Growth of tech-preneurship is on track but threatened by internet tax

The 12 per cent levy on internet bundles recently approved by Parliament under the Excise Duty Amendment Bill 2021, will further deny startups and entrepreneurs a chance to grow their businesses. 

Ahead of the 2021/2022 budget reading slated for June 10, 2021, scrapping Over-The-Top tax (OTT) should have been an opportunity for the government to accelerate its efforts in supporting the growth of the Information Communication Technology (ICT) sector as well as digital inclusion. 

“Whereas we understand the need for mobilization of revenue, we miss out on the fact that regulation can be used as a tool to grow the tax base to support entrepreneurs. We are sacrificing long-term gains for short-term needs. We need to use regulation to incentivize investment in startups. This would result in growth of businesses that the government can tax,” The Innovation Village Team Lead Japheth Kawanguzi says. 

CK Japheth, Team Lead, Innovation Village

According to a poll done by The Innovation Village on the new tax, 90 percent of entrepreneurs said the tax limits chances of online business success. Only 9.5 per cent welcomed the move. 

Zulaikah Namanda runs a private media company. She has been bearing the brunt of the old tax and now must face the new direct tax. But, her major worry lies with the problems her business seeks to solve. 

“There is already a digital divide and an information gap in our country. We are charged with the distribution of information and because print is expensive, the internet has been a great resource in not only getting information out but also getting feedback from our audience. High internet rates mean that the information divide grows to leave others behind,” she says. 

While Namanda is concerned about the digital divide, Founder of Yunga, Anatoli Kirigwajjo has concerns about the sustenance of his innovation towards security. Kirigwajjo is in the business of reinforcing community security through the use of his online application Yunga. As an entrepreneur whose innovation is solely dependent on the use of data, he has qualms with the tax.

“Naturally I am opposed to this tax because my security innovation runs on data. If my client has to buy more data at a higher price to sustain the application on their phone, it might become a luxury to them that they might choose to give up. In the end, it frustrates the service on a user and entrepreneur end,” he explains. 

It has been almost three years since the government introduced the Over-The-Top tax (OTT) commonly known as the social media tax. The move was made after President Museveni directed the Ministry of Finance to widen the tax revenue base. The anticipation was that the tax would rake in between Shs400 billion and Shs1.4 trillion. However, the daily Shs200 tax levy on telecom subscribers accessing Facebook, Twitter, WhatsApp among other social media platforms caused a nationwide uproar as many said it would stifle freedom of expression and make Ugandans who depend on social media to run their businesses, poorer. 

“I do not know whether anyone can understand the many ways this tax can change a business that operates online. Even if I paid my own social media tax without complaining, as a digital marketeer running social media-based adverts online, the use of Virtual Private Networks (VPNs) by many Ugandans means that I lose grasp of my target audience who never see my adverts. Their VPN stations place them in other countries like Bosnia so the adverts I put out do not get me enough customers. I lose out on clients and eventually, my income becomes affected. I do not know why the government does not relieve us,” Muzamiru Ssendi, a digital marketeer, says about the recently scrapped OTT tax. 

The introduction of OTT left the country divided with some internet subscribers paying the tax while others evaded it using Virtual Private Networks (VPNs). The consequences of the latter? Uganda Revenue Authority (URA) missed its targets right from the first quarter of the 2018/2019 financial year. URA collected Shs20.5 billion compared to its Shs24.9 billion target. In January 2020, the tax body led by former Commissioner General Doris Akol requested for a policy shift from OTT to a levy on internet bundles in a bid to reduce revenue lost by the government through tax evasion. For the private sector, the tax now presents a new set of consequences beyond social media usage but the integration of digital technology into business operations on the whole. 

The voices of entrepreneurs and internet users opining the new tax are compounded by other players in the startup ecosystem. Business Lead Natasha Kassami, works with Upskill, a venture under The Innovation Village, that focuses on  building today’s most in-demand skills.  Upskill runs digital skilling programs to prepare youths to find dignified jobs within tech-savvy and innovative organizations. 

With thousands of Ugandan youths trained in these digital skills, Kassami says this new tax has more negatives than positives. “It is limiting to very many entrepreneurs and it is only going to widen the digital skills gap,” she says. 

Natasha Kassami, Business Lead, Upskill

She believes that Ugandan youth are at a disadvantage compared to those in other countries. Not all hope is lost, however, according to Senior Associate Special Projects at The Innovation Village, Aaron Musoke. 

“The way forward is to support this important work through joint efforts in the ecosystem as social corporate responsibility,” he says.

Musoke suggests working with Internet Service Providers to subsidise these costs for particular segments of society. He shares the example of MTN Uganda, which is enabling free access to education for student websites. He also suggests revising the tax to introduce brackets depending on the activity of the Internet. E-commerce and learning platforms should not be taxed.

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