James Saaka - Executive Director, National Information Technology Authority-Uganda (NITA-U)
James Saaka - Executive Director, National Information Technology Authority-Uganda (NITA-U)

This week, on January 24, James Saaka the Executive Director, NITA-U  – while appearing before the Committee on ICT to discuss the Budget Framework Paper FY 2018/19 – proposed a removal of taxes on smartphones.

According to New Vision [print, page 6] of January 25, 2018, Saaka told the committee headed by Annet Nyakecho (Tororo North County) that in a bid to increase accessibility of smartphones, NITA-U in conjunction with the ministry of ICT & National Guidance have agreed to bring a proposal to Parliament to remove taxes on smartphones.

While as NITA-U did explain that this accessibility to smartphones will lead to an increased usage of government e-services – which NITA-U has been working on tirelessly, I think this won’t be the case. The immediate, medium and long-term beneficiaries in this are not NITA-U itself. For example, how many people with smartphones already visit those e-government platforms?

Currently, there are various parties that the taxation on smartphones affects both directly and indirectly. These are; telecoms, phone dealers [both authorized and non-authorized], [smartphone] app developers, end users, Uganda Revenue Authority and others.

In this writing, I provide a breakdown of who stands to gain and lose. Though, in the long-run, all stand to gain. Even NITA-U, though not directly in form of people using government e-services.

THE WINNERS

  1. Telecommunication Companies

It is no longer a secret that telecoms are now betting on deriving their biggest chunk of revenue in the coming years from data and digital products. And, consumption of internet data has spiralled in the past few years.

For example, while reporting [PDF] in their 2015 performance report, MTN Uganda – the biggest telecom company in Uganda with an estimated 53% market share, indicated that it experienced a “17.4 percent increase in data revenue that contributed 28.3 percent of the revenue”. Fast forward, to 2016, the telecom reported [PDF] that “Data revenue alone rose by 29.2 percent to Shs. 77 billion from Shs. 60.8 billion in 2016”.

This was attributed to an increase in data traffic and good growth in data bundle adoption.

Similarly, Airtel Uganda, the second largest telecom after MTN Uganda with an estimated 38% market share, reported that “value-added services that include voice mail, phone back-up and postpaid bill payment, and data saw their revenue more than double from Shs169.6bn to Shs306.28bn[PDF] in the period of 2016.

Clearly, it doesn’t take rocket science to understand that the future revenue for the telecoms is internet data and digital services (which also depend on data). This, therefore, implies that telecoms need as many smartphones in peoples’ hands as possible.

Because, as you already guessed, a person with a smartphone has more internet data needs compared to one with a basic feature phone which uses USSD. But, out of “25 Million mobile phone subscribers, you have only four million with smartphones,” according to Saaka.

Therefore, with the rise of messaging and social platforms, the biggest winners in this proposed tax removal on smartphones are the telecoms. Because of the direct positive correlation between internet usage and a smartphone.

2. App Developers

There was a debate on whether reducing taxes on smartphones will actually drive an uptake in the usage of local applications. Barbara Birungi, a co-founder of Hive Colab and Witu called it “super good news” for the developers. Adding that “if you are a startup that built an app for [a] smartphone, it’s looking brighter” because “more users will come on board soon”.

Well, some people like Stephen Ssenkomago – a member of ICTAU, defer in opinion. Stating that “the challenge [for local apps] is not smartphones but [the] utility of the apps”. He argues that the “affordability of “smartphones” has not been a blocker for [the] adoption of apps in the country”.

Though there’s no direct correlation between smartphone affordability and adoption of local applications, my argument is that it is a significant factor in its own right. Just like affordability of internet data bundles is.

Reaching full-scale adoption of local apps will require a lot of factors to align, and affordability of smartphones is one of them. Otherwise, do you expect those to use your application to run it on a Nokia 105?

So, definitely, App developers are beneficiaries of this. But, as Stephen argues, it is only those whose apps will solve a real need that will benefit.

3. Energy Companies

According to this report from GSMA, “In 2015, Fenix International partnered with MTN Uganda, to provide ‘free’ smartphones to individuals who purchased the solar company’s power systems”.

Similarly, M-Kopa has a “smartphone partnership” with Safaricom. The report indicates that the solar energy company “began offering smartphone loans in 2016 for consumers who had completed their payment plans on their solar home systems”.

Keep in mind that these energy companies are targeting people who are at the bottom of the pyramid – who others prefer to call the “can’t afford to spend a dollar a day” or as the report called them, “rural poor” and “rural working poor”.

To this group that these companies are targeting, even a five dollar change in the prices is significant. This is a price-sensitive group. Now, imagine scrapping VAT and Excise duty on imported phones which are 18% and around 10% respectively.

Fenix International has been able to grow from 100,000 subscribers at the start of 2017 to over 150,000 by close of 2017 in Uganda, according to sources I spoke to. Similarly, M-Kopa has been able to reach over 300,000 homes in East Africa as of mid-2017.

