+ A
A -
A number of sub-Saharan African countries have sought to introduce taxes on electronic transactions, in response to a sustained uptake prompted by the pandemic. While such moves have been met with criticism, they represent an opportunity to significantly boost tax revenue.
Covid-19 and its knock-on effects gave rise to a sharp increase in electronic payments across the African continent – a trend that is set to continue.
In parallel to this, public finances in the region have taken a significant hit, as revenue from tax and exports was eroded by the global economic crisis of the last two years.
Many governments are consequently looking to the e-finance boom to help plug their respective tax gaps, as well as to expand their fiscal reach in the informal economy.
Developments in digital taxes
A timely example is Ghana, which was due to introduce a 1.75% tax on electronic transactions of more than GHS100 ($14.25) in February, though its official rollout has yet to take place. If enacted, the levy would apply to everything from mobile money to inward remittances.
Announcing the planned measure, Ken Ofori-Atta, the minister of finance, said it would help to widen the tax net, and increase the country’s tax-to-GDP ratio from 11% to 16%.
Last year the World Bank announced that Ghana’s mobile money sector was the fastest growing in Africa, with the Bank of Ghana recording a 143% year-on-year (y-o-y) increase in transaction value in the first quarter of 2021, alongside a 64% y-o-y increase in transaction volume.
These figures suggest there is much untapped fiscal potential in the space. Nevertheless, the new levy has given rise to considerable controversy, to the extent that scuffles broke out in the Parliament during a vote on the bill.
Critics have expressed concern that it will stymie the development of e-commerce in Ghana, not least by driving people back to cash transactions.
Furthermore, it is thought that the levy could disproportionately affect the rural poor, who have limited payment options and often depend on remittances. On a similar note, many argue that the levy will limit financial inclusion.
These concerns echo recommendations made by the World Bank to Malawi, which in 2019 moved to impose a similar tax, which the bank said would have a negative impact on the country’s financial inclusion and digitalisation agendas. Ultimately, Malawi’s government decided not to institute the tax.
If it goes ahead with the levy, Ghana would join a growing list of African nations that have introduced similar taxes in the wake of the pandemic, often giving rise to critiques along similar lines.
On January 1 Cameroon unveiled a new 0.2% tax on mobile money transactions, which was met with a campaign of opposition. Tanzania, meanwhile, imposed a 0.1% minimum tax in July 2021, only for the government to cut this by 30% after protests and a dramatic drop-off in usage.
Pre-pandemic forerunners
Even prior to the pandemic, various countries had imposed taxes on digital transactions, with mixed results.
For example, in Uganda a 1% levy on all mobile money transactions was introduced in July 2018, but this was quickly cut to 0.5% following public opposition and a 24% drop in transaction values.
A recent study by the UN Capital Development Fund found that the tax provoked wealthier and more urban Ugandans to switch to agent banking. In other words, the levy did indeed disproportionately impact lower-income people, as well as having a regressive effect on the formalisation of the Ugandan economy.
Côte d’Ivoire, meanwhile, attempted to introduce a 0.5% mobile money transaction tax in 2018, but this was swiftly withdrawn and replaced in 2019 with a tax on providers’ total revenue, rather than the transactions themselves.
The government insisted that providers not pass this extra cost on to their users, which led companies to cut back on operational and infrastructure spending. This outcome would seem to confirm another of the fears of critics of such taxes, namely that they stand to limit the growth of the sector itself.
Lastly, Zimbabwe established a 2% intermediated money transfer tax in 2019. While this tax has proven equally unpopular, it has achieved the desired effect of boosting government tax revenue.
By the end of 2021 the tax accounted for nearly half the contribution of corporate tax, which is second only to value-added tax in Zimbabwe’s fiscal mix.
As such, while the government has promised to review the tax, it has also said that it is too lucrative for any review to take place in the short to medium term.
The example of Zimbabwe highlights how, despite the possible negative side effects of such taxes, the income they generate makes them appealing to many governments.
In this light, it would seem reasonable to expect additional such taxes to be imposed in sub-Saharan Africa going forwards. It is up to governments to ensure that they do not represent a step backwards in digitalisation and financial inclusion.
