Fiscal policy is important to economic planning considering that taxation is the primary means by which governments generate revenue to fund expenditure. In the wake of the Covid-19 pandemic, the global economy is still recovering from the attendant economic decline.
In Ghana, the government has proposed several tax measures in its 2022 economic policy and budget statement to aid recovery. These include a unified common platform for property rate administration; at least a fifteen percent (15%) increase in fees and charges and the imposition of an electronic transactions levy (E-levy).
Drawing on the experiences of Kenya, this brief argues that taxation on electronic transactions may not expand the tax base significantly as envisioned but, rather, may reverse the gains on financial inclusion and digitalization.
What is E-levy?
The government of Ghana has proposed a tax on all electronic transactions at a rate of 1.75 percent on mobile money transactions above one GHC 100 or less a day. To wit, transactions amounting to GHC 100 cedis is exempt from the 1.75 percent tax. Nevertheless, the tax has attracted some amount of backlash from the general Ghanaian population. The concerns raised are mainly centered on the idea that such a tax may not protect or exclude the most vulnerable members of society. For instance, the main opposition party has argued that the tax is punitive, regressive and will affect inward remittances. Beyond this, there are concerns that the implementation of the e-levy will adversely affect the digitalization agenda and in turn reduce drastically the amount government has projected to receive from the E-levy.
Implementing an Electronic Transactions Tax: Evidence from Kenya.
Since its emergence over a decade ago, mobile money has become the financial service of choice for many previously unbanked persons in Sub Saharan Africa (SSA). In the last decade, sub-Saharan Africa has seen a double-digit growth in both the value and volume of electronic transactions. As a result, many countries in SSA have introduced taxes on electronic transactions in the bid to expand the tax base and increase revenue.
In Kenya, the electronic transactions tax was first introduced in 2013 as an excise tax at a rate of 10 percent on both bank transfers and mobile money payments. The rates were increased to 20% and 12% respectively in July 2018. Since the introduction of the levy, the growth in electronic transactions reduced markedly from 12.2 percent between 2010 and 2013 to 7.0 percent from 2014 to 2017.
Data from the central bank of Kenya shows that while the number of mobile phone accounts increased from 1.4 million in 2007 to 44.3 million in September 2018, the average value of mobile phone transactions experienced a sharp decline over the period. This means that, while the volume of transactions experienced a steady increase, the value of transactions remained low.
What can Ghana learn from the Kenyan experience?
In Ghana, growth in the value of electronic transactions has been pegged at 120 percent while the total mobile money subscribers and active mobile money users have grown by about 18 percent between 2016 and 2019. The mobile money tax is likely to slow or completely reverse this growth. The tax has the capacity to redirect the consumption behavior of mobile money users and through that, increase traditional cash transactions while simultaneously reducing the volume and value of electronic transactions.
By effect, the revenue projections made by the government may not be realized. In Kenya, mobile money-related taxes amounted to less than 1 percent of the government’s total tax revenue but yet came at high costs to the Kenyan government. The E-levy may have the same effect on Ghana. Ghana’s efforts at financial inclusion have been championed by mobile money and its interoperability with the banking system. A high tax on that same system is very likely to cause a reversal in the progress made.
What Can Policy Makers do?
A country’s fiscal policy includes both revenue policies and expenditure policies. The government of Ghana can consider contractionary fiscal policy measures in the bid to reach fiscal consolidation. At any cost, if the electronic transactions tax will be introduced, its implementation should take into consideration the experiences of other countries in sub-Saharan Africa. For instance, Nigeria’s electronic transactions levy proposes a small flat rate of 50 Naira (75 pesewas) on any amount beyond a 10,000 Naira (149 Cedis). This model’s concurrent flat rate and exemption threshold may be more appealing for two reasons. First, the exemption threshold will exempt the most vulnerable members of society. Secondly, the flat rate may seem almost negligible on large transactions.
Another key consideration the government must make is the fact that mobile money users already pay a service charge of 1 percent on all transactions. The imposition will mean that most users will be paying 2.75 percent on their transactions. This may discourage digital transactions and encourage more cash transactions thereby shrinking the digital economy.
Closely related to this, the government should consider an upward review of the exemption threshold from hundred cedis (GHC100) to about two hundred and fifty cedis (GHC 250) per day. This will ensure the protection of the poor and vulnerable while at the same time protecting the digitalization agenda which lies at the center of the 2022 economic policy.
The government of Ghana’s attempt at economic recovery budget following the global economic decline caused by COVID-19 is commendable. The growth in electronic transactions in the past two years presents a good opportunity for the government to innovatively increase Ghana’s tax revenue towards building a sustainable entrepreneurial nation through fiscal consolidation and job creation.
At the same time, the government should take note that the policy could increase the tax burden on mobile money users, promote cash usage, reverse financial inclusion and eventually reduce drastically the progress made in digitalization.
Posts Comments
Abena B December 14, 2021 / 2 years ago
Great write-up. A call to the Ghanaian government to tread cautiously with the e-levy as the results could end up becoming a shot in the foot. Your recommendations are apt.
paul mensah December 14, 2021 / 2 years ago
Thumbs up guys!
Kofi Kofi February 15, 2023 / 1 year ago
Insightful. guess the insight here has been revealed after implementation of the E-levy