Politicians, parliamentarians, academics, investors, entrepreneurs, civil society organisations and, indeed, taxpayers in Ghana have been debating the proposed introduction of an ‘Electronic Transaction Levy’ or ‘E-levy’ in recent days, following presentation of the 2022 Budget Statement to Parliament by Minister of Finance Mr. Ken Ofori-Atta, on November 17, 2021. The debate on the justification, fairness and utility of the E-levy is at an impasse, and positions have become polarised.
The 2022 budget, coming under the theme ‘Building a Sustainable Entrepreneurial Nation: Fiscal Consolidation and Job Creation’, seeks to introduce a number of bold policy initiatives designed to restore macroeconomic stability with a focus on fiscal and debt sustainability in an extraordinarily tough economic environment.
The budget’s theme is important and particularly timely when economic growth and job creation are such high priorities around the world. The single most important focus of the Sustainable Development Goals (SDGs) is to recognise that sustainable development means creating decent jobs – jobs that pay living wages and offer a chance to develop new skills (Goal 8), and which reflect the aspirations of many Ghanaian youths today.
Poverty and social exclusion remain key challenges in Ghana and have become amplified during the recent domestic financial sector crisis and ongoing COVID-19 pandemic. Persistent jobless-growth and its associated unemployment have reached crisis proportions, especially among the Ghanaian youth. Data from the Labour Force Survey conducted by the Ghana Statistical Service (GSS) show that the total unemployment rate for Ghana is 11.9%.
According to the data from GSS, Ghana’s youth (15-24) unemployment rate has reached 25.9% – more than two times that of the adult population. Vulnerable employment is also high at 68.6%, indicating lack of decent work. When employment opportunities in the formal wage economy are scarce, people are compelled to settle for low-paying jobs in the informal sector – often through self-employment in the services sector. About 90% of the currently employed population are in the informal sector and do not contribute adequately to tax revenues.
The COVID-19 pandemic has had a severe impact on economic activity in Ghana. In 2020, the Ghanaian economy recorded its lowest growth in over 25 years. Growth slowed to 0.4% from 6.5% in 2019, and is only expected to recover to 5.1% by end of 2021. Data from the World Bank’s World Development Indicators indicate that by the international poverty line of US$5.50 a day, at 2011 international prices, more than half of the Ghanaian population are poor – living on less than US$5.50 a day.
Government debt now stands at some GH₵341.76billion, or 77.8% of GDP; up from 54.2% at the end of 2017. This means that every adult Ghanaian citizen (18+ years) is indebted to Ghana’s creditors to the tune of about GH₵19,000. The total debt stock represents over 494% of total domestic revenue and over 617% of tax revenue. Interest payments on the public debt stand at some GH₵32.5billion and are projected to rise to about GH₵37.4billion by close of 2022, representing one of the fastest-growing items of expenditure in the budget. At present, interest payments on public debts consume 47% of total domestic revenue and nearly 60% of total tax revenue.
Clearly, the mobilisation of domestic finance is critical to success in obtaining resources to finance the investment needed for meeting the laudable objectives in the 2022 Budget Statement. Ideally, it would have been preferable for Ghana to use domestic savings to finance the required investments; due, in part, to the fact that it is less volatile than most sources of external financing and does not increase the economy’s vulnerability to external shocks over which we have no control. In response to rising public debts and tight fiscal space, one of the proposed revenue policy measures in the 2022 budget is introduction of an E-levy on all electronic transactions… ostensibly in the hope of raising an additional GH₵6.9billon.
We have followed closely the discourses written and spoken about the necessity and justification of the controversial E-levy, and hereby write this short policy brief to offer our impartial educated thoughts in the hope that they may add to improving the public debate – and probably guide the Minister of Finance and Members of Parliament to make informed judgment about the way forward.
When we first heard of this E-levy, we thought it was going to be a tax on electronic commerce, or commerce conducted through electronic networks or platforms. In Ghana today, as in many other developing economies, there is a growing and flourishing informal sector wherein businesses make use of social media platforms such as Facebook Messenger and WhatsApp to sell and buy products. In contrast to businesses in formal brick and mortar stores, these informal businesses do not pay tax on sales they make through social media.
