Taxes on airtime and financial transactions dethrone ‘sin taxes’ as new source of KRA excise tax revenue

For a long time, the taxman’s excise basket was almost full with collections from people who could hardly resist a hit of nicotine or a sip of this foamy substance.

Since excise taxes were collected primarily from cigarettes and alcohol, they were dubbed “sin taxes.” But the government has since found a new source of revenue for excise taxes.

The latest Economic Survey by the Kenya National Bureau of Statistics (KNBS) shows that revenue from financial transactions and airtime has overtaken “sin taxes” to become the largest source of excise taxes, as the government expands the basket of products subject to excise taxes beyond alcohol and tobacco. .

In the 2022/24 fiscal year, excise taxes on financial transactions and airtime amounted to Sh80 billion, compared to Sh62.66 billion on alcoholic beverages and cigarettes, data shows. KNBS data.

A large portion of financial transactions includes fees for mobile money transfers such as Safaricom’s M-Pesa, through which more than half of the country’s economy is transacted.

Excise tax collection on financial transactions and airtime first surpassed that on alcohol and cigarettes in the year ending June 2022 and the gap has since widened as activities related to money transfers increased and telecommunications services.

Excise taxes on financial transactions and airtime now account for 47.9 percent of total revenue, compared with 37.5 percent on alcoholic beverages and tobacco products, analysis shows National Treasury data.

Excise taxes tend to target such harmful products as alcohol and cigarettes, not only to discourage people from engaging in such activities but also to raise taxes on consumers who won’t be scared off by a higher cost.

Although excise duty collections on beer increased last year, there are also fears that per-unit consumption has fallen as consumers look for cheaper alternatives, including counterfeit drinks.

Similarly, a combination of health awareness campaigns, regulations, and punitive taxes have made smoking unpopular.

With revenue streams from tobacco and alcohol drying up, the government has turned to new areas, such as financial transactions and airtime, to boost revenues and fund its ever-expanding budget.

Robert Waruiru, a tax expert, believes this indicates the critical role that financial inclusion plays.

“I also think it demonstrates the elastic nature of demand for tobacco and cigarettes, which we hope will inform our future tax and fiscal policy,” Waruiru said.

β€œThis also shows the decline in disposable income for individuals and highlights the need to review the PAYE (pay as you earn) structure,” he added.

In proposed revenue collection measures for the 2024/25 financial year, which will begin in July, the Government hopes to raise more from financial transactions and spirits through new amendments.

Excise taxes on financial transaction fees, including banking fees, will rise to 20 per cent from the current 15 per cent if the National Assembly approves the Treasury proposals.

The Finance Bill 2024 also proposes higher taxes on spirits by levying the tax based on pure alcohol content.

Excise taxes on tobacco products have increased as the government attempts to harmonize taxes on filtered cigarettes with those without.

β€œThe excise tax is a tax imposed by the government on certain products with negative externalities to discourage their consumption. In addition, excise taxes are also levied on other goods and services to generate revenue,” the National Treasury said in the Medium-Term Revenue Strategy 2023.

In the medium term, President William Ruto’s administration has indicated its intention to review excise duties on petroleum products, betting and gaming; and introduce excise taxes on coal and other products with harmful health effects, such as sugar.

The excise tax basket has evolved since the 1980s and 1990s, when it was dominated by 80 percent alcohol and tobacco products.

But since its introduction in 2015, financial transactions are the largest contributor to the excise fund, with the Kenya Revenue Authority (KRA) collecting Sh45.19 billion from mobile money transfer and airtime services.

Taxes on airtime and financial transactions reflected Safaricom’s revenue performance in telephone services and M-Pesa for the financial year ending March 2024.

M-Pesa revenue grew 19.5 percent to Sh140 billion, while data revenue rose 25 percent to 67.4 percent. Voice revenue fell 0.6 percent to Sh80.5 billion, while messaging revenue rose 8.3 percent to Sh12.3 billion.

Data from the Economic Survey 2024 released by the statistics office shows that the government collected excise duty worth Sh45.19 billion from financial transactions in the 2022/23 financial year, an increase of 10.5 percent with compared to Sh40.89 billion collected in the previous period. .

The excise duty, popularly known as tax six, has long been levied on luxury and harmful products such as alcohol, cigarettes, gambling, juices, motor vehicles, soft drinks and cosmetics.

However, the government expanded the list of excisable goods to include airtime, financial transactions, fuel and internet data services.

In the 2022/23 financial year, beer collections recovered from a drop of Sh27.35 billion to Sh32.09 billion.

Excise duty on wines and spirits, another category of alcoholic beverages that includes vodka, whiskey and gin, also fell marginally to Sh18.9 billion as sales declined due to tax increases that depressed imports and production.

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