As a major economic stakeholder, Vodacom is cognisant of the importance of taxation and the need for governments to widen their tax revenue basis to benefit all citizens adequately.
However, since the negative effects grossly outweigh the benefits, there is a clear and pressing need to review the policies and adapt accordingly.
Below we highlight some of the unintended consequences of mobile money taxation. Impact on the end user Mobile money taxes directly impact the poorer members of society who are more sensitive to transaction costs while excluding high-income groups who can access alternative means of payments where a similar tax is not applied.
The disproportionate nature of these taxes can lead to a change in behaviour and use of financial services, and a return to cash transactions by those who would benefit the most from mobile money services.
This behavioural change was demonstrated in Tanzania’s impact report prepared by the GSMA, which analysed the impact of the new levy on mobile money transactions in the first three months after its introduction.
Following the introduction of the mobile money levy, mobile money revenue reduced sharply by 28% per month between June and August (also demonstrated above).
An impact study of mobile money taxation in Uganda also found that the tax burden of 0.5% on mobile money withdrawals had been disproportionately felt by the poorest people, with a noteworthy increase in agency banking for higher-value transactions.
Impact on economy
Mobile money has demonstrated the critical role it plays in driving financial inclusion, supporting emergency response initiatives, and reducing poverty among the unbanked who now have access to loans, savings, and other essential financial services.
This has increased financial awareness as users develop their financial literacy to improve their own lives.
However, as emphasised throughout this report, poorly implemented policies around mobile money taxation risk reversing these gains and curtailing economic growth.
Mobile money taxation is a careful balancing act between the key government agenda of short-term domestic revenue mobilisation (which can be achieved more efficiently and equitably using tools other than telecoms-specific taxation) and longer-term tax-based growth and financial inclusion.
Reducing mobile money usage would diminish financial inclusion, employment opportunities and overall growth.
The spill-over effects of this would likely be increased fraud and higher levels of insecurity. Additionally, future investments could be delayed if the tax administration landscape remains uncertain or inequitable.
This will inhibit the development of the digital economy which will have a detrimental domino effect on other critical national goals, such as the economic and social development aims noted in this report.
Poorly designed and implemented taxes and levies could also frustrate government revenue generation objectives.
Often, such taxes and levies prompt reduced consumption of mobile money services, which results in taxing a lower consumer base and collecting far less revenue than anticipated, as was the case in Ghana. The net result is a return to informality as consumers use cash and other informal means, avoiding the tax net.
Impact on businesses and investments
Beyond impacting the users, increased taxes affect mobile money providers’ business models and ability to provide services to the unserved and underserved.
Suppose there is a reversal to cash transactions by majority of individuals and small to medium enterprises, businesses stand to lose out on heavy investments already made in the sector toward boosting financial inclusion.
Additionally, where the tax burden is too high, there is a risk that providers will restrict their investment which then reduces mobile money penetration and thus the socio-economic benefits derived from mobile money.
For countries with national financial inclusion targets, the impact will be felt by a reduced demand for mobile money services, ultimately leading to the loss of the previously sought-after informal market and hampering their financial inclusion goals and objectives.
Proposals for a better approach
Based on the above examples and the highlighted unintended, yet adverse, consequences of mobile money taxation, targeted mobile money taxes and levies are ineffective at creating a sustainable source of tax revenue and are detrimental to the economy. Disproportionate taxation measures cannot solve poorly formulated and administered tax policies in the long term.
It can be argued that this approach reflects a misunderstanding of the mobile money industry and, consequently, an inaccurate assessment of the full impact of mobile money taxes.
It fails to highlight the significant negative impact on mobile money users and agents, and the consequent adverse implications for the financial services sector and financial inclusion overall.
Future review of taxes imposed on mobile money transactions should be preceded by a thorough analysis of optimal taxation practices, the likely change in behaviour around financial services and, above all, the marginal contribution to the tax effort that policy aims to raise.
There is therefore a call for governments to explore tax policy alternatives that will strike a balance between achieving these goals and enforcing fundamental taxation best-practice principles.
One such option is for governments to explore how best to broaden their tax bases in ways that promote positive social outcomes and a balance of taxation that incentivises sustainable investment while focusing on developing much sounder relationships between tax authorities and businesses.
Fundamental taxation principles
According to the IMF and the Organisation for Economic Co-operation and Development (OECD), 2019 Progress Report on Tax Certainty, tax certainty is an essential component of investment decisions for taxpayers and can have significant impacts on economic growth.
Taxes should be as broad-based as possible and apply equally across business sectors. Sector-specific taxation should only be used in exceptional circumstances where there is a clear and justifiable necessity to do so. For example, to curtail a particular behaviour that produces negative externalities (e.g. increased public healthcare spending resulting from the detrimental effects of alcohol and tobacco use, etc.).
A tax or levy imposed on businesses because they have cash is short-sighted, creates arbitrary distortions and serves as a deterrent to investment in infrastructure.
