Ditch physical, let’s get digital!

Let’s get physical” was the refrain in Olivia Newton-John’s number one hit “Physical”, which 40 years ago topped the global song charts. If the Minister for Finance, Hon Mwigulu Nchemba, had delivered this year’s Budget speech by way of song, then his refrain could have been “Ditch physical”, or better still “Let’s get digital”!

Tanzania’s National Information and Communication Technology (“ICT”) Policy of 2016 recognises technological transformation as foundational for Tanzania to realise the ambitions (set out in Tanzania Development Vision (“TDV”) 2025) of transformation from a low-productivity, agricultural economy to a knowledge-based, semi-industrialised middle-income economy by 2025. The National Five Year Development Plan 2021/22-2025/26 (FYDP III) has ambitious targets for ICT growth by 2025/26. As benchmarked against 2019/20, these include doubling the sector’s contribution to GDP (to 3 percent from 1.5 percent), and increasing the percentage of both internet users and broadband communication coverage to 80 percent (from 43 percent and 45 percent respectively).

This year’s budget speech certainly caught the technology “zeitgeist” on a number of fronts, including broadening the tax base, as well as embracing an “efficiency agenda” both in terms of tax administration, as well as expenditure control.

The broader tax base is reflected in changes to the taxation of digital services supplied to local consumers by overseas (non-resident) companies (think iTunes, Netflix etc). Such services will now have an effective 20 percent tax as a consequence of new administrative mechanisms to enable collection of VAT (18 percent) as well as the introduction of a digital services tax (“DST”) (2 percent). One administrative concern with the DST is that it has no revenue threshold for application, unlike VAT (which has a Sh100m annual threshold).

What is not in doubt is the significant contribution of the local ICT sector to Government revenue, with telecommunications being the leading generator of consumption taxes (VAT and excise duty) on local supplies which totalled Sh515 billion (approximately $220m) in the nine months to March 2022, and was followed by VAT and excise collections on beer (Sh395 billion) and spirits (Sh183 billion) (according to TRA collection statistics). Without wishing to sound politically incorrect, some might surmise that whilst this statistic (of collections on telecommunications exceeding collections on beer) might be a surprise to wives, it may not come as such a surprise to husbands!

This time last year, the introduction of the mobile money transfer levy did stir quite a bit of controversy; and despite a show of unity in a joint press conference hosted at the time by the Minister for Finance and the Minister for Information Communication & ICT, there was clearly some unease as the change did seem to work against digital inclusion ambitions. But at least our discussion was more civilised than in Ghana, where in December 2021 a Parliamentary discussion on a similar proposal descended into a brawl between Members of Parliament!

So, what was the impact of the levy? According to Bank of Tanzania statistics there was an immediate significant decline in the value of mobile money payment transactions, but then some pickup following a 30 percent tariff reduction announced in September 2021.

Vodacom’s preliminary results statement for the year ended 31 March 2022 also highlighted the challenge mentioning that “service revenue declined 1.0 percent to Sh956.5 billion impacted by the direct and indirect effects of levy on mobile money transfer and withdrawal transactions, and competitive pressures”, noting that “M-Pesa revenue declined 7.6 percent to Sh329.6 billion”. It also stated “we are grateful for the 30 percent reduction announced in September 2021, however it still represents a material increase in end user charges. We believe by unlocking the growth potential in M-Pesa we can meaningfully address financial inclusion.”

There was some good news in this year’s budget with a reduction of the maximum levy per transaction to Sh4,000 (down from Sh7,000). At the same time the levy’s base was expanded to include all electronic transactions and renamed “electronic money transactions levy” instead of “mobile money transfer levy”; so it will also cover in scope transactions made through financial institutions (but with an exemption for salary payments).

A more general concern for the ICT sector remains the excise duty rate (17 percent) on electronic communication services, bearing in mind the other turnover based imposts on such services (including 18 percent VAT, 0.3 percent service levy, TCRA 1 percent and UCAF 1 percent). This year’s budget did not reduce this excise duty rate, one of the highest in Africa.

A commitment was also made to leverage ICT systems even more in tax administration (including electronic filing and payment), and to try to register all persons over 18 with the National Identification Authority (“NIDA”) and to automatically link this registration with a Taxpayer Identification Number (“TIN”) registration. Originally, the Budget speech had proposed the mandatory use of a TIN for all sale and purchase transactions - a requirement fraught with practical implementation challenges; ultimately, this intention (although reflected in the Finance Bill) did not appear in the Finance Act.

ICT was also a prime focus of measures announced for more effective management of Government expenditure. In particular, apart from new measures for tighter expenditure control (including on vehicles, travel, meetings) and more robust procurement and audit discipline, there was also a commitment to leverage ICT systems to drive savings - for example, by ensuring adequate ICT facilities to enable virtual meetings. Seeking to drive a culture change in the way bureaucrats operate, the Minister emphasised in his words that “Tunataka kufuta usemi wa [we want to replace the expression] ‘Government works on papers’, sasa tunasema [with] ‘Government works on records’”.

So an anthem for this coming financial year is certainly “let’s get digital”, or rewording yet another phrase: “Kazi iendelee kidigitali”!