Sending Ksh5,000 Might Cost Ksh140, Bankers Caution

The National Treasury’s recent proposal to raise excise duty on fees for mobile wallet and bank account transactions in the Finance Bill 2024 has sparked significant debate and concern. This move, if implemented, would see the cost of sending Ksh5,000 via mobile money increase from Ksh115 to Ksh140, a notable rise in transaction fees that could have wide-reaching implications for Kenyans.

Implications for Kenyans

1. Increased Cost of Transactions: The proposed increase in excise duty from 15% to 20% on mobile money transfers and bank transactions will significantly raise the cost of financial services for the average Kenyan. As highlighted by the acting CEO of the Kenya Bankers Association (KBA), Raimond Molenje, this increase will make everyday transactions more expensive. For instance, sending Ksh5,000 will incur an extra Ksh25, bringing the total cost to Ksh140 from the current Ksh115. This represents a substantial financial burden, particularly for low-income earners who rely heavily on mobile money services for their day-to-day transactions.
2. Potential Shift Back to Cash Transactions: Molenje’s concerns about the potential shift away from digital transactions back to cash are significant. The convenience and security of mobile money and digital banking have been pivotal in Kenya’s financial inclusion efforts. Higher transaction costs may deter people from using these services, thereby reversing the gains made in promoting digital financial inclusion. This could result in an increased preference for cash transactions, which are less secure and harder to trace, potentially hampering efforts to formalize the economy and improve financial transparency.
3. Impact on Government Revenue: While the government aims to increase its revenue through higher excise duties, there is a risk that this strategy could backfire. As people move away from digital transactions, the overall volume of taxable transactions may decrease, negating the expected revenue gains from the higher excise rates. This could be particularly detrimental given the government’s ambitious revenue target of Ksh2.94 trillion for the next fiscal year, up from Ksh2.62 trillion this year.
4. Economic Impact: The increased cost of financial transactions could also have broader economic implications. Businesses that rely on mobile money and banking services might face higher operational costs, which could be passed on to consumers in the form of higher prices for goods and services. This inflationary pressure could further strain the already stretched budgets of ordinary Kenyans.

Broader Tax Changes

In addition to the increased excise duty on transactions, the Finance Bill 2024 proposes other significant tax changes:

1. Introduction of VAT on Financial Services: The introduction of Value Added Tax (VAT) on various financial services, including forex transactions, cheque processing, and the issuance of securities, will further increase the cost of these services. VAT at 16% on the issuance of credit and debit cards and other financial instruments could make these services prohibitively expensive for many Kenyans, further discouraging their use.
2. Impact on Telecom Services: The proposed increase in excise duty on mobile airtime and data charges from 15% to 20% will raise the cost of telecommunications services. This is likely to impact not only personal communication but also businesses that rely heavily on mobile and internet services for their operations.

Government’s Revenue Targets and Fiscal Policy

The government’s push to enhance tax collection is driven by the need to meet its ambitious revenue targets. With the current fiscal year’s revenue collection falling short of targets, the proposed tax changes are part of a broader strategy to increase tax revenue to Ksh2.94 trillion in the next fiscal year. However, the success of this strategy depends on the elasticity of demand for the taxed services. If the increased costs lead to a significant reduction in usage, the expected revenue gains may not materialize.

Conclusion

The proposed increase in excise duty on mobile wallet and bank account transactions in the Finance Bill 2024 has far-reaching implications for Kenyans. While the government aims to boost revenue, the potential negative impact on financial inclusion, transaction volumes, and overall economic activity cannot be ignored. As policymakers debate these proposals, it is crucial to consider the balance between revenue generation and the economic well-being of citizens. The feedback from stakeholders like the Kenya Bankers Association highlights the need for a careful assessment of the potential consequences to ensure that the tax policy supports rather than hinders economic growth and financial inclusion.