Mobile money taxes reversing digital financial inclusion in Uganda

Uganda’s mobile money tax policy is threatening to reverse years of digital financial inclusion by driving low-income users back to cash. With 43 million accounts processing 326.3 trillion shillings annually, experts warn that excise duties on withdrawals and service fees are making digital payments more expensive than physical transport.

KAMPALA, Uganda — The mobile money industry, once the primary engine for digital financial transformation in Uganda, is facing a significant setback as a complex web of government taxes threatens to reverse years of progress in financial inclusion.

While the sector has grown to more than 43 million registered accounts processing 326.3 trillion shillings annually, industry players and policy analysts warn that the current tax regime is driving low-income users back to cash. The government currently levies a 0.5 percent excise duty on withdrawals, a 15 percent excise duty on telecom service fees, and a 10 percent withholding tax on agent commissions.

For many Ugandans, these cumulative costs make digital transactions significantly more expensive than physical cash delivery. For example, sending and withdrawing 1 million shillings through mobile money can cost a user 20,000 shillings in combined fees and taxes. In contrast, a round-trip taxi fare to deliver that same cash in person between Kampala suburbs like Kireka and Wandegeya costs approximately 6,000 shillings.

Jane Nalunga, executive director of the Southern and Eastern Africa Trade Information and Negotiations Institute, said the impact is most visible on small transactions. A user withdrawing 50,000 shillings faces a total cost of 2,250 shillings once the 250 shilling withdrawal tax is added to operator fees.

“If individuals have alternatives to using mobile money, they may avoid the system due to these costs,” Nalunga said.

Tax analysts point out a disparity in how different financial channels are treated. Denis Kakonge, general manager of corporate services at MoMo Uganda Limited, noted that mobile money is the primary channel for unbanked and low-income populations, yet it carries a transaction value tax that bank agency networks do not.

The sensitivity of the market to these costs was previously demonstrated in 2018. When the government initially introduced a 1 percent excise duty on withdrawals, the sector saw an immediate decline in usage as customers shifted back to cash. Although the tax was later halved to 0.5 percent, the cost barrier remains a deterrent for the 23 million transactions occurring daily in the country.

Uganda’s National Development Plan IV and Digital Transformation Programme identify digital services as essential drivers of growth. However, the reliance on the sector as a cash cow for revenue creates a policy dilemma. While mobile money is easy to monitor and tax, analysts suggest that a lower, more efficient tax structure would stimulate higher volumes and ultimately expand the tax base through increased digital economic activity.