Associate Professor of Fintech and Information Systems, University of Southampton

PK Senyo received funding from Innovate UK, ESRC and UKRI.

The University of Southampton provides funding as a member of The Conversation UK.

The Minister of Finance of Ghana, Ken Offry-Atta, announced that the government intends to introduce an electronic transaction tax (e-levy) in the 2022 budget. He said this is to "expand the tax net and ropes of the informal sector."

The proposed levy will take effect on February 1, 2022 and will be charged at 1.75% of the value of electronic transactions. It covers mobile money payments, bank transfers, merchant payments and inward remittances. Except for the inward remittance to be borne by the beneficiary, the initiator of the transaction will bear the cost. Transactions up to GH¢100 (US$16) per day are tax-free.

According to the Minister of Finance, the total value of digital transactions in 2020 is estimated to exceed 500 billion pounds (approximately US$81 billion), compared to 78 billion pounds (approximately US$12.5 billion) in 2016. It achieved tremendous growth in just five years.

Although the reason for this new tax is to expand the tax net, since most of the population earns a living in the informal sector, this seems to be a convenient way to increase government revenue. The initial response to the announcement of the tax was dissatisfaction and fear that it would affect the country’s current digital agenda.

I don’t think these reactions will lead to a reversal, as was done recently at the port when the benchmark value was paid. However, given the current cost of mobile money, the government may reconsider implementation and subsequent charges.

There are many reasons why the government is unlikely to back down. Ghanaians should prepare for this taxation.

There is no viable alternative: Although this electronic taxation may force some people to use cash, for most people, there is no viable alternative. Currently, electronic payment, especially mobile money, is the most effective and cost-effective transfer method because it is widely used in Ghana. It is widely used because of its convenience, especially in rural areas. The only option is to use a bank with limited branches. The bank itself is now digitizing its services to minimize the use of cash.

My research on the use of financial technology in Ghana shows that in the absence of practical alternatives, mobile money is the only way for many people to obtain financial services. Research also shows that the costs associated with mobile money are not a hindrance. Therefore, regardless of the electronic tax, people will still use mobile payment.

An easy way to generate income: Successive governments have failed to find innovative solutions to expand the tax net to include the informal sector, even though the sector employs most Ghanaians and accounts for approximately 85% of the city’s economy. Since many people (including those in the informal sector) use mobile money, the government sees this as a simple way to tax the informal sector. Estimates show that in 2020, the total amount of mobile money transactions will exceed 99 billion U.S. dollars (561 billion GH), far exceeding the 29 billion U.S. dollars for check and cash transactions.

Considering the potential revenue that the government can generate, and since it is impossible to devise any innovative solutions to tax the informal sector, mobile currency taxes seem to be an easy way out.

Institutionalization of digital payment: Recently, the government has begun to implement digital projects to reduce the use of cash. These include the electronic currency (e-cedi) project, in which the central bank will issue "its own mobile currency version." The launch of e-cedi may further restrict the use of cash, forcing people to use electronic payments, so people will have to pay for e-levy.

The government is also shifting to digital-only payment options for its services to curb corruption and revenue leakage. This means that without digital payments, people may have difficulty accessing certain services, such as obtaining passports or driving licenses, registering companies, or clearing goods at ports. This is another reason why people have no choice but to pay electronic taxes.

Digital payment normalization: With the emergence of COVID and the implementation of movement restrictions, as well as the closer connection between mobile money, bank accounts and cards, many people use digital transactions and payment methods in most of their daily economic activities. The government claims that the value of digital transactions increased by 120% between February 2020 and February 2021. An increase of 44% in the previous year. The government realizes that most people are now accustomed to online transactions. They are very convenient, and people will find it difficult to return to physical transactions.

Due to the existing mobile currency charges, many people will not approve of electronic taxation. There is also a risk that it may make Ghana less attractive to fintech start-ups, thereby undermining the development of Ghana’s fintech ecosystem. For example, such electronic taxation will lower the profit margins of fintech startups that may not want to pass on costs to consumers. In 2021, Zeepay, a local financial technology company in Ghana, attracted approximately US$7.6 million in investment.

Given the direct and indirect benefits of fintech to the economy, this kind of electronic taxation will become another problem for already troubled fintech startups. The government seems to only consider short-term revenue growth. Therefore, the government should re-examine the implementation and strategically target taxation, rather than imposing a comprehensive electronic tax on digital payments. It should be guided by the experience of other countries such as Uganda, which have also implemented mobile currency taxes.

Write articles and join a growing community of more than 137,100 scholars and researchers from 4,211 institutions.

Copyright © 2010–2021, The Conversation US, Inc.