DFS Expert, Skills and Innovation
UNCDF based on its market development approach, encourages stakeholders and industry players to explore tax policies that strike a balance between government priorities and the reactions the market might have. Best practices suggest that vulnerable groups should be put at the center of such policy making to leave no one behind in the digital era; broad consultations and public-private dialogue are needed to inform the action; weighted waivers could be considered to provide solutions that take into account user profiles and transaction types.
This blog article explores the pros and cons of the introduction of an electronic levy on the ecosystem, looking at peer countries that have introduced similar measures and including an assessment of the effects that this may have on uptake and usage of digital financial services (DFS).
On 17th November 2021, the Minister for Finance announced during the presentation of the 2022 Budget Statement and Economic Policy of Government to the Parliament of Ghana, the introduction of an “Electronic Transaction Levy” or “E-Levy” of 1.75 percent on electronic transactions above GHs 100 (US$16) per day to take effect from 1st February 2022. The levy will be applied to mobile money payments, bank transfers, merchant payments, and inward remittances (MoF 2022 Budget Highlights). In March 2022, Ghana's Parliament approved the bill with 1.50 percent taxation on electronic money transfers.
All charges will be borne by the sender except in the case of inward remittances where the charge will be borne by the recipient. According to the Finance Minister, the country’s total digital transactions for 2020 were estimated to be over GH¢500 billion (about US$81 billion) compared to GH¢78 billion (US$12.5 billion) in 2016. As a result, Government is projecting to rake in tax revenue of about GH¢6.96 billion (US$1.1 billion) in 2022, and about GH¢26.90 billion (US$4.5 billion) from 2023 to 2025 after the implementation of the electronic transaction levy to help widen the tax net and rope in the informal sector (PwC 2022 Budget Digest).
This announcement has led to different reactions from the industry’s stakeholders, with some of them supporting the tax introduction as a way to collect public revenues while others criticizing such measure and its negative impact on digital payments and on the digitization journey that Ghana is championing. Ghana’s GDP contribution led by the Services sector, accounted for an average share of 51.9 percent first half of 2021 with the majority coming from the Information and Communication sub-sector, thus making a compelling case for Government to review that sector in its bid to generate more revenue. However, many analysts have said that government needs to explore multiple sources of tax revenue than to target a big source of its revenue from taxing electronic transactions.
UNCDF maintains a neutral role within the ecosystem and only aims at anticipating potential effects that policy regimes may have on Digital Financial Services (DFS). As UN entity, UNCDF does not interfere with Parliament's decisions but rather stands with governments to provide support and accompany them in the implementation of their agendas while leaving no one behind. This blog article intends to explore the pros and cons of the introduction of such e-levy on the ecosystem, looking at peer countries that have introduced similar measures and including an assessment of the effects that this may have on uptake and usage of DFS.
E-levy experience: Pros and Cons
In Sub-Saharan Africa, some governments have attempted to impose e-levy rates on digital transactions with some failing and others succeeding. In the case of Uganda, tax on electronic transactions faced a lot of backlashes and it was reduced to 0.5 percent applied to withdrawals only. At the time, UNCDF conducted a study to assess the effects of the tax on consumer behaviour and digital financial inclusion on selected Ugandan users, providing indicative evidence of negative impacts on vulnerable groups. On the other hand, in Nigeria, the World Bank estimated that the country is likely to make N 462bn (US$ 1.13bn) from the electronic money transfer levy as a source of stable revenue in 2021. It is worth noting that Nigerian EMT Levy applies a fixed NGN 50 (US$ 0.12) for all transactions over NGN 10,000 (US$ 24).
In Ghana, the proposed e-levy tax rides on the back of the success of mobile money in the country over the past couple of years. Mobile money has made great strides in increasing access to digital financial services in Ghana and bridging the financial inclusion gap. By November 2021, Ghana had 47.3 million registered users, 18.4 active users and over GHs 80 billion (US$13 billion) value of mobile money transactions performed. It comes as no surprise that Ghana has become one of the fastest-growing mobile money markets in Africa, with registered accounts increasing six-fold between 2012 and 2017.
