Ghana’s finance minister Ken Ofori-Atta has announced that the government intends to introduce an electronic transaction levy (e-levy) in the 2022 budget. He said this was to “widen the tax net and rope in the informal sector”.
The proposed levy, which will come into effect on 1 February 2022, is a charge of 1.75% of the value of electronic transactions. It covers mobile money payments, bank transfers, merchant payments, and inward remittances. The originator of the transactions will bear the charge except for inward remittances, which will be borne by the recipient. There is an exemption for transactions up to GH¢100 ($16) per day. According to the finance minister, the total digital transactions for 2020 were estimated to be over GH¢500 billion (about $81 billion) compared to GH¢78 billion ($12.5 billion) in 2016. The huge growth in just five years.
While the justification for this new levy is to widen the tax net, since the majority of the population make a living in the informal sector, it seems a convenient means to increase government revenue. The initial response to the announcement of the levy has been one of displeasure and fears that it will affect the country’s current digitization agenda. I do not expect these responses to lead to a reversal, as was done recently with the payment of benchmark values at ports. However, the government may revisit the implementation and subsequent charges gave the existing cost of mobile money.
There are several reasons why the government is not likely to backtrack. Ghanaians should brace themselves for this levy. The Ghanaian government is unlikely to backtrack on the levy
Firstly, there are no viable alternatives. Though this e-levy may force some people to resort to the use of cash, for the majority, there is no viable alternative. At the moment, electronic payment, especially mobile money, is the most efficient and cost-effective means of transferring money since it is widely accessible in Ghana. Its wide use is because of its convenience, especially in rural areas. The only alternative is to use banks, which have limited branches. And banks themselves are now digitizing their services to minimize the use of cash.
My research into the use of financial technology in Ghana has shown that in the absence of practical alternatives, mobile money is the only means for many people to access financial services. The research also indicates that the cost associated with mobile money is not an inhibitor. Thus, irrespective of the e-levy, people will still use mobile money.
The levy is an easy way for the government to generate revenue. Successive governments have failed to find innovative solutions to expand the tax net to include the informal sector, although this sector employs the majority of Ghanaians at about 85% of the urban economy. As many people, including those in the informal sector, use mobile money, the government sees it as an easy way of taxing the informal sector. Estimates show that in 2020, the total volume of mobile money transactions was over $99 billion (GH¢561 billion) far surpassing check and cash transactions which stood at $29 billion. Given the potential revenue, the government can generate and as it is unable to devise an innovative solution to tax the informal sector, mobile money taxation appears to be the easy way out.
Digital payments have been institutionalized in Ghana
In recent times, the government has embarked on digitalization projects to reduce the use of cash. Among these is the e-currency (e-cedi) project, in which the Central Bank will issue its “own version of mobile money.” The roll-out of the e-cedi may further limit the use of cash, forcing people to use electronic payments, so people will have to pay the e-levy. The government is also moving to a digital-only payment option for its services, to curb corruption and revenue leaks. This means that without digital payment, people may struggle to access certain services such as getting a passport or driver’s license, registering a company or clearing goods at the port. It’s another reason people will have little choice but to pay the e-levy.
Normalization of digital payments during the pandemic
With the emergence of covid-19 and the imposition of restrictions on movement and the fact that mobile money, bank accounts, and cards have become more closely linked, many people resorted to digital transactions and payment for most of their day-to-day economic activities. The government asserts that the value of digital transactions rose by 120% between February 2020 and February 2021. In the previous year, it rose 44%. The government is aware that most people are now accustomed to online transactions. They are convenient and people will find it difficult to revert to physical transactions.
Many people will not be in favour of the e-levy because of existing charges on mobile money. There is also the risk that it could derail the growth of the Ghanaian FinTech ecosystem by making Ghana unattractive for Fintech startups. For instance, this e-levy will reduce the profit margins of Fintech startups that may not wish to pass on the cost to consumers. In 2021, Zeepay, an indigenous Ghanaian Fintech Firm alone attracted about $7.6 million investment. Given the direct and indirect benefits Fintech contributes to economies, this e-levy will become an additional problem for already struggling Fintech startups. It appears that the government is only thinking of short-term revenue gains.
Thus, the government should relook at the implementation and strategically target the tax instead of the blanket e-levy on digital payment. It should be guided by lessons from other countries like Uganda who have also implemented mobile money tax.