Rethink taxation of cash withdrawals, internet

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OPINION

By Denis Kakembo

Whereas the theme for Uganda’s National Budget Framework for the financial year 2024/25 is the full monetisation of the economy through commercial agriculture, industrialisation, service sector growth, digital transformation and improved market access, the proposals contained in the tax bills before Uganda’s Parliament for deliberation and enactment into law, effective from July 1, 2024, appear to contradict these objectives.

While public attention and discourse in print and broadcast media have largely centred on the contentious proposal to tax land sale transactions, an equally important yet less-discussed proposal involves imposing an excise duty of 0.5% on the total value of cash withdrawn through payment systems.

Although this duty is not entirely new, as it already applies to mobile money transactions, the broader expansion into other payment systems ignites a fresh debate over the rationale and merits of taxing cash withdrawals more generally.

Taxing cash withdrawals raises important questions regarding economic policy. Although the Government may argue that cash withdrawals represent economic activity deserving of taxation because they involve the movement of funds within the economy, this rationale can be problematic when considering its broader impact on consumers and businesses.

Ideally, taxing only the service fees charged by providers for facilitating cash transfers would more equitably target the economic activity without imposing additional burdens on individuals and businesses.

The high taxes on internet services too, raise concerns given their central role in the country’s digital transformation and payment system operations.

Local internet service providers (ISPs) must deduct a 5% withholding tax on payments to foreign internet connectivity service providers, along with 18% VAT on imported internet services and an additional 18% VAT when sold locally in Uganda.

Additionally, there is a 12% excise duty on the Internet sold to local consumers. The profits ISPs make are further subjected to corporation tax at the rate of 30%.

These layers of taxation significantly raise the cost of internet access, potentially obstructing the nation’s progress towards its digital transformation goals.

The imposition of an excise duty on cash withdrawals raises questions about potential overtaxation and its effects on financial inclusion. With the majority of Ugandans lacking bank accounts, financial technology companies have stepped in to offer services to the unbanked population.

However, taxing cash withdrawals may unintentionally discourage the use of formal financial systems and push consumers toward informal channels.

This shift could threaten economic growth and development by impeding the integration of more people into the formal economy and limiting access to regulated financial services.

While policymakers may argue that the 0.5% levy on cash withdrawals is minimal, the cumulative impact on individuals and businesses should be carefully considered.

For instance, salaried workers already subject to Pay As You Earn (PAYE) taxes face an additional 0.5% tax on cash withdrawals when transferring funds to their mobile money wallets.

Service payments via payment systems could also already have been subject to withholding tax.

Moreover, this tax could undermine financial inclusion efforts, disproportionately impacting low-income individuals who rely on mobile money and payment system transfers as their primary means of transacting.

The added costs may discourage these individuals from engaging with formal financial systems, limiting their access to convenient and secure financial services.

The broader implications of the proposed excise duty extend beyond just taxing cash withdrawals. It sets a precedent that may pave the way for further taxation on financial transactions, potentially including cash withdrawals at bank counters in the future.

As it has been reported in the press before, it is likely the Government may consider this proposal as it strives to boost tax revenues. There should be a deterrent to this.

Therefore, it is crucial for both the Government and Parliament to critically assess the long-term impact of such proposals. The existing levy on cash withdrawals from mobile money platforms introduced in 2018 was already a controversial measure. Perhaps Parliament should even revisit the same in this year’s budget cycle.

While the need to broaden Uganda’s tax base is understood, the Government must balance this with the risk of overtaxing the population, which could hinder economic growth and development. Careful consideration must be given to ensure that tax policies align with broader economic objectives and do not disproportionately impact those who can least afford it. It is imperative to strike a balance between fiscal responsibility and fostering an inclusive economic environment for all Ugandans.

The writer is the managing partner, Cristal Advocates