In recent years, Kenya has seen a significant shift towards digital payments, with platforms like Lipa Na M-Pesa playing a crucial role in this transformation. However, recent tax measures have led to an unexpected setback, with some businesses resorting back to cash transactions. This move is seen as a regression from the progress made during the COVID-19 period when digital payments were widely adopted.
The Rise of Lipa Na M-Pesa
Lipa Na M-Pesa, launched in 2012, has been instrumental in empowering businesses across Kenya. As of September 2020, over 200,000 businesses were using the service. The platform particularly caters to small and medium-sized businesses by providing higher transaction and account limits, secure payments, and easy integration with business systems.
The COVID-19 pandemic saw an increase in the uptake of Lipa Na M-Pesa as more businesses adopted cashless payments. The number of customers using the service increased by 1 million since January 2020 to more than 6 million.
The Tax Dilemma
Despite the success of Lipa Na M-Pesa, recent tax measures by the Kenya Revenue Authority (KRA) have raised concerns. There has been a spike in transactional charges over the last few months due to the implementation of the Finance Bill 2023 which has now led some businesses to resort back to cash transactions to avoid the additional costs associated with digital payments.
Small businesses, which form a significant portion of Lipa Na M-Pesa users, are likely to be most affected by these measures. These businesses often operate on thin margins and any additional costs can significantly impact their profitability.
Moreover, transitioning back to cash transactions could expose these businesses to risks associated with handling cash, such as theft and loss. It also negates the benefits of digital payments such as convenience and the ability to track and record transactions.
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While it is crucial for businesses to comply with tax regulations, it is equally important for these measures to be implemented in a way that does not discourage the use of digital payment platforms. Policymakers should consider the potential impact on small businesses and explore ways to support them during this transition.
The new tax measures have pushed past the optimal point on the Laffer Curve. Taxes and costs associated with digital transactions have become too high, and businesses are finding it more profitable to revert to cash transactions, despite the benefits of digital platforms. This could lead to a decrease in overall tax revenue, contrary to the intended effect of the tax increase.
Therefore, it’s crucial for policymakers to consider the implications of the downsides when designing tax policies. Striking a balance between ensuring tax compliance and promoting digital transactions could help optimize tax revenues while also supporting the growth of digital platforms like Lipa Na M-Pesa.