The COVID-19 pandemic has accelerated e-commerce, despite the catastrophic shutdown of business activity and consequent economic contraction caused by the virus. E-commerce channels have deepened and expanded during the crisis, with a growing interest in digital processes and online purchasing in many countries. Growth of the digital economy, and in particular online sales, has created additional complexity and increased the risks of underreporting – resulting in the loss of significant tax revenue to the state. Every effort by the state to curb tax avoidance, tax fraud and tax evasion, and leakage of potential tax revenue should therefore be encouraged by all citizens as just and fair.
To our surprise, however, on reading the budget and listening to policy statements upon same, it seems that the proposed E-levy is, literally, a tax on mobile money (MoMo) payments. In that case, the proposed E-levy is not strictly a consumption or income tax but a tax on electronic payments or remittances.
The E-levy belongs to the class of tax instruments referred to generally as ‘financial transaction taxes (FTTs)’. FTTs is a generic name for taxes that are levied on transactions such as the sale and purchase of some sort of financial instrument such as stocks, shares, bank transactions or forex transactions.[1] The tax was originally intended to make financial markets more stable by discouraging excessive risk-taking. English Economist John Maynard Keynes was one of the first prominent proponents of such a tax.[2]
In his General Theory of Employment, Interest Rates and Money, Keynes proposed a securities transactions tax to reduce destabilising speculation in equity markets. He was followed later by American Economist James Tobin, who proposed a tax on financial transactions using the famous description that it was to “throw sand in the wheels of the excessively efficient international money markets”.[3] Tobin’s focus was on foreign exchange markets and how to preserve sound macroeconomic policies, hence his suggestion of a currency transaction tax to “throw sand” into the overheated gears of the global financial system and to limit speculation by reducing velocity and volume of transactions.
How desirable is the E-levy?
Because these taxes are easily administered, FTTs have thus often been introduced by countries experiencing fiscal crises as a swift means of raising substantial revenue. All that is required is just a few large financial institutions, or in the case of MoMo, mobile network operators (MNOs) to withhold the taxes from their customers and remit same to the revenue authorities. However, the introduction of FTTs has always been controversial.
The question is whether there is an efficiency justification, for imposing such a tax. Why would anyone want to “throw sand” in the wheels of our budding MoMo payment ecosystem? Economic theory and empirical evidence have taught us that taxes on financial transactions are among the least efficient tax handles to be considered by any country. The E-levy will affect only a segment of financial transactions that involve the transfer of resources from one person (business or individual) to another when the transaction takes place electronically.
If this proposed E-Levy became law, it would mean that with effect from February 1, 2022, government would take 1.75 percent of the value from every MoMo transfer over and above GH₵100 per day. This tax will always apply every time one used his/her MoMo account to make transfers, whether paying your child’s school fees or sending money to pay your parent’s medical bills in the village.
The design of the tax raises multiple concerns. Ghana’s proposed E-levy will affect only a segment of financial transactions that involve the transfer of resources from one person (business or individual) to another if it takes place electronically and is connected with MoMo or payment cards. By only taxing electronic financial transactions associated with MoMo and payment cards, the E-levy can be avoided by simply switching to other means for payments.
There are good reasons to reconsider taxation in the financial sector. Since Ghana’s proposed E-levy only targets mobile money transactions, the tax will potentially result in substitution across financial instruments or payment methods and thus raise less tax revenue than projected in the 2022 budget. The levy will increase both explicit and implicit transaction costs for MoMo payments.
If care is not taken, the levy has the potential of slowing down financial intermediation and financial inclusion; and discouraging the use of electronic payments while encouraging the use of cash for transactions. These unintended consequences could offset whatever advantages are to be derived from the levy for revenue purposes. To illustrate: assuming someone wants to transfer GH₵10,000 to a client or a relative, there is a menu of payment options to choose from:
- issue a cheque to the person;
- deposit cash into the person’s bank account;
- transfer the money from a bank account to the person’s bank account via Internet banking;
- transfer the money from a mobile money account to the person’s bank account;
- transfer the money from a bank account to the person’s mobile money account;
- transfer the money from a mobile money account to the person’s mobile money account.
