The ongoing public participation on the Finance Bill 2023 has revealed more loopholes that could have disastrous consequences for various sectors of the economy.
With the mandatory separation of mobile money transfer services from voice and internet services, the telecommunications sector is set to undergo a transformational shift in earnings.
Safaricom, the market leader, is seeking a tax reprieve based on this anticipated split.
Safaricom, whose petition was presented yesterday to the National Assembly’s Finance and National Planning Committee by audit firm PricewaterhouseCoopers (PwC), argued that the split will force the telco to create a new company to run M-Pesa, with the new entity taking both financial and physical assets and incurring a 30% income tax.
Safaricom claims that this will be detrimental to both the new company and its shareholders.
PWC Associate Director Edna Gitachu pleaded with the committee to amend the Income Tax Act using the Finance Bill to allow related companies to transfer assets at written-down values without triggering a tax incident.
“This transfer has not been occasioned by Safaricom, it’s actually been occasioned by regulatory pressure by Central Bank of Kenya,” she said.
“These two companies will ultimately be owned by the same shareholders so our prayer is that as the transfer of assets is happening, it should be at a tax-neutral position so that we do not have tax being a hindrance to the regulatory requirement by the Central Bank of Kenya.”
Safaricom also claimed that if the company is split, it and other similar service providers will be at a competitive disadvantage, with users facing higher transaction costs.
The cost will be incurred as a result of provisions in the Finance Bill 2023 that propose harmonising excise duty on money transfers by lowering the duty on bank transactions from 20% to 15% and raising the duty on mobile money transfers from 12% to 15%.
PWC, through Tax Partner Job Kabochi, argued that the increase could be detrimental to newly formed mobile money service operators, arguing that the service should be protected from higher charges since mobile money is a financial inclusion enabler for low-income earners.
“In our view there was a reason why the special rate of 12 per cent vis a vis the 20 per cent that applies to transfers by banks and other money agents was there,” he said.
“It was all about financial inclusion. I don’t think we’ve sorted out the problem as a country.
“On the one hand we’ve seen proposals to reduce the excise duty rate on transfers by banks, as well as other agencies from 20 per cent to 15 per cent and on the other we are seeing a proposal to increase the duty rate on transfers through M-Pesa and other mobile platforms from 12 per cent to 15 per cent.
“This is going in the opposite direction.”
Mr Kabochi stated that, while the excise duty rate for transfers by banks and other agents has been reduced, the class of individuals who are supposed to benefit from the special rate of 12% will have to pay more in excise duty.
“We should consider ring fencing of this entity and similar type entities which by regulation are then required to provide this money transfer outside the ambit of cell phone service provider.”
Aside from the division of its services, Safaricom expressed concerns about the taxation of key enabling devices that facilitate service delivery, which are subject to excise duty.
This includes SIM cards, which have a Sh50 excise duty, as well as mobile phones, which have a 10% excise duty.
The argument is that excise duty is a consumption tax imposed on imports to encourage local production, but there is little to no local production for SIM cards and mobile phones.
“The rational as to why excise duty is applied on supply of goods, is to protect local industries as well as to curtail the consumption of a product or service that is seen to be harmful,” PwC said.
“SIM cards are just enablers for the application of tax such as excise duty on M-Pesa, talk time, data for browsing and the likes.”
They said given that excise duty is a tax on consumption, it should be restricted to use of the services and how the individual chooses to use them as opposed to the actual purchase of the SIM card.
“Even if you apply the rational that you’re trying to protect the local industry, we are only able to as a country to provide five per cent of the SIM cards that are needed by our market, in the telco space, so you then miss the point if duty is introduced to protect the local industry.”
In response to the 10% excise duty on mobile phone purchases, Safaricom Head of Venture Development Karanja Gichiri argued that as the government migrates its services to digital and online platforms, access to smartphones will be akin to a human right.
“However, six out of 12 Kenyans do not have access to this type of a smartphone. About 5,000 government services will be deployed through the phone and if nearly 50 per cent of our population will have smartphones, then we are actually creating a form of discrimination and that digital divide in our society.”
Before making submissions and recommendations to the Budget and Appropriations Committee, the Departmental Committee on Finance and National Planning will continue to hear from various stakeholders.
The perspectives expressed by both companies and individuals are expected to be taken into account in the final budget, which will be presented on June 15.
