At issue is an approach prioritising early tax collection on telecom services and devices, rather than long-term value created through digital participationUganda’s push to build a digitally driven economy is running into a contradiction as the very tools —mobile money and smartphones—meant to drive inclusion, are being taxed in ways that may be slowing adoption, widening inequality and undermining national development targets.

At issue is a policy approach that prioritises early tax collection on telecom services and devices, rather than the long-term value created through digital participation. Analysts warn that this risks suppressing usage even as billions are invested in digital infrastructure.

A new policy paper by the Civil Society Budget Advocacy Group (CSBAG) argues that without urgent reform, Uganda could miss key milestones under its digital transformation agenda.

The group points to a growing misalignment between the tax regime and targets set under the National Development Plan IV (NDP IV), which aims for 45 percent internet penetration and 71 percent mobile money usage by 2029.

Unlike bank customers, who pay tax only on the fees of ATM withdrawals, mobile money users are taxed both on service fees (15 percent VAT) and 0.5 percent on the value withdrawn.

Individually modest, these taxes combine to create a cost burden that disproportionately affects low-income users—the very demographic Uganda is trying to bring into the digital fold.

Mobile money, now the country’s most widely used formal financial service, has grown from 56 percent usage in 2018 to about 64 percent today. But that growth is showing signs of strain.

Uganda remains the only country in East Africa taxing withdrawals on full transaction value. Regional peers Kenya, Tanzania and Rwanda instead focus on taxing transaction fees—or avoid withdrawal taxes entirely.

CSBAG says evidence from past policy changes highlights the risks. Following the introduction of mobile money taxes in 2018, Uganda recorded a 40 percent drop in usage.

Research suggests that for every 10 percent increase in transaction costs, usage can decline by up to 20 percent—underscoring how sensitive digital financial services are to pricing.

The International Monetary Fund (IMF) has also warned that such taxes can be economically inefficient, generating “deadweight losses” of 33-35 percent of revenue collected.

Similar effects were at one time observed in Tanzania, where mobile money taxes disproportionately affected rural households, cutting into essential spending, while wealthier urban users—more reliant on banking services—were largely unaffected.

Uganda has more than 57 million registered SIM cards, but only around 20 million users have smartphones capable of accessing advanced digital services. More than 30 million connections remain tied to basic feature phones, limiting users to calls and SMS.

This “usage gap,” according to CSBAG Executive Director Julius Mukunda, highlights a structural problem. “Without affordable devices, large segments of the population remain locked out of e-commerce, e-government services, digital finance and online education,” he says.

Applied taxesEntry-level smartphones priced Ush250,000-350,000 ($67-94) can rise to as much as Ush460,000 ($124.50) once taxes are applied—placing them beyond the reach of many rural households.

Meanwhile, basic feature phones—costing as little as Ush60,000 ($16.24)—remain accessible but offer limited functionality, effectively trapping millions in a low-value digital ecosystem.

To address this, CSBAG proposes cutting the mobile money withdrawal tax to 0.25 percent, introducing a cap of Ush5,000 (1.35) per transaction, exempting small withdrawals and removing taxes on entry-level smartphones valued below Ush350,000 ($94).

Government hesitation centres on revenue concerns. Import duties and VAT deliver immediate fiscal returns, while the benefits of increased digital adoption accrue more gradually. But CSBAG argues this is a short-term view.

Expanding the user base by four million people could yield an additional Ush2.1 trillion ($546 million) annually by 2030. Global evidence from the GSMA suggests that a 10 percent increase in smartphone penetration can drive GDP growth of up to 1.2 percent.

For Uganda, closing the usage gap could unlock as much as UGX 14.6 trillion in economic value and create nearly 1.8 million jobs by the end of the decade. The implications extend beyond taxation.

Programmes such as the Parish Development Model increasingly rely on digital platforms for service delivery.

Without widespread smartphone access, both beneficiaries and administrators face barriers.

At the same time, sectors such as e-commerce, ride-hailing and business process outsourcing—seen as key drivers of youth employment—remain out of reach for those without internet-enabled devices.“The question is not whether the government can afford to lose revenue at the border,” says Mr Mukunda. “It is whether it can afford to leave75 percent of its population in digital darkness.”

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