost, with individuals paying an average of nine percent of monthly income for 1GB of data, compared with 5 percent globally.”

The study has noted that these high costs are intensified in the East and Southern Africa where “some governments recently introduced consumer-facing Internet taxes targeting social media services, making it even less feasible for many individuals to connect. While we know that women are already less likely than men to use the Internet in these countries, there has been little study of whether, or how, these taxes have affected women’s access.”

This is perhaps the first study exploring how Social media taxes are affecting the ability of consumers — especially women in Tanzania, Uganda, and Zambia — to connect and access the Internet’s benefits. The study established that:

  • Participants had little awareness or understanding of the rationale behind the taxes, due to a lack of communication and little public consultation from the governments ahead of the taxes being introduced.
  • The ability of people to pay the taxes depended largely on their socio-demographic status. The taxes are therefore likely to deepen digital inequality between the rich and the poor.
  • One of the main barriers keeping many women offline is skills. The tax is likely to exclude those who could most benefit from the ease of use of select services, widening the digital divide between those with and without digital skills.
  • With higher costs preventing individuals from participating in online discussions and accessing online government services, the taxes were also believed to have a negative effect on the freedom of expression and civic engagement.

It is always prudent to study the impact of policy interventions especially in ICTs to avoid widening of the digital divide. Access and affordability of every citizen is a human right issue considering the fact that connectivity has given rise to new technological innovations such as new digital marketing of rural goods, online learning and creation of local content — especially by and for women — that with time, new enterprises will blossom and contribute not just to economic development, but also to tax to the governments.

CASE OF SAFARICOM

We can learn from the past in order to nurture future enterprises that will contribute to both economic growth and taxes to governments for service delivery and inclusive development.

The case of Safaricom stands out as one of the leading companies in Africa that developed out of an enabling policy environment.

Since inception 18 years ago, Safaricom has paid $6.74 billion (Sh674 billion) in taxes. Today, the company contributes 6.5 percent to the country’s Gross Domestic Product (GDP).

The company supports close to a million direct and indirect jobs. Last year alone, it paid $981.3 million (Sh98 billion) to the government in duties, taxes and license fees.

This phenomenal contribution to economic growth could not have been achieved without an enabling policy environment.

Through a public private partnership, the company partnered with the other players in industry and government to build critical infrastructure that has propelled not just Kenya but all other land locked countries in the region including Ethiopia, Uganda, Rwanda and Burundi.

The government subsidised broadband to Kenya Education Network, a national research network connecting all institutions of higher learning to fuel next generation innovators, subsidised devices for university students and removed taxes from all other ICT devices.

The results were that Kenya has become an innovation hub and now is one of the leading countries with the fastest Internet speeds.

The policies that created the largest telecommunications company by revenue in Africa are increasingly under threat from murmurs of a new tax on social media, taxing broadband as well as devices before we even hit 100 percent mobile phone and Internet penetration.

The studies reviewed here show that it would be unwise to follow those countries that have imposed taxes on ICTs. We may lose the chance of creating another giant enterprise in Kenya and perhaps marginalise women further since they are less likely to enjoy expensive connectivity.

There is no doubt that higher taxes usually translate into higher prices for end users and as the studies have shown, undermine entrepreneurial expansion, which hurts economic growth.

These studies demonstrate why we need a new approach towards taxation of data and ICT services in Africa.

The writer is a professor of entrepreneurship at University of Nairobi’s School of Business. @bantigito