How governments solve revenue gaps with taxes on mobile transactions

A number of sub-Saharan African countries have sought to introduce taxes on mobile transactions, in response to the sustained uptake prompted by the Covid-19 pandemic. While such moves have been met with criticism, they represent an opportunity to boost tax revenue significantly. The Covid-19 pandemic 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 taxes and exports was eroded by the 2020-22 global economic crisis. 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.

Digital Taxes

A timely example is Ghana, which was due to introduce a 1.75% tax on electronic transactions of more than GHS100 ($14.92) in February 2022, though it had yet to be rolled out as of August 2022. 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%.

In 2021 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, according to the World Bank. These figures suggest there is significant untapped fiscal potential in the space. However, critics have expressed concern that the new tax will stymie the development of e-commerce in Ghana.

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. 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, including Cameroon and Tanzania, that have introduced similar taxes in the wake of the pandemic, often giving rise to critiques along similar lines.

Pre-pandemic Forerunners

Prior to the Covid-19 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 value. A 2021 study by the UN Capital Development Fund found that the tax provoked wealthier Ugandans to switch to agent banking. In other words, the levy on electronic transactions disproportionately impacted lower-income people, as well as having a regressive effect on the regulation and formalisation of Uganda’s informal 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.

Zimbabwe, for its part, introduced 2% tax in 2019 on intermediated money transfers. While unpopular, this levy has achieved the desired effect of boosting government tax revenue. By the end of 2021 the tax accounted for nearly half of the contribution of corporate tax, which is second only to value-added tax in the fiscal mix. In this light, it would seem reasonable to expect similar taxes to be imposed going forwards. However, governments may need to balance fiscal priorities with digitalisation and financial inclusion targets.