All these people they are reaching, as pointed out up there, are bottom of the pyramid. Imagine if the smartphones were more affordable? So, yes, clean energy companies stand to gain. A lot.

3. Authorized Distributors

According to the same GSMA report referenced above, “in 2016, Kilimall Uganda partnered with a global smartphone manufacturer Infinix Mobility, to launch the Infinix Note 3 for (~$148) and Hot 4 (~$115) in the Ugandan market.”

The report also adds that “Tecno Mobile has established a franchise retail network that has been successful in providing low-cost smartphones across Ghana, Cameroon, Nigeria, Mozambique, Kenya, Tanzania, Uganda & Ethiopia since 2010”.

Though, the biggest competitor to these authorized or licenced distributors is Mutaasa Kafeero, OLX, Jumia Deals, Liquidation Uganda and your friend who wants to dispose of their old phone. As it is currently, there’s a huge price difference between a new phone and a second hand – which is even less than a year old – of the same model and brand.

Removing the taxes won’t match the prices but would reduce the price difference significantly. This will allow one to have a luxury of comparing the two.

So, authorized distributors, too, stand to gain from this. Given that most people that buy second hand phones do that solely based on the price. And, in the end, Transsion Holdings, the parent company of the Tecno and Infinix brands will be smiling.

4. End-users

Definitely, the first beneficially are the end-users. The people that want to buy the phones. A reduction in the new phone prices will automatically imply a reduction in the prices of the used phones. Say, if one can access a brand new phone at UGx. 100,000 (roughly USD 30), then you have to have a very lowly priced used phone to entice them.

5. Facebook and Co.

Saaka, in his interview with New Vision, said that they “want to remove taxes on smartphones so that they are affordable”. He added that “we want a common man in Nakapiripirit to afford a smartphone and process his driving permit and passport without necessarily coming to government offices in Kampala”.

Also read: BICU should transform Up Accelerate into the standard accelerator to build sustainable startups in Uganda

Which is actually good. Sad news? That’s not what will happen. The people who’ll be able to purchase the “affordable smartphones” are going to do something very different from what Saaka thinks. They’ll rush to catch up with their peers on WhatsApp and Facebook.

Because, what are the chances that a person in Nakapiripirit knows about NITA-U and its e-government services? Zero. But, what are the chances that they heard someone on their local radio station say “like us on facebook” or “send us a WhatsApp message”? 100%.

So, Mark Zuckerberg’s Facebook and co. are in business.

LOSERS

  1. Uganda Revenue Authority

Uganda Revenue authority is the loser in this game. Though, that’s in the short term. Currently, I don’t have the exact figure of how much URA earns from taxes on smartphones and therefore can’t state whether removing it will deal a significant blow or not.

But, based on this article (written in 2009), it must be significant. Of course, it involves both direct (VAT and Excise duty) and indirect taxes like a service fee, that they charge you on top of the airtime you buy.

In that article, Keith Muhakanizi, the then under-secretary in the Ministry of Finance, said: “If there are no taxes on people using mobile phones, whom do we tax then? Can we have a government without taxes?”

It also adds that “Uganda Revenue Authority, the statutory body collecting taxes, reported its net tax collections from telecommunications companies last year [2008] amounted to US$3.57 billion or 9.5 percent of the country’s total tax revenue”.

Keep in mind that at that time, Uganda had an approximate 10 million subscribers – on Mobile, not fixed line connections. Now, go ahead and factor in the fact that the country now has over 25 million mobile phone subscribers.

Yet at the time when the industry was bringing in 9.5%, people mostly used their mobile phones for voice calls. That has changed since then. Mobile phones are now doing everything.

As of now, of the 25 million mobile phone subscribers, only four million Ugandans have smartphones. Yet, that four million is able to contribute a significant chunk of revenue to telecom companies. What if it doubled or tripled? What would be the effect on their revenue, and eventually taxes?

While as this move of forfeiting revenue in form of VAT and Excise duty is not logical in the short run, it will surely pay off in the long run.

Because, how easy is it for URA to tax a grandma in Bududa who has her money stashed in her pot? Yet, if that grandma subscribed to a social bundle to chat with her son in Kampala using WhatsApp voice notes, then URA can be able to get in the way via telecoms.

Similarly, when you look at companies like Fenix International and M-Kopa vs. the grandma. Who is easier to tax? The grandma with her UGx. 5,000 stashed away or this company that can get the grandma to spend it?

It is hard to detail all the benefits of this, but this report [PDF] can help paint a rough understanding of what they can be in the long run. But, one clear benefit is an increased tax base.

In conclusion, I would like to state that the above was based on the assumption that the removal of the taxes eventually leads to a significant increase in the number of new smartphones bought and used. Otherwise, we may struggle to see a benefit for any of the identified parties in case it doesn’t turn out to be so.

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