ATM Tax? The effect of imposition of tax on cash withdrawals from banks

“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill.
It is a common appreciation that Uganda’s banking sector is far from perfect. With the country still ailing and trying to nurse its wounds from a ‘not yet gone’ pandemic, it would seem outright to suggest that the sector be handled with extreme tutelage, however the acts of our finance custodians seem to suggest otherwise. As we draw to the closure of the budgeting process for the financial year 2021/22, the Secretary to the Treasury thought it timely to drop a shocker to wind things up.

See (Daily Monitor 10th February 2021), a letter from the Secretary to the Treasury issued and addressed to the Governor Bank of Uganda seeking his opinion on their proposal to explore taxation of cash withdrawals from commercial banks. Therein, he explained that currently, mobile money withdrawals are subject to 0.5% excise duty while counter, agency banking and ATM withdrawals in commercial banks are not subjected to the same tax. The addresser goes on to claim that extending such tax to the latter transaction points will promote cashless transactions, e-commerce and raise revenue, perhaps in expectation of a round of applause for this thoughtful analogy. I found nothing commendable in the substance of this letter though I’m tempted to at least note that this proposal came through the right offices involving the relevant stakeholders as required by law, this is unlike the mobile money tax which came straight from the President’s office.

A 2018 Study by Financial Sector Deeping Uganda (FSD Uganda) showed that in Uganda only 11% of adults used banking services and 2% of those did not have bank accounts. This means only 9% of adult Ugandans have bank accounts.

Let’s delve deeper into the nitty gritty of this proposed tax, shall we?
For context, it is important to appreciate how significant banking processes are in multiplying money in the economy, the most important player being the depositor. To animate this, let’s assume on a bright Monday morning you among a series of other bank account owners deposit ugshs 10,000. The Central bank requires each bank to keep a certain percentage of that deposit approximately 20% which can either be kept by the bank as cash or deposited with the Federal Reserve, in our case, the mighty Bank of Uganda. The remaining 80% is what the banks to give out as loans, bank overdrafts, investments, etc. with the intended end of multiplying the value of the deposits in its vaults. Therefore, when the remaining ugshs 8,000 is loaned out, repayments are automatically deposited by the recipient in the bank, therefore 20% of it is kept and 80% is handed out as loans. This cycle continues making for banks and their owners tons of profits but also helping to build businesses and fund a variety of ventures hence multiplying the economy. Despite the bull dog ego of banks, all this impossible without depositors.

So how does this relate with the new tax proposal?
Well, as you can see, the whole process of generating money in an economy starts with depositing money into the banking system. Introduction of a tax on withdrawals means people will be discouraged from making deposits in the first place and those who get paid directly in the bank might resort to withdrawing all their cash and keeping it with them. This will instead discourage the cashless transactions that the ‘great thinkers’ are trying to promote. If such deposits are reduced, then we risk an inevitable increase in the cost of acquiring loans. Drawing from past scenarios, it is known that when deposits reduce, banks raise their interest rates in order to remain profit making for their ever cunning owners.

The set back that emanated from the introduction of mobile money tax in July 2018 is a rich comparative. In May 2018, mobile money transactions were approximately ugshs 7,000,000,000,000 from about 120 million transactions but with introduction of the tax, the figures took a dive, down to approximately ugshs. 3,700,000,000,000 from approximately 170 million transactions. This depicts a halt in bigger transactions using mobile money as people resorted to other means. To date, the mobile money ‘industry’ has not recovered from this hit!

Therefore, this tax if put in place, attacks a key multiplying point of our economy and might reap fatal consequences for the banking system and the economy as a whole. Remember the 9% of adults that have bank accounts? Well we might as well kiss goodbye to a rise in that number anytime soon because there is no way in hell one shall convince a layman to keep their money in banks so that their tax-free money can be looked at by the taxman.