In order for the emerging economies of Africa to sustain their development needs domestic revenue mobilisation is essential. James Claude, CEO of Global Voice Group recently spoke with Digital Banker Africa on the role of technology in boosting domestic revenue mobilisation in Africa.
- What is the state of the tax-to-GDP ratio of African countries?
The World Bank recommends a tax-to-GDP ratio of 15%. On average, Africa lags behind other emerging economic regions such as the Asia-Pacific region (21%) and the Latin America and Caribbean economies (22.9%), averaging 16.6% according to the Organisation for Economic Co-operation and Development (OECD) Revenue Statistics in Africa 2021 report. Only 15 countries in Africa are above the recommended World Bank ratio and what is even more surprising is that the non-resource rich countries lead the way in terms of high tax-to-GDP ratios – Morocco, Seychelles, South Africa, and Tunisia all have tax-to-GDP ratios above 26%. That is in stark contrast to Nigeria, the Democratic Republic of Congo, Congo, and Niger which all average below 10.5%.
Given the massive demands of developing African countries, this low level of tax collection jeopardises the African continent’s socio-economic developmental progress. Low taxes generated and collected by these African countries are partly attributable to the underdevelopment of African countries’ tax management systems. These inefficiencies are impeding efficient tax collection and management.
The need to improve the tax-to-GDP ratio is evident with some African countries already making deliberate efforts to achieve this. For example, Ghana introduced new tax measures in their 2022 budget that according to their finance minister will raise their tax-to-GDP ratio from 12% to 16.5%.
- What challenges exist for African tax administrations in the mobilisation of revenue?
There are several challenges that limit the effective collection of domestic taxes by African governments. One of the largest hindrances is the size of the informal economy. According to the International Labour Organization (ILO), 2 billion people work in the informal economy globally, and in Africa, 85.5% of the population does. The informal economy operates mainly on cash transactions and possesses very little in terms of a paper trail or records that can be audited to effectively seal any revenue leakage gaps. Many businesses in the informal sector also do not have formal registration as companies, and are not registered with tax agencies, making it challenging to track the revenues generated by these businesses and tax them.
Tax evasion is a major challenge too. For example, from the total population of slightly above 47.6 million Kenyans, Kenya Revenue Authority (KRA) reports that about 5.5 million taxpayers filed their returns in 2021. The number of registered taxpayers using iTax – the authority’s tax portal – stands at 6.1 million. This number is expected to grow to 8.2 million by 2023. That number is still quite low compared to the number of citizens between the ages of 25 and 49 (16.7 million), who would make up the largest chunk of the tax base.
- How can tech be used to grow domestic revenues?
There are many African governments that have been eagerly adopting emerging digital technologies to address these tax collection and management challenges in the last decade. These smart technologies are meant to address these difficulties and streamline tax collection and management systems to positively impact local tax revenue generation and management. For example, Rwanda and South Africa have developed and implemented digital systems such as point of sale devices (POS) and e-tax filing systems to simplify the tax remittance systems and provide greater convenience for taxpayers.
Tunisia has also adopted technology to boost domestic revenue mobilizations and uses an online filing and payment system that minimises the frequency of payments. This is done promptly, minimising the burden on taxpayers and potentially discouraging tax evasion. Reports have demonstrated that tax collection and payments reforms have decreased tax evasion and expanded the overall tax revenue collection. Tunisia’s tax-to-GDP ratio as a result has grown from 12.3% in 2008 to 34.2% in 2021.
The growth in mobile money transactions, while positive for financial inclusion and economic growth, also presents a possible opportunity for the government to increase tax income. Digital payment systems are currently largely untaxed, and while the industry grows, several government tax revenue sources are experiencing a decline in growth.
- What gaps in policy need to be addressed for tech to effectively boost domestic revenue mobilisation?
Policy is central to ensuring the effectiveness of any initiatives or measures put in place, including those around domestic revenue mobilisation and technology. Technology has become central to the economies of many African countries, with the growth of mobile money, e-commerce, digital payments and increased internet penetration. However, as stated above, many of these technology-backed systems remain largely untaxed. This is largely due to the large informal economy.
Addressing the regulatory gap requires an appropriate regulatory framework. These frameworks set the basis for tax compliance and effective revenue assurance. Policy makers are therefore called to promote the right regulatory frameworks that enable the implementation of technologies to improve oversight within the digital ecosystems, where tax shortfalls are prominent. The right systems can improve visibility on revenue leakage enabling improved domestic revenue assurance.
Some African countries, like Rwanda and Ghana, have embraced digitalization and can be legitimately described as pioneers when it comes to the adoption of regulation technology. The telecom regulators of both countries, RURA and NCA, implemented some of GVG’s regtech solutions, which allowed them not only to enhance the governance of the telecom and digital financial services, thanks to the resulting improvement in their decision-making capacities but also to secure additional revenue from these essential sectors.
The digital transactions ecosystem is experiencing an unparalleled growth in the African continent. However, the growth of this strategic driver for the economies is not reflected accordingly in the GDPs’. When this happens, it’s a clear indicator that the existing policies are insufficient to oversee these growing ecosystems and ineffective in channelling their growth in the real economy. In response to this reality, many governments in Africa are drafting policies to tax digital transactions. Ghana’s e-levy, in force since May, sets a 1.5% tax on most electronic money transfers and Cameroon brought in a similar charge in January. These are examples of policies aimed precisely at filling budget holes and driving domestic revenue mobilisation, using key economic sectors that generate billions in revenues and remain highly undertaxed.
- Any closing comments?
Technology has the potential to solve the challenges faced by African countries in domestic revenue mobilisation, but it is a double-edged sword. Without the right frameworks and policies being put in place, the potential benefits of implementing technology would not be felt or fully materialise. Tax authorities and governments need to work together to identify impactful solutions and create the required enabling environment for these technology backed solutions to thrive. This is a conversation that must be had from an industry level, with all stakeholders. As such, we will be holding a webinar on this topic with two experts on Thursday 3rd November to discuss ways that technology can be applied to solve the dilemma of domestic revenue mobilisation: https://www.globalvoicegroup.com/upcoming-webinar/
We encourage everyone who has an interest in the topic to join!
Read the original article in Digital Banker Africa