On one side, the e-levy is expected to increase tax revenue by GHs 6.9 billion (US$1.1 billion) for the government to help reduce the budget deficit. In Ghana, government after government has struggled with implementing a comprehensive tax regime due to the large informal economy. Today, mobile money has provided a platform for bringing the informal sector to formal financial services and that provides a channel to implement a tax regime that reaches almost all its adult citizens. The potential revenue generated will be used to finance the ‘YouStart’ Initiative, road construction, develop the digital space of Ghana and particularly the development of basic education in the country amongst several others. For instance, the YouStart initiative would be a vehicle to support young entrepreneurs access capital, gain technical skills, receive training and mentoring to enable them start their own businesses which will go a long way to solve the nation's youth employment challenge. Also, the government has guaranteed a waiver for transactions below GHs 100 a day (US$ 16) which will be exempted from the tax to ensure that vulnerable groups can still access digital transactions without any cost increase. Exemptions also exist for merchant and salary payments if the merchant/business is registered with Ghana Revenue Authority (GRA).
On the other side, there are concerns from industry stakeholders on the potential impact of the e-levy on the country’s current digitization agenda. Various stakeholders believe the e-levy will reverse all the gains made with Digital Financial Services, leading clients to revert to cash. Government in its analysis of the impact of the e-levy predicts that 24 percent of users will drop of within the first couple of months but users will eventually go back to using digital services because the benefits outweigh the negatives. As a matter of comparison, the survey conducted by UNCDF on the impact of mobile money tax in Uganda, 38 percent of respondents used mobile money less after the introduction of the tax. Low-income users were unduly affected by the withdrawal tax, compared with higher income groups. About 57.4 percent of high-income respondents started using agent banking as a direct result of the tax compared to 11.1 percent of low-income respondents who could not better access alternatives where similar tax is not applied. Overall, there was a drastic decrease in transaction value after the tax was introduced of over 50 percent where higher income users more likely to engage higher-value transactions migrated away from mobile money.
Transactions that will be taxed under the e-levy and its implications
The main concern for the introduction of the e-levy remains with regards to the users of digital payments that will need to bear the higher costs. Beyond the initial estimates of 24 percent drop out rate, reflections are made around the elasticity of the demand of these services that could be affected by such increase:
- Potential effects on Peer to peer (P2P) transfers: As of 2021, P2P transfers remain the highest transactions on mobile money platforms in Ghana and cost on average one percent per transaction (both for transfers and withdrawals) capped at GHs 10,000 (US$1,666). The e-levy foresees an additional 1.75 percent tax on the transaction value that will result in total transaction cost of 2.75 percent on transactions above GHs 100 with no upper limit determined yet. The tax will be applied to the sender when they initiate the transfer. Initial reactions after the announcement of the e-levy led to some panic withdrawals by mobile money customers, an indication that the e-levy can cause a reduction in the values and volumes of transactions resulting in an increase in the use of cash. Mobile money boasts of 441,000 active agents in the country who have also registered their displeasure due to the potential loss of income.
- Potential effects on merchant payments: Merchant payments offer customers the opportunity to pay for products and services through mobile money, Point of Sale (POS), Quick Response (QR) Codes, rather than cash. In the case of MTN, MoMo Pay is gaining popularity gradually with its reduced transaction fee for the sender of 0.2 percent compared to the P2P transfer fee of one percent. Merchants have a five or six digit code that customers can use to pay in place of a mobile number and are not charged to move money from their wallet to bank account. Point of Sale terminals offer clients a safer and easier way to pay for goods and services using Visa and MasterCard credit or debit card from any part of the world in either cedi or foreign currency. New models of POS accept mobile money wallet payments. Currently, merchant POS commission ranges from Min 2 percent - 4 percent paid by the merchant and will be required to pay e-levy tax on their transactions. An additional levy on top of merchant fees would curtail the adoption of digital payments by informal MSMEs who tend to avoid transacting via digital payments because of merchant fees that eat into their already thin margins.
