| dc.description.abstract | Executive Summary
Mobile phones have the potential to transform peoples’ lives. Their penetration growth in
Kenya has been very encouraging in recent years. Governments play a key role in supporting
mobile communications and wireless data growth and developments through creation of a
favorable environment for penetration growth and backing the emergence of a local content
and service industry. Taxation policies implemented by governments significantly impact speed
of adoption and usage of the telecommunication services, particularly at lower income
segments of the society. While seeking to raise revenue for government programs, revenue
authorities have to consider the implications of tax structures from the viewpoint of broader
national development, beyond the short term tax collection.
For example, handsets and smartphones represent the predominant access to wireless
broadband in Kenya, such that handset taxes may also lead to under-consumption of Internet
services. As devices become more expensive, it is likely that consumers will opt for less featurerich
options, thus reducing the potential impact of ICTs and making the attainment of Kenya’s
national broadband strategy to become a knowledge-based society and economy, among other
target objectives, harder to achieve.
In 2009, the Government of Kenya zero-rated ICTs among other basic goods and services in
order to make them more affordable and in particular for mobile technology, expand the
subscriber penetration. In 2013, the government reversed this decision. Many stakeholders felt
that in as much as reasons provided by government for re-introducing VAT on ICTs were
justified, the decision was seen as being based on partly false data and assumptions and
provide only a short-term fix, thus impacting negatively the growth of the sector and on Kenya’s
role as the leading digital economy in Sub-Saharan Africa. In addition, there were a number of
concerns, particularly around the possibility of slowing down the pace of economic growth
associated with the penetration growth of mobile devices and the use of associated services,
the risk that this could reverse some of the gains made during the tax break, the realistic
possibility of generating more revenue in the longer term if zero-rating remained in effect and
the need to explore other strategic means of generating revenue other than taxing mobile
devices.
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It’s against this backdrop that this study was done to explore the potential effects of this policy
change and make further recommendations based on the findings.
The study aimed to address the concerns of key stakeholders around the changes in the ICT
industry, particularly on mobile devices sub-sector, that could occur as a result of the reintroduction
of VAT on ICT equipment. Further the study explored various related aspects and
attempted to quantify the short term as well as anticipated consequences of the reintroduction
of VAT on the sub-sector.
The study relied on a number of sources generating a rich combination of qualitative and
quantitative data sets. An extensive desk research and literature review of published reports in
the area of taxation of mobile phones in the region was done. A total of 14 face-to-face
informant interviews with key stakeholders, including regulators, academia and policy makers
were done. An additional 13 questionnaire responses from mobile operators, wholesalers,
distributors and software developers were received. A random sample of youths responded to
key questions regarding mobile phone ownership and usage.
A synthesis of the data generated numerous findings that are expounded in the report. Below is
a summary of the recommendations from the study.
Supporting the ICT sector
There is need for the government to support the growth of the ICT industry. CT is the fastest
growing sector in Kenya. The liberalization of the telecommunications sector and affordability
of mobile phones injected competition and innovation into the market to propel growth.
Taxation policies do have a direct and significant impact on the value that people derive from
mobile telecommunication services. This study, similar to other related studies, established that
higher taxes on ICTs and the services they provide run counter to government’s commitment to
improving access to communications. To foster the maturity and rooted establishment of this
sector in Kenya as a regional power, the removal of the tax holiday on mobile and computing
devices is viewed as premature and is discussed further in this paper.
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Dialogue between industry stakeholders
The ICT sector’s cooperation and dialogue is very crucial, not only for taxation but on several
other policy concerns. There is need for establishment of consultative forums with diverse
participation to regularly and transparently discuss key policy topics. The study established that
there are cases of conflicting views on some issues among stakeholders, even within
government entities. The study recommends that consolidation and sharing of knowledge
needs to be enhanced. The government is best placed to provide leadership in creating
stimulating environments for open dialogue. There are case studies from other countries which
give evidence of how collaboration between stakeholders can work to enable the collection of
close to 100% of duties.
Moderate and balanced approach to taxation
Although the penetration of mobile phones appears impressive, research shows that the actual
numbers of unique owners and users is lower, implying that many citizens remain unconnected.
The total cost of ownership of mobile phones is still high, particularly for the less fortunate in
society. Developing and implementing a balanced taxation profile for ICTs would lead to higher
incentives for mobile consumption and purchase choices. It is the desire of stakeholders to
have consumers move up the value chain from basic mobile consumption to more advanced
services driven by the potential of wireless data and internet through mobile devices.
“The government, acting as a gardener, supports the innovators by providing appropriate
financial and other measures(“watering the plant”); by removing regulatory, institutional, or
competitive obstacles to innovation (“removing the weeds and pests”); and by strengthening
the knowledge base through investment in education and research (“fertilizing the soil”).” - The
World Bank.
Regular review of the effectiveness of policies
The nature of tax policies is that they understandably take time to undergo review. However,
given the dynamic nature of the industry and the cascaded effect that fine-tuned policies would
have, it makes it worth considering regular review. The growth rate of the sector, the demand
for services, the facilitating role that the sector plays, the overlapping effect to other sectors,
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and the potential to create numerous opportunities, all point to the fact that careful monitoring
and review of policies in this sector would be worthwhile.
Policy reviews need to be guided by empirical data and be informed by stakeholder feedback.
Appropriate matrices need to be established to help quantify the effectiveness of existing
policies, an input that would then assist when conducting reviews and introducing changes.
Sealing of loopholes
One of the reasons why the revenue authority supports the re-introduction of VAT is because of
the complexity of processing tax refunds and the fact that a number of players exploit
loopholes in the system to unfairly benefit or compete. The percentage of counterfeits in the
country is still high and the telecommunications regulator faces huge challenges policing and
controlling potential criminal activities as a result of counterfeit phones. Switching off such
phones happens further down the supply chain when unsuspecting customers have already
bought mobile devices. Suppliers and mobile operators face challenges regarding interpretation
of the existing tax regime. While others have been frustrated trying to interpret, others have
exploited the unclear aspects.
The introduction of taxation into a system that is not watertight, where the collection and
enforcement infrastructure is not strong enough undermines formal growth of the sector by
enabling tax evaders to exploit loopholes to compete unfairly. | en_US |
