Why Uganda Should Drop Levy on Internet
Africa ICT Opinions

Why Uganda Should Drop Taxes on Internet

By CPA Zuriat Nakayenga, Senior Tax Advisor

Adam Smith “The Father of Economics” argued that taxes should be proportional to how much a person benefits from living within society.

A good tax system is one that ensures that every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into public treasury.

It is, therefore, a system that yields enough revenue but causes minimum aggregate sacrifice to the people and minimum obstruction to the incentives of production, just like the honeybee which collects nectar from the flower without hurting it.

At the start of July 2018, a dark cloud fell over internet users that mainly use social media for advertising and communication, Excise tax of UGX 200 was introduced as payment for Over -The -Top (“OTT”) services including social media platforms like Twitter, Facebook and WhatsApp et al under the Excise Duty Act.

The directive was that OTT services included applications or apps that offer voice and messaging services over the internet.

In his address, the President of the Republic of Uganda stated that the Excise tax of UGX 200 was to cub on what he termed as “Lugambo” (literally meaning gossip) among social media users who share opinions, prejudices, insults and friendly chats.

The Government of Uganda envisaged collecting a total revenue of between UGX 400billion and UGX 1.4 Trillion annually.

The introduction of OTT followed the passing of a 1 % excise duty on mobile money transactions.

The social media tax received critics from various groups and resulted in people taking to the streets to demonstrate against the tax on grounds that it was unfair to Ugandans.

To avoid the social media tax, most Ugandans opted to use the Virtual Private Network (“VPN”) and wireless networks in offices.

Several humanitarian organisations expressed concerns that the social media tax was an instrument to muzzle freedom of expression and denied Ugandans their basic human right to freely use the internet.

The justification to introduce the social media tax was that the Government needed money to further develop infrastructure in rural areas.

Three years down the road, the Government which had projected to collect revenue worth UGX 284bn from social media by 2019, was only able to register UGX 49.9bn which is just 17.4 % of the annual projected revenue.

With reference to the principles that Economists have laid down that policymakers should take into account in making tax laws such as Convenience, Economical, Simplicity, and ability to pay et al, the Government should consider dropping this Excise duty of UGX 200 on OTT services.

One of the reasons is, it is a consumption tax that can be avoided as evidenced by the number of taxpayers currently using VPN to circumvent the tax.

Secondly, the mode of payment for the tax is rigid, a taxpayer is only allowed to pay daily, weekly, or monthly which has encouraged more VPN usage and less payment of tax.

Evidently, the government has not achieved its objective and the tax is now a deadweight loss since it has caused a decrease in demand for Internet Usage especially for the low-income earners.

The telecommunications industry has been negatively impacted in form of loss in revenue from the consumption of Internet data and moreover, the system of collection and administration of the social media tax contradicts Adam Smith’s four maxims of an effective tax system, fairness, certainty, convenience, and efficiency.

In response to the underperformance of the social media tax, the Government now proposes to drop the social media tax under the Excise Duty (Amendment) Bill 2021 and introduce a 12% levy on internet data.

The bill which proposes the introduction of Excise duty of a rate of 12 % excluding data used for the provision of medical and education services, was tabled by Minister of Finance and Economic Planning and Development Hon. Matia Kasaija before the Parliament.

The proposal aims at countering the effects of social media tax introduced in 2018 to make it more efficient to collect tax off data instead of the social media tax which is highly evaded.

If assented to by the President, this tax becomes effective on 1 July 2021.

Whereas the Government may limit the avoidance of taxes on data, the consumption of data in the economy will drastically drop.

The tax will make consumption of internet data quite expensive for an economy that is in the process of recovering from the economic crisis created by the COVID-19 strict measures and lockdown imposition on non-essential activities.

The likely incidence of tax in circumstances of a tax on internet data would be the final consumer with telecommunication companies being at liberty to transfer a bigger percentage of the burden of the tax to the end-user.

This will, however, depend on the end user’s perception of demand for internet data. If one believes they can do without internet data, we shall witness another migration of users abandoning the service.

What Ugandans should expect if the tax is finally passed, is either an increase in the price of internet data or a decrease in the quantity of internet data or both depending on what the telecommunications will consider as a more viable mode of managing customer response.

One could argue that the Government should not be introducing consumption taxes now when the economy is struggling to recover from the COVID-19 disruptions but rather concentrate on efficiently collecting the already existing taxes by offering taxpayers efficient ways to settle tax liabilities and strengthening progressive taxes.

To avoid further roar and backlash from the general public, the Government should consider dropping both taxes that are likely not going to raise the required revenue.