- Potential effects on bank transfers: Bank to bank, transfer from bank to mobile money and vice versa will also be taxed except transfers between own accounts which will not be charged. Banks still process small to large value transactions such as salary payments, P2P, B2B, B2G payments and charge various fees depending on the type of transactions through various channels including the branch, mobile banking, internet banking, ATMs. E-levy can result in lower transaction values and volumes, make banking expensive and reduce usage of financial products and services.
- Potential effects on inward remittances: Remittance is a significant source of external financing and a major contributor to national income. Many Ghanaian families depend on remittances from relations living abroad to cater for various expenses including education, health, rent, housekeeping, and utilities. Ghanaians in the diaspora also send money home to fund the construction of residential and/or commercial buildings. Remittances therefore contribute to the economic well-being of Ghanaians (Bank of Ghana. Guidelines for inward remittance services by payment service providers. Feb 2021). In the recent past, remittances were sent mostly using informal channels given the prohibitive costs and difficult accessibility of formal channels; however new innovative channels have emerged and gave the opportunity to access international remittances in an easier, more efficient termination to wallet. Users can easily receive remittances from abroad in their wallet (at a transaction fee) and enjoy the financial services linked to the wallet, such as savings plan or insurance. Taxing the recipient of remittance inflow could result in double charges for remittances funds that terminate straight into mobile money wallets. For such clients, an e-levy fee will be charged when they receive their remittance into their wallet.
The way forward
Digital finance has played a huge role in financial inclusion by offering innovative financial products and services to underserved people. Despite the strides made by mobile money in Ghana, financial literacy levels are low and customers seem sensitive to the slightest price increments leading to more exclusion. The more expensive transactions become, the easier it could be to revert to cash.
While an e-levy can be justified by the need for stable source of revenues, there is a potential risk of going back with the digital agenda and discouraging users from using formal platforms, with a final negative outcome for the revenue collection. Initial assessment suggests that there is a clear trade-off between two of the government’s key agendas, namely effective domestic revenue mobilization and financial inclusion. While the waiver of exemption below GHs 100 is clearly a sign of the willingness to safeguard excluded groups, the risk of dropout of average users remains undetermined.
UNCDF based on its market development approach, encourages stakeholders and industry players to explore tax policies that strike a balance between government priorities and the reactions the market might have. Best practices suggest that vulnerable groups should be put at the center of such policy making to leave no one behind in the digital era; broad consultations and public-private dialogue are encouraged to inform the action; weighted waivers could be considered to provide solutions that take into account user profiles and transaction types.
Ghana has made tremendous progress in its digital agenda and all the efforts should capitalize on these successful results while giving the government the possibility to build a strong system of public finances. UNCDF invites stakeholders to continue the conversation to leave no one behind in the digital era.
- Abor, J.Y., Amidu, M. and Issahaku, H. (2018), “Mobile telephony, financial inclusion and inclusive growth”, Journal of African Business, Vol. 19 No. 3, pp. 430-453.
- Allen, F.E., Carletti, R., Cull, J., Qian, L., Senbet and Valenzuela, P. (2014), “The African financial development and financial inclusion gaps”, World Bank Policy Working Paper No. 7019, Washington, DC
- Bank of Ghana report,2020
- Demirgüç-Kunt, A., Klapper, L., Singer, D., Ansar, S., & Hess, J. (2020). The Global Findex database 2017: measuring financial inclusion and opportunities to expand access to and use of financial services. The World Bank Economic Review, 34(Supplement_1), S2-S8.
- National Budget,2022.
- PwC 2022 Budget Digest. https://www.pwc.com/gh/en/assets/pdf/pwc-ghana-2022budget-digest.pdf
- Bank of Ghana. Guidelines for inward remittance services by payment service providers. Feb 2021