12% tax on data will drive up costs for businesses

Pressures from the Covid-19 pandemic have elevated the digital economy as a safer means of doing business. Due to health and safety concerns from the coronavirus, online transactions and businesses have become the norm.

But Uganda has now joined a list of other countries in taxing the digital economy going by the 12% levy government has slapped on Internet data starting July 1, 2021.

Ms Josephine Nakiwala, one of the micro and small scale enterprise owners has been passed out after training in using digital platforms.

Ms Nakiwala who was about to start testing the waters in the virtual world will have to incurr more costs in data to run her online business.

A quick computation indicates that Ms Nakiwala will need to spend a minimum of Shs200,000 monthly on data alone. If you compute the 12 per cent tax imposed on data effective next month, Ms Nakiwala currently employing five people, will be parting with an additional Shs24,000 every month, which is nearly half the amount of money she pays for electricity (Yaka) monthly. 

Then there is Abdul Karim Sanya, the managing director of Media Company. Every month, they spend nearly Shs15 million on data alone. With the new 12 per cent tax on data, they will pay an additional Shs1.6 million - an equivalent of a salary for three contract (semi-casual) employees.

This scenario is not specific to Mr Sanya’s company as it applies to most medium sized companies in the country.         

Before that, there was a Shs200 daily Excise Duty rate for Over the Top Services (OTT) which many tax experts say is less harsher than the 12 per cent substitute being charged for Internet data except for medical and educational services.

This tax has been introduced following the growing trend of using data by telecommunications users. The revenue from the taxed services including airtime, value added services is shrinking and hence poses a risk of revenue loss.

Although there is an exemption for those who will be providing medical and education services, there is no basis upon how these will be distinguished.

According to Ms Juliet Najjinda, a tax advisor at PricewaterhouseCoopers, the bigger problem is that the more you consume the data, the more costs you will incur. This will increase the cost of doing business.  

Tax Authority

Uganda Revenue Authority spokesperson Ian Rumanyika said the previous tax regime of the Shs200 Over the Top Tax (OTT) was complicated by multiple rates on various telecommunication services which posed administrative and compliance challenges.

This prompted government to create a harmonised excise duty rate of 12 per cent on airtime and value added services that include “Internet” data. This, however, excluded data on medical and educational services. It also excluded services of mobile money withdrawals and mobile money transfers as well as all international calls.

According to the URA, many Ugandans resorted to using Virtual Private Networks (VPN) and wireless networks in their offices to avoid paying the tax. For OTT, every Ugandan using social media platforms such as Facebook, and WhatsApp was expected to pay Shs200 daily.

He said: “It was very difficult to enforce OTT and that is why the 12 per cent tax was introduced on data. But the main point is to harmonise the different rates and have one single duty rate on airtime, value added services and Internet.”

Expected revenue is about Shs60 billion which is a much lower projection compared over Shs200billion expected to be collected from OTT which returned just about 15 per cent of the estimated revenue.

Giving and taking

This measure is a typical example of giving with one hand and taking away with another. For example, under the National Development Plan III there is a focus on leveraging opportunities for advances in Information Communication and Technology for development. Other government programmes aimed at improving interaction between citizens and government are ICT oriented and with this tax measure, they will be affected, Ms Regina Navuga, a tax analyst says.

This would further affect the efforts to implement the Access to Information law which creates barriers for access to government programmes for the citizens.

According to UCC’s latest (December 2020) Communications market performance report, the number of active internet subscriptions stand at 52 per cent with 21.4 million people, translating into an Internet access reach of more than one active connection for every two Ugandans.

Active mobile money subscriptions are 23 million served by 235,800 mobile money agents. High-speed optical fibre cable covers 3,900 kilometres.

In addition, new industries have been established in the assembly of computers, mobile phones and accessories, and the development of knowledge-based ICT solutions. According to the budget speech read by Ntenjeru County North Member of PArliament Amos Lugoloobi, the ICT Innovation Fund established in 2017 has funded the local development of 115 applications many of which are in use in government and private sector. These include the Academic Information Management System (AIMS) and the e- Government procurement solutions.

But the government measure is in many ways retarding its baby growth by introducing a harmonised excise duty rate of 12 per cent on airtime, value-added services and Internet data, excluding data for provision of medical services and the provision of education services, something Mr David Walakira, a development expert described as a another bluff from the government.