— Oxford Business Group
Covid-19 and its knock-on effects gave rise to a sharp increase in electronic payments across the African continent – a trend that is set to continue.
In parallel to this, public finances in the region have taken a significant hit, as revenue from tax and exports was eroded by the global economic crisis of the last two years.
Many governments are consequently looking to the e-finance boom to help plug their respective tax gaps, as well as to expand their fiscal reach in the informal economy.
Developments in digital taxes
A timely example is Ghana, which was due to introduce a 1.75% tax on electronic transactions of more than GHS100 ($14.25) in February, though its official rollout has yet to take place. If enacted, the levy would apply to everything from mobile money to inward remittances.
Announcing the planned measure, Ken Ofori-Atta, the minister of finance, said it would help to widen the tax net, and increase the country’s tax-to-GDP ratio from 11% to 16%.
Last year the World Bank announced that Ghana’s mobile money sector was the fastest growing in Africa, with the Bank of Ghana recording a 143% year-on-year (y-o-y) increase in transaction value in the first quarter of 2021, alongside a 64% y-o-y increase in transaction volume.
These figures suggest there is much untapped fiscal potential in the space. Nevertheless, the new levy has given rise to considerable controversy, to the extent that scuffles broke out in the Parliament during a vote on the bill.
Critics have expressed concern that it will stymie the development of e-commerce in Ghana, not least by driving people back to cash transactions.
Furthermore, it is thought that the levy could disproportionately affect the rural poor, who have limited payment options and often depend on remittances. On a similar note, many argue that the levy will limit financial inclusion.
These concerns echo recommendations made by the World Bank to Malawi, which in 2019 moved to impose a similar tax, which the bank said would have a negative impact on the country’s financial inclusion and digitalisation agendas. Ultimately, Malawi’s government decided not to institute the tax.
If it goes ahead with the levy, Ghana would join a growing list of African nations that have introduced similar taxes in the wake of the pandemic, often giving rise to critiques along similar lines.
On January 1 Cameroon unveiled a new 0.2% tax on mobile money transactions, which was met with a campaign of opposition. Tanzania, meanwhile, imposed a 0.1% minimum tax in July 2021, only for the government to cut this by 30% after protests and a dramatic drop-off in usage.
Pre-pandemic forerunners
Even prior to the pandemic, various countries had imposed taxes on digital transactions, with mixed results.
For example, in Uganda a 1% levy on all mobile money transactions was introduced in July 2018, but this was quickly cut to 0.5% following public opposition and a 24% drop in transaction values.
A recent study by the UN Capital Development Fund found that the tax provoked wealthier and more urban Ugandans to switch to agent banking. In other words, the levy did indeed disproportionately impact lower-income people, as well as having a regressive effect on the formalisation of the Ugandan economy.
Côte d’Ivoire, meanwhile, attempted to introduce a 0.5% mobile money transaction tax in 2018, but this was swiftly withdrawn and replaced in 2019 with a tax on providers’ total revenue, rather than the transactions themselves.
The government insisted that providers not pass this extra cost on to their users, which led companies to cut back on operational and infrastructure spending. This outcome would seem to confirm another of the fears of critics of such taxes, namely that they stand to limit the growth of the sector itself.
Lastly, Zimbabwe established a 2% intermediated money transfer tax in 2019. While this tax has proven equally unpopular, it has achieved the desired effect of boosting government tax revenue.
By the end of 2021 the tax accounted for nearly half the contribution of corporate tax, which is second only to value-added tax in Zimbabwe’s fiscal mix.
As such, while the government has promised to review the tax, it has also said that it is too lucrative for any review to take place in the short to medium term.
The example of Zimbabwe highlights how, despite the possible negative side effects of such taxes, the income they generate makes them appealing to many governments.
In this light, it would seem reasonable to expect additional such taxes to be imposed in sub-Saharan Africa going forwards. It is up to governments to ensure that they do not represent a step backwards in digitalisation and financial inclusion.
— Oxford Business Group
