Research group Brookings has described Kenya's taxation on mobile transactions as "retrogressive" and said it is eroding gains.

According to the report, Taxing Mobile Transaction in Africa, low income users shy away from expensive mobile transactions, making taxation retrogressive.

"A higher tax rate on low-level retail electronic transactions mostly levied on low-income earners that are sensitive to transaction costs may discourage the use of mobile phone-based transactions, incentivising them to revert to cash transactions to evade taxes and so less tax revenue. This trend will deal a big blow to the financial inclusion success witnessed so far," reads an excerpt from the report.

In 2018, Kenya's government increased the excise duty on mobile money transfer services from 10% to 20%, increased telephone airtime tax to 15% and introduced a 15% tax on internet data services.

The move dealt a blow to the country's low income population, Brookings added.

The research firm referred to Kenya's 2009 tax exemption on mobile handsets as an example of what could be considered. It argued that this exemption had a positive effect on internet and mobile money users.

"This move increased the affordability of the handsets and made possible the more than 200 percent increase in handset purchases and a 50 percent to 70 percent increase in penetration rates," it said.

In 2013 Kenya reintroduced the 16 % VAT on ICT equipment - including mobile phones. Five years later in 2018, the government increased the excise duty on mobile money transfer services from 10% to 20%, increased telephone airtime tax to 15% and introduced a 15% tax on internet data services.

Uganda had also introduced a social media tax in 2018. According to government reports, this tax has resulted in a reduction in the amount of internet users and had a negative effect on the digital economy.

Internet subscription reduced by 2.5 million users, while mobile money transactions also dropped by 4.5 trillion Ugandan shillings (US$1.2 million), according to Uganda Communications Commission (UCC).

Brookings said by reducing tax obligations on mobile money transfer and pushing financial inclusion and innovation to underserved communities, governments on the continent will realise new tax from economic activities.