After more than a decade since its emergence, mobile money has evolved as the formal financial service of choice for many underserved groups in developing countries.
The rapid adoption and widespread use in these areas aren’t due to its convenience (as it is in many developed markets) but on its necessity, since it bridges gaps for unbanked people that the existing banking sector cannot.
As a result, emerging markets have become the epicentre of mobile money activity, with sub-Saharan Africa experiencing the most growth. Transaction volume and value in the region have seen double-digit growth during the last decade, and mobile money accounts are expected to reach 500 million at the end of 2020.
As expected, the success of such services attracted the attention of tax authorities seeking to expand their revenue base. After all, in sub-Saharan Africa, the formal economy represents about 34% of the population, putting extra pressure on states to seek new sources of revenue. Mobile money services have been such an opportunity.
With the recently proposed 1.75% e-levy on mobile money transactions what are some of the implications and what lessons can Ghana learn from other African countries such as Cote D’Ivoire, Uganda, Republic of Congo, Gabon, Malawi, and other Sub Saharan African countries.
‘Poorly designed tax policy’
While there is no doubt that African governments have to raise taxes and broaden their tax bases, they must also approach tax policy with a discerning eye. Despite the diverse methods proposed to tax mobile money, in most cases the results – especially on mobile money transaction – are controversial, proving the structural weaknesses of taxation in the region and putting Africa’s financial inclusion at risk.
A recent report from GSMA notes: “State authorities are unable to fully understand the nuances of emerging sectors, such as mobile-money services or even the wider digital economy.” The result has been “badly designed taxes which, although they may seem attractive at first sight, fail to consider the impact on the broader economy and society.”
A poorly designed tax policy, leads to deficient outcomes. Independent research and reports from prestigious organisations, such as the above mentioned GSMA, reveal aspects of the problematic way in which mobile money services are treated. This includes specifics of the population that uses these services or the negative impact on financial inclusion those taxes bring about.
Needing guidance
There is a lack of capacity within research units at the policy level and a lack of national policy frameworks to guide them. As a result, the full impact of mobile money taxes is not adequately assessed. “Political economy factors are ever-present too, which leads to these taxes being implemented without established processes being followed,” the GSMA report argues. It also adds that where these taxes have been implemented, mobile money transaction values have contracted, and “their growth trajectory reduced with negative implications for wider CIT and VAT tax takes.”
Another point of note is many mobile money users belong “to marginalised societal groups and the negative impact on financial inclusion and broader development goals is significant.” On the other hand, these taxes do not extend to the banking sector, suggesting that they are regressive, undermining tax equity’s fundamental concept.
According to another report of GSMA, 77% of mobile money providers reported paying sector-specific taxes in 2019, whether on fees, transaction values, or total revenue. Additionally, 23% of those affected said taxation was harming the uptake of mobile money services and their business, revealing the regressive effect of poorly designed taxes.
Channel VAS‘ mobile financial services provide access to over $12m daily to a pool base of more than 750 million subscribers globally, a significant amount of which are in the sub-Saharan region. We have experienced first-hand these services’ growth, their beneficial effects on underserved populations, as well as how they can be hindered by poorly designed taxation.
Mobile Money Taxation – GSMA 2019 Report
The trend of sector-specific mobile money taxation continued in Sub-Saharan Africa in 2019. Over the course of the year, Côte d’Ivoire, Republic of the Congo, Malawi and Gabon all proposed new mobile money taxes.78 Seventy-seven per cent of mobile money providers reported paying such taxes, according to our Global Adoption Survey, whether on fees, transaction values or totalrevenue.79 Twenty-three per cent of those affected said taxation was having a negative impact on the uptake of mobile money services and their business.
To understand this trend, it needs to be viewed in the context of taxation and development. Developing countries are facing growing pressure to raise their tax take as a percentage of GDP to finance much-needed public spending. However, the strength of the informal sector within the economy makes it difficult for governments to mobilise revenues from individuals and MSMEs, so it often becomes easier to focus on corporations instead.80 Meanwhile, revenue authorities have had to offset a declining telecom sector tax take from voice and SMS as users move to data and over-the-top services.81 It is against this backdrop that mobile money taxes have been proposed.
In applying these taxes solely to mobile money transactions, it is not clear that generally accepted tax principles of equity, certainty, convenience and efficiency are being followed. For instance, since poorer households are more likely to use mobile money services, sector-specific taxation applied to mobile money could be considered regressive and deepen inequality. Equally, by incentivising a move back to cash, tax authorities risk reversing financial inclusion gains and undermining the payments infrastructure that will underpin the digital economy at the heart of many national development plans.82 The broader tax base that digital economies inevitably create will therefore be sacrificed for a short-term increase in the tax take. Beyond financial inclusion, mobile money taxation also puts other development goals at risk, including poverty reduction, economic growth and human capital development.
Conclusion
Mobile money has enabled developing countries to achieve unprecedented levels of financial inclusion, and will continue to contribute to broader development goals. When contemplating sector-specific taxation for mobile money, authorities should consider the longer term negative impacts of such policies. Ideally, finance authorities and policymakers should engage in dialogue with the mobile money industry when formulating policies so that, together, they can ensure mobile money continues to have the greatest possible impact on national development agendas.
Source: The Africa Report