With the anticipated hike in import duty, excise duty, and value-added tax (VAT), telecommunications behemoth Safaricom eliminated the idea of producing an Sh5,000 mobile phone domestically, depressing President William Ruto's desire for Kenya to produce the least expensive smartphone in Africa.
According to Safaricom, the planned tariffs would result in an Sh11,500 price increase for locally-made devices.
Last December, President Ruto said that Kenya would produce the cheapest smartphone in Africa this year, with a price of less than Sh5,000.
To guarantee that all Kenyans will have access to digital networks for business and exposure to government services, Dr Ruto vowed to provide an affordable smartphone within eight to twelve months of this year.
He explained to members of micro, small, and medium-sized enterprises (MSMEs) at a seminar that the least expensive smartphone costs between Sh10,000 and Sh15,000.
To lower the price of regionally manufactured phones, the telco on Tuesday requested that the Finance and Planning Committee of the National Assembly adjust the import tax, excise duty, and VAT rates on mobile phones.
For me to save Sh4,000 and reduce the price from Sh11,500 to Sh7,500, we would need to solve the import, excise, and output VAT issues if we were to pursue the president's objective of a $50 phone. Speaking to lawmakers during public testimony on the Finance Bill was Karanja Gichiri, Head of Venture at Safaricom.
"We can reduce the taxes to Sh3,000, which will result in a locally assembled smartphone costing between Sh6,500 and Sh7,000 in the end."
To charge VAT on domestically integrated or produced mobile phones at 0%, a group of telecom providers and device manufacturers is urging the Finance Committee to make revisions to the Finance Bill, 2023.
The consortium requested that the committee, which was headed by Molo MP Kuria Kimani, alter the legislation to exclude the sale of locally made or assembled phones from excise duty.
Job Kabochi, a partner at PwC, spoke on behalf of the consortium and informed MPs that "there has been an overall decrease in imports by 13.5 per cent due to shortages and escalation in the fourth quarter of 2022."
"We suggested that the VAT Act and the Excise Duty Act be modified by adding new paragraphs within Part A of the Second Schedule of the VAT Act to include the distribution of locally created and manufactured mobile phones and by adding new paragraphs to Part A of the Second Schedule of the Excise Duty Act to include disassembled or unassembled kits for local assembly or manufacture of mobile phones."
In its submissions before the committee, Safaricom claimed that the tax cuts would enable them to produce the cheapest phone in Africa.
According to Safaricom, a factory would shortly begin operations to produce 1.2 million to 1.4 million cell phones annually.
"We now have a newly established local assembly line. According to estimates, we import 4 million phones annually, which puts pressure on our need for foreign money," according to Mr Gachiri.
"The microprocessor that controls the phone's 4G network is the most costly component. We have researched, and the processor and components drive a $40 base that is adequate for a nice phone."
He said the costs of shipping the phones to the port of Mombasa are other cost factors, with Safaricom spending an extra Sh2,300 for an Sh5, 000 phone, mostly due to import duty and excise duty.
"Following that, the phone would cost Sh300 to assemble, including factory profit margins. We aim to pass on the savings to the customer."
"However, when you include the last-mile connection, another Sh1,400 would be used, and the device's output VAT is Sh1,500. With the manufacturer taking just Sh300, the ultimate price now stands at Sh11,500," according to Mr Gachiri.
He said that whereas the currency rate was about Sh118 to the dollar when Dr Ruto announced the manufacturing of the Sh5,000 domestically built cellphones, it is now at Sh135.
"To take advantage of the Africa Continental Free Trade Agreement (ACFTA), we will be leaders in mobile telephony in both Africa and the rest of the globe," according to Mr Gachiri, who estimates that 120 million additional users in Africa will require phones.
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