The E-levy liability does not arise if the first three options are used; the last three options, which involve mobile money, are the target and thus would attract a tax liability of GH₵175. Hence, the E-levy discriminates against the use of an electronic medium – mobile money – to settle transactions. So, the question is: do we have a problem with the frequent use of mobile money? We guess the answer will be no! It is apparent that the main purpose of Ghana’s proposed E-levy is to raise revenue for government due to the apparent fiscal challenges.
The tax revenue in Ghana is low: less than 13% of GDP compared with the sub-Saharan Africa average of 16.4%. Indeed, the problem with the fiscal deficit has everything to do with low domestic revenue mobilisation. Government expenditure as a share of GDP has been relatively stable, at least over the last decade – declining from 23.8% in 2016 to 19.4% in 2019 before rising to 25.1% in 2020 (largely due to COVID-19-related expenditures and election-year syndrome). Thus, ideally, we should support any commitment to widen the tax net to raise more revenue, reduce the deficit and debt accumulation, and for the provision of public services and infrastructure in the country.
However, the proposed E-levy is not the way to go. It is simply not an efficient tax. The proposed E-levy can impede the functioning of both the Ghanaian financial system and the real economy. For a most efficient tax handle, taxpayers’ choices are unaffected by tax policy. The E-levy will affect the medium to use in the payment of transaction or transfer: cash, cheque and electronic mediums of payment or transfer. This will create inefficiency in the economy, since an inefficient payment medium will be used because of the E-levy. Payments and transfers will move from electronic or digital platforms into cash or cheque to avoid the E-Levy. Thus, the use of physical cash will rise and distort prices in the economy.
There are also distributional and revenue generation implications from the proposed E-Levy. Due to its cascading effect, the incidence of FTTs, such as the proposed E-Levy, can be complex and capricious. Though they are sometimes portrayed as progressive, the burden of the tax may end up falling on the poor who have limited financial payment options and those who mostly depend on inward remittances. We know that there are differences in the elasticities of demand for electronic payments among different MoMo users.
Transfers or gifts, which are usually urgent or needed by the recipients, have low elasticity since there are limited substitutes given the time-limit for the recipient to get the transferred money. Thus, the incidence will be high for those groups who provide urgent help or are living far from the people they take care of. These are transfers to people who may be in critical need or living in places far from the person making the transfer.
The people who transfer or make high payments (say GH₵1,000) may switch to using bank transfers, issue a cheque or make direct deposits instead of using mobile money and paying GH₵17.50. Thus, a transfer of GH₵1,000 to pay for goods and services – even a remittance to a relative – will attract a tax of GH₵17.50; but if the same payment/remittance is effected through direct deposit or bank transfer into the person’s bank account no tax obligation will arise. Essentially, there are available options for big senders to use for payments and transfers. They can easily avoid this tax. Thus, the burden of the E-levy will disproportionately fall on persons who may not be able to transfer substantial resources at a time.
The opportunity to avoid using MoMo for transaction settlements will also affect the projected revenues contained in the 2022 Budget Statement. Though FTTs appear to offer an easy fiscal handle, their revenues have a tendency to erode over time, as taxpayers learn to avoid them by using cash payments and other payment methods.
A back of envelope calculation suggests that the E-levy will likely generate far less revenue than that projected. In 2020, MTN MoMo recorded a total volume of transactions at 2.6 billion amounting to GH₵549billion[4] (the total value of Mobile money transactions for all service providers was GH₵564billion[5]). The total revenue generated by the MTN end to end charges of 2 percent amounted to GH₵1.3billion (equivalent to 0.23 per cent of the total value of transactions or GH₵0.5 per transaction).