In line with the government’s priorities stipulated in NDP, structures to support ICT development have been put in place. The second phase of the National Backbone Infrastructure was completed and seventy-two (72) Ministries, Departments and Agencies (MDAs) connected.

The national Information Technology Authority Uganda (NITA-U) is implementing the National Data Transmission Backbone Infrastructure and e-Government Infrastructure Project (NBI/EGI). The major aims are to connect all major towns within the country onto an Optical Fibre Cable based Network and to enable MDAs operate available e-government services. Whereas the government may be able to discount its cost, the MSMEs doing business with it don’t have the same luxury. 

Due to the Covid-19 pandemic, the narrative of promoting Digital Trade (e-commerce) is on the rise.

According to Ms Regina Navuga, a tax analyst, as a result of Covid-19 pandemic, the need for affordable and reliable Internet access increased as work, school, trade and many other essential services shifted online.

While Uganda is in support of a transformative Digital Economic agenda, this proposed Excise Duty on the internet might hinder, rather than promote E-Commerce. According to the UNCTAD (2018) Rapid eTrade Readiness Assessment, one of the key impediments to E-Commerce in Uganda is 3As of Internet such as Accessibility, Availability and Affordability.

According to the UN International Telecommunication Union (ITU), in contrast to other EAC partner states, the cost of Internet in Uganda remains high per Gigabyte ($2.67) compared to Kenya ($2.41), Tanzania ($2.18) and Rwanda ($2.18) as of December 2020.

Moreover, in December 2020, African leaders, under the Smart Africa Alliance committed to reduce the cost of Internet by 50% by 2022. Furthermore, it is critical to note that under Sustainable Development Goal (SDG) 9, Uganda, like other UN member states, commits to provide universal and affordable access to the Internet for all by 2020. Therefore, the levy 12 per cent is contrary to these critical aspirations.

Sector players

“We appreciate the government’s need to increase its tax collections. Our tax to GDP ratio is one of the lowest in the region at around 13 per cent, way below the sub-Saharan Africa average of around 20 per cent.

“However, I am not sure the tax on data bundles is the right response. The original OTT tax policy was not effective, as it led to a decline in the number of Internet users and URA also didn’t meet its revenue targets on this tax,” Mr Benon Okwenje, the general manager, Financial Markets Department at Centenary Bank noted in an email response when contacted.

He continued: “While the new tax on data bundles is a much more effective and fair way to extract tax revenue from network operators, the high percentage increase to 12 per cent will almost certainly force network operators to pass on a portion of these additional costs onto consumers.

“This would then discourage Internet usage and thereby be a hindrance to the growth of ICT in Uganda and depress Uganda’s long-term economic growth potential. With the recent effects of the Covid-19 pandemic, we have seen a significant increase in things like digital payments, online platforms and remote working. Therefore, I would have actually expected a reduction in taxes on data bundles as a way of supporting Uganda’s digital transformation.”

Tax obligation

Discussing the highlights of the CMA organised media training last week on Friday, Mr Walakira noted that taxing data in itself is not a bad thing if only it is used to develop the Internet infrastructure which in turn will reduce the cost of data.

However, that is not the case. He said: “If we don’t pay taxes, we think government is doing us a favour by providing some services. So I have no problem with the 12 per cent tax as long as we get a return on investment and learn to demand for accountability.”

Dropping OTT

Shs200 tax dropped

Uganda Revenue Authority spokesperson Ian Rumanyika said the previous tax regime of the Shs200 Over the Top Tax (OTT) was complicated by multiple rates on various telecommunication services which posed administrative and compliance challenges.

This prompted government to create a harmonised excise duty rate of 12 per cent on airtime and value added services that include “Internet” data. This, however, excluded data on medical and educational services. It also excluded services of mobile money withdrawals and mobile money transfers as well as all international calls.

According to the URA, many Ugandans resorted to using Virtual Private Networks (VPN) and wireless networks in their offices to avoid paying the tax. 

He said: “It was very difficult to enforce OTT and that is why the 12 per cent tax was introduced on data. But the main point is to harmonise the different rates and have one single duty rate on airtime, value added services and Internet.”

Expected revenue is about Shs60 billion which is a much lower projection compared over Shs200billion expected to be collected from OTT which returned just about 15 per cent of the revenue.