Tax Temptations Slow Ethiopia’s Telecoms, Digital Banking Momentum: GSMA Report

Only 11pct of Ethiopians generate income from internet use

Reports from a global telecoms lobby group warn that levying taxes on telecom and mobile money services could reduce the volume of digital transactions by up to half.

The Global System for Mobile Communications Association (GSMA), a worldwide industry lobby group with close to 800 mobile operators as members, released its first Ethiopian-focused report this week in collaboration with Ethio telecom.

Among the key points mentioned in ‘Driving Digital Transformation of the Economy in Ethiopia’ is the government’s recent introduction of value added tax (VAT) on digital financial services, including mobile money.

“It is important that the government avoids the temptation to resort to distortive taxation on emerging mobile money services, as seen in other African countries, as this would jeopardize the sector’s development. While taxation is a necessary tool for generating government revenue, this particular imposition could have unintended negative consequences on the growth and development of mobile money in Ethiopia,” it reads.

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GSMA warns that taxation and the associated rise in transaction costs could drive price-sensitive consumers away from mobile money services, which it describes as crucial for financial inclusion in areas lacking traditional banking outlets.

It recommends VAT reductions or exemptions for digital financial services “to maintain the growth momentum of this crucial sector.”

“Without such adjustments, the tax could create a barrier to further innovation and expansion, stifling Ethiopia’s efforts to build an inclusive digital financial ecosystem. Mobile money levies have been shown in a number of countries to slow down the growth and usage of mobile money,” reads the report.

The organization estimates the new tax rules could result in digital transaction values dropping by as much as half. Ethiopia saw upwards of 300 billion birr transacted digitally in 2023, according to the report.

Telecoms operators in Ethiopia are also subject to a five percent excise tax on mobile and wireless connections, in addition to licensing fees.

“Sector-specific taxation raises costs to consumers irrespective of how the taxes are structured. Although some taxes are levied on mobile operators, most of their costs are ultimately passed on to customers in the form of higher prices,” reads the report.

GSMA argues against the 10 percent excise duty applied to smartphones, which it says will hinder the country from achieving the targets set out in its Digital Ethiopia 2025 strategy.

The report recommends providing benefits and incentives for telecom infrastructure development, digital finance and international communication services. The Association also wants to see a temporary suspension of taxes on digital financial services.

Bureaucracy and complicated permit procedures are also stifling the telecom sector, according to the report.

“No national-level legislation governs access to rights of way and other permits. This means that the process and the fees charged vary considerably across different regions and even localities. In some cases, local authorities charge high fees in areas which may result in lower profitability, making network rollout in those areas less commercially viable,” it reads.

GSMA recommends the introduction of a consistent national framework for permits and right of way concessions, as well as a standardized fee system.

The Association estimates the telecommunications sector accounted for eight percent of Ethiopia’s GDP in 2023, generating 57 billion birr in taxes alone.

‘The State of Mobile Internet Connectivity 2024’another GSMA report published this week, features a survey of mobile and internet access in a dozen  Low and Middle Income Countries (LMICs) including Ethiopia, Egypt, Kenya, and Uganda.

The organization says it was unable to conduct interviews for its survey in the Amhara region, Western Tigray, Metekel Zone (Benishangul-Gumuz) and parts of Oromia and Afar due to security concerns.

“These areas represent 27 percent of the population in Ethiopia, so the sample was representative of the remaining 73 percent who live outside these areas,” it reads.

With 53 percent, Ethiopia had the lowest proportion of mobile internet users among the countries surveyed while India had the highest at 94 percent. Up to 28 percent of Ethiopian mobile internet users utilize social media for business, according to the report.

GSMA found that 93 percent of urban residents in Ethiopia own a mobile phone. The figure is 60 percent for rural areas. Still, the report notes that the high cost of mobile phones is the top barrier to further use of mobile internet in Ethiopia, along with data costs and inconsistent internet coverage.

No less than 91 percent of Ethiopian internet users have social media accounts, while 28 percent access mobile money or online banking services. Less than five percent use the internet to order goods, while 11 percent depend on the internet for income generation, according to the report.