We assert that digitisation has led to several benefits across multiple economic sectors. It should be incentivised to continue playing its vital role in that development and not taxed out of existence, specifically in the mobile money industry.
Given the many benefits of mobile financial services, it stands to reason that mobile money tax should be based on fundamental tax principles and proportionate and broad-based rather than sector specific.
The proposed taxes should avoid any regressive impact on users and be simple, understandable, and easily enforceable. Additionally, and given the context, tax policies must consider the compounding effect of multiple taxes already borne by the mobile sector as recommended by the mobile industry association body, GSMA.
Widening the tax base
As highlighted earlier, increasing taxes on mobile money transactions may cause more harm than good. However, industries can thrive where the appropriate enabling environment supports economic growth, creating a more extensive tax base for the authorities.
The part of a country’s output that the government collects through taxes, the tax-to-GDP ratio, is an essential indicator of measuring the government’s tax effort.
It is used internationally by, among others, the IMF, the World Bank, the OECD, and the African Tax Administration Forum (ATAF) in the comparative analysis of tax systems and economic performance.
The 15% tax-to-GDP ratio often quoted by the IMF as ideal for emerging economies should not be considered in isolation. Given the need for supportive policy intervention toward economic recovery, fiscal interventions should consider positive externalities and digital/financial inclusion objectives.
South Africa is one good example, where it has consistently improved its tax-to-GDP ratio, achieved through nine strategic objectives.
Although GDP is the primary driver of total tax collections, improvements in the tax-to-GDP ratio can significantly improve total tax collection.
This is achieved by broadening the tax base without increasing taxes on existing entities. By drawing more users into the formal economy, mobile money services can provide a wide range of socio-economic benefits and allow authorities to identify and tax previously anonymous economically active participants who are not being taxed fairly.
Additionally, mobile money can facilitate government payments and improve tax collection processes. Taxing MFS services to the extent that users abandon the service and revert to a cash-based economy is ultimately counterproductive for economic development, broadening the tax base and governments’ tax revenue collection objectives.
According to the OECD Report on African tax statistics, only eight African countries have a tax-to-GDP ratio that is above 20%. Part of the reason for this could be attributed to the narrow tax base as well as low tax productivity.
Conclusion and recommendations
The mobile telecommunications sector is one of the highest-taxed sectors in many countries in which we operate. This limits the affordability of essential communication services in these markets for ordinary consumers.
The unintended consequence of regressive mobile money taxes and levies is pushing consumers to use cash and other informal means, potentially reversing financial inclusion gains, frustrating the achievement of national financial inclusion targets, increasing informality, and resulting in lower tax revenues.
The importance of adequate and well-structured tax policies cannot be overstated. Without a sound and well-researched approach to tax policy, a short-term revenue approach can lead to adverse and undesired outcomes on several fronts.
As highlighted above, mobile money taxation can harm financial inclusion objectives as it further exacerbates the affordability barrier by disproportionately affecting low-income and financially excluded households.
Due to the ubiquitous nature of mobile money, it is anticipated that this impact will be felt in multiple sectors and ultimately impact a country’s economy.
We believe that the detrimental effect of mobile money taxes grossly outweighs the tax gains that the government is looking to collect. This therefore presents a sound policy ground for the abolition of mobile money levies in all applicable markets.
We urge governments to reconsider the imposition of such taxes and levies and instead enable the relevant authorities to create enabling environments in their respective market operating landscapes to incentivise greater private sector investments.
This will allow the industry to become more profitable and thus increase the standard general taxes paid without the need for the implementation of specific mobile money taxes.
This means generating increased revenue without impacting the financial and economic inclusivity of the most vulnerable members of society.
Vodacom recognises the motivation of government authorities to impose taxes and levies and wishes to reiterate that broad-based corporate taxes levied at internationally benchmarked rates are not viewed as a barrier to investment or innovation.
However, it is key to note that raising or introducing sector-specific taxes harms the general economy and hinders the investment needed to deliver a digital society and financial inclusion, as highlighted in this paper.
Below we highlight some key recommendations that could contribute to the effective development of mobile money tax policies and continue to bolster economic development:
- Widen the tax base by creating an enabling legal and regulatory environment that will allow businesses to thrive and be more profitable.
- Ensure mobile money taxes are aligned to long-standing tax principles based on equity that do not exacerbate social divides.
- Engage with mobile money operators and telecommunication businesses to understand the business and impact of mobile money taxation.
- Create tax policies that are proportionate and broad-based rather than sector-specific while avoiding any regressive impact on users. 5. Improve tax collection processes through extensive research and public-private collaboration.
African Eye Report with files curled from Unpacking the Implications of Mobile Money Taxation in Africa 2023 report file:///Users/masahudu/Downloads/Mobile%20Money%20Taxation%20Paper_FINAL_31%20Mar.pdf
