A shop attendant accepts an e-payment, highlighting the growing role of digital transactions in everyday commerce across Ghana. Credit: Cashkinetic
Building a case for an electronic transactions levy
Across Africa, the growth of telecommunications is creating new work opportunities and transforming economies, with the finance and telecommunications sectors emerging as key enablers of economic growth. Ghana, like other African countries, has seen a boom in digital payment platforms, generating income opportunities and boosting digital marketing. This demand for digital services has fuelled economic activity, creating a vibrant ecosystem around e-commerce and online shopping.
In Ghana, access to mobile phones and the internet has driven rapid growth in e-commerce, leading to widespread adoption of mobile money payments for diverse transactions, from small household purchases to larger appliances. As a result, the value of mobile money transactions grew from Gh¢150 billion in 2017 to Gh¢986 billion in 2021. By 2023, internet penetration had also reached over 16.99 million active users (53% of the population).
Despite this progress, declining tax revenues and a growing informal sector have raised concerns for the government. While digitisation efforts have promoted financial inclusion, many economic activities remain untaxed. In response, the government introduced an Electronic Transactions Levy (E-Levy) in 2022, joining other African countries like Uganda, Congo, Cote D’Ivoire, and Nigeria in seeking to tap into the informal sector through digital finance.
The E-Levy: Widening the tax net
The E-Levy was designed to capture a portion of the informal sector’s revenue by imposing a small tax on the initiator of electronic transactions, including mobile money payments, bank transfers, merchant payments and inward remittances. By doing so, the government aimed to enhance domestic revenue mobilisation.
While there was board support for measures aimed at expanding Ghana’s tax net, many were concerned about the immediate effects of the E-Levy, particularly on the suppliers of retail digital financial services, such as mobile money agents and small-scale non-bank financial institutions. While the levy’s potential impact on consumers was more apparent, its effects on the operations and sustainability of service providers were less clear. Key questions emerged around how the levy might disrupt supply dynamics within Ghana’s retail digital financial sector, potentially altering business viability, transaction volumes, and the overall market structure.
Investigating supply side dynamics
To better understand the E-Levy’s effect on the supply of retail digital financial services (DFS), a 2022 pilot survey by a team of researchers from the University of Ghana examined its impact on mobile money vendors, microcredit providers, remittance firms, FinTech companies, and other small-scale financial institutions. Supported by the Retail Finance Distribution Research Initiative (ReFinD) at the Institute of Statistical, Social and Economic Research (ISSER), this study sought to evaluate the levy’s effects on the digital financial market from the supply side.
The study surveyed 3,167 “firms” across Ghana’s sixteen administrative regions, focusing on mobile-money agents and other small-scale non-bank financial institutions. Most of these businesses were urban-based micro-enterprises, predominantly male-owned and catering mainly to male clients.
Findings: impact on patronage and financial inclusion
Survey results indicated an initial dip in customer transactions following the first week of the E-Levy’s introduction, though a partial recovery occurred in early 2023. While customer numbers had not yet returned to pre-levy levels, firms reported an increase in turnover, suggesting some resilience in the sector. Moreover, the levy’s impact on financial inclusion appeared minimal, as the customer composition of firms remained largely unchanged.
Interestingly, about one in four businesses took proactive steps to help customers offset the levy’s impact, often facilitating agent-to-agent transfers and cash-out transactions to minimise the tax burden.
Key informant interviews with association leaders of various players in the supply space revealed that initial drops in demand were partly due to misinformation and limited understanding of the levy’s scope and effects. Nonetheless, the levy’s design appeared to limit its impact on the operations of digital financial service providers.
Conclusion
While the E-Levy aimed to expand Ghana’s tax net by targeting users of digital financial services, its initial implementation faced several challenges. From the supply side, the levy had limited effects on financial inclusion and firm turnover, but it did spur businesses to adopt tax-evasive strategies to protect client relationships, inadvertently undermining the levy’s intended purpose.
These findings underscore the importance of effective stakeholder engagement and transparent communication around tax policies. Promoting voluntary compliance and minimizing economic distortions are crucial to fostering a tax environment that supports both growth and revenue generation.
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