(Ecofin Agency) - Report Calls for Exemptions on Small Transactions in Mobile Money Taxation Across Africa

A new report highlights that while taxing mobile money services in Africa could increase government revenue, it may negatively impact the poorest households if small transactions are not exempted.

A report released on July 25 by the Institute of Development Studies, a think tank associated with the University of Sussex (UK), finds that the negative effects of mobile money taxation in Africa could be minimized by excluding the smallest transactions to protect low-income households.

Titled “Taxing Mobile Money in Africa: Risk and Reward”, the document explains that digital financial services (DFS), including mobile money, are rapidly growing across the continent due to their accessibility and affordability compared to traditional financial services.

Governments are promoting these services to boost economic development, increase financial inclusion, and improve administrative efficiency. DFS also represent a new source of tax revenue for countries. Currently, 15 African countries tax mobile money services in various ways: Benin, Burkina Faso, Cameroon, the Central African Republic, the Democratic Republic of the Congo, Chad, the Republic of Congo, Côte d'Ivoire, Ghana, Kenya, Nigeria, Tanzania, Uganda, Zambia, and Zimbabwe.

Tax systems vary from country to country in terms of tax base, types of taxed transactions, and exemptions. The tax base could include transaction value, service provider fees, or mobile operator revenue. Except for Tanzania, where mobile wallet withdrawals are taxed at three different rates, the effective tax rate is generally less than 1% of the transaction amount.

In Africa, as elsewhere, mobile money tax revenues are modest but significant, averaging about 1% of total tax revenues.

For example, Uganda's mobile money tax introduced in 2018 generated just under $50 million during the 2022/2023 fiscal year. Zimbabwe, where mobile money tax revenue made up 9.3% of total tax revenue in 2022, is an outlier.

The report also notes that the impact of mobile money taxation on market growth is minimal in the medium to long term. Transaction volumes and values often return to pre-tax levels within a relatively short period, making the impact on overall service adoption and financial inclusion quite small.

In Ghana, for example, the introduction of a 1.5% electronic tax on mobile money transactions in May 2022 led to a moderate decrease in service usage. Transaction volumes fell by 5.2% and values by 18.6% from May to June that year. However, the market rebounded by July, regaining transaction values to pre-tax levels within a few months.

Data shows that the reduction in transaction volume and value following the introduction of taxes is particularly pronounced among the poorest households, especially when taxes are applied indiscriminately to low-value transactions. These households are very sensitive to transaction costs, so even a small increase in fees can make mobile money services unaffordable.

To limit the negative effects on low-income households, the Institute of Development Studies recommends that African tax authorities follow Ghana's example. Ghana now combines a tax exemption for small transactions with a cost-sharing arrangement for these transactions through agreements with mobile operators.