A number of sub-Saharan African countries have sought to introduce taxes on electronic transactions in response to the sustained uptick prompted by the Covid-19 pandemic. While such moves have been met with criticism, they represent an opportunity to boost tax revenue. Public finances in the region have been affected over the last two years by the global economic crisis, which has eroded revenue from tax and exports. Many governments are therefore looking to e-finance to plug their respective tax gaps, as well as to expand their fiscal reach in the informal economy.
Digital Taxes
An interesting case study in regards to e-levies is Ghana, which was due to introduce a 1.75% tax on electronic transactions of more than GHS100 ($14.25) in February 2022, although this rate was later reduced to 1.5% when it was ultimately implemented in May 2022. In November 2022 Ken Ofori-Atta, Ghana’s minister of finance, said the government would further reduce the rate to 1%. According to Ofori-Atta, when arguing in favour of the initial rate of 1.75% in January 2022, the levy would help widen the country’s tax net and increase its tax-to-GDP ratio from 11% to 16%.
Ghana’s mobile money sector has been Africa’s fastest-growing over the past five years, 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 during the same period, suggesting untapped potential. Critics, however, argue it would stymie the development of e-commerce in Ghana – not least by driving people back to cash transactions – and disproportionately affect the rural poor, who have limited payment options and often depend on remittances.
Ghana joins a growing list of African nations that have introduced similar taxes. On January 1, 2022 Cameroon unveiled a new 0.2% tax on mobile money transactions that was met with opposition. Tanzania imposed a 0.1% minimum tax in July 2021, which the government then cut by 43% following protests and a drop-off in usage.
Forerunners
Prior to the pandemic, various countries had imposed taxes on digital transactions with mixed results. For example, a 0.5% levy on all mobile money transactions was introduced in Uganda in July 2018. A November 2021 study by the UN Capital Development Fund found that the tax led to wealthier and more urban Ugandans switching to agent banking. In other words, the levy did indeed disproportionately impact lower-income people and had a regressive effect on the formalisation of the Ugandan economy.
Côte d’Ivoire 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 on transactions. The government insisted that providers not pass this extra cost on to their users, leading companies to cut back on operational and infrastructure spending. This would seem to confirm another fear of critics of such taxes, namely that they could limit sector growth.
Zimbabwe enacted an unpopular 2% intermediated money transfer tax in 2019, although it has managed to boost government revenue. For example, the Zimbabwe Revenue Authority reported that the tax had accounted for 8.8% of total fiscal revenue in the third quarter of 2022 and nearly half of corporate taxes by the end of 2021, second only to value-added tax. The tax has not experienced widespread popularity though, and there have been calls from various interest groups to either reduce the rate to below 1% or abolish it entirely.
Zimbabwe highlights how despite the possible negative effects, the income such taxes generate makes them appealing to governments. For example, the Nigerian government reported that its levy on electronic money transfers had generated $232m in revenue in April 2022 alone. It would therefore be reasonable to anticipate more such taxes in sub-Saharan Africa, and it is up to governments to make sure they are implemented in a way that preserves and promotes digitalisation and financial inclusion in their countries.
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