Supposing the value of MoMo transactions experience an annual growth of 100 percent to reach GH₵2.3trillion in 2022, using the MTN average effective charge of 0.23 per cent in 2020, the 1.75 percent E-levy on MoMo transactions will generate revenues of GH₵4.5billion (GH₵2.4billion, less than the projected GH₵6.9billion in the 2022 Budget Statement). Moreover, both the volume and value will likely decline as a result of behavioural changes in usage of the electronic platform for financial transactions in response to imposition of the E-levy. This means that projected revenue in the budget is over-optimistic.
In Uganda, for example, the imposition of one percent mobile money transaction (cash-in, transfer and cash-out) tax led to a drastic reduction in mobile money transactions – the value of mobile money transactions fell by 24 percent. The IMF had warned that it was the rural poor who were likely to be hit disproportionally hard by the transaction taxes.[6] In fact, transaction values of P2P transfers fell by more than 50 percent.[7] There were behavioural changes in response to the tax.
Consumers used other, cheaper, alternative modes of transactions: cash and the banking system became the main modes of transactions for low value transactions and higher value transactions respectively. Even reduction of the tax to 0.5 percent on the value of withdrawals only did not bring back the high value transactions, as there is no tax on banking system withdrawals. However, some of the low value transactions came back as they lack the flexibility and options to transfer money in an easy and safe manner – suggesting the poor (especially rural poor) disproportionately bears the burden of the mobile money transaction tax, defeating the tax principle of tax equity (both vertically and horizontally).
Conclusion and Alternative Tax Policy Options
Around the world, the digital economy is experiencing considerable growth; posing a greater risk for the tax base of many developing countries. One of the fundamental questions facing modern policymakers is whether and how to tax the digital economy. The daunting task many revenue authorities face has been how to protect their revenue base without hindering the development and use of new technologies or the business community’s involvement in emerging digital economy and e-payment systems.
In Africa, the MoMo system is by far the best innovation adopted by many countries to achieve financial inclusion. More importantly, the cashless nature of the MoMo system offers users the convenience of making or receiving secure payments with just the click of a button. The adoption of MoMo is therefore widely acknowledged to increase productivity by improving efficiency, reduce transactional and operational cost, improve financial security, create employment opportunities and stimulate business growth. Whatever Ghanaian policymakers choose to do in their quest to raise more domestic revenue, it is important to ensure that the policy measures introduced do not hinder this MoMo economy.
Even though the proposed E-levy is well-intentioned, it is our considered view that if care is not taken it could actually end up “throwing sand” into the burgeoning MoMo ecosystem and potentially impede financial inclusion and the efficient payment and settlement systems landscape being developed by the Bank of Ghana. Any tax approach adopted should therefore consider the impact this tax may have on the beneficial use of MoMo services. A radical approach targetting MoMo payments and isolating it for special treatment would be ill-advised. In our view, the introduction of this levy is too radical and discriminatory. It is important to note that this levy flouts at least three of the principal canons of taxation:
- Neutrality and equity – i.e. treating similar activities similarly. Taxation should be neutral and equitable between the digital and conventional economies; and digital payment models that are similar to each other should be taxed in the same way. And, taxes should not be designed to influence individual decision-making.
- Effectiveness and fairness – the potential for tax avoidance and evasion should be limited.
- Fairness, i.e. non-discrimination. This principle demands that taxes should not favour any one group over another.
We suggest that government should drop this E-levy. It is distortionary, discriminatory and inefficient. The consequential distortions and resultant deadweight losses that would be created by this tax handle could far outweigh the additional revenues that may be generated. The existing tax handles should rather be efficiently deployed to raise the needed revenue for the 2022 fiscal year and beyond. Here, the role of MoMo and banks or card transactions are very critical. Government should employ MoMo and other electronic platforms as enablers for efficient implementation, monitoring and enforcement of existing tax handles.
Let’s take, for instance, Person to Person (P2P) transfers. Such receipts will fall into one of the following: gift (local or international remittance) or income from employment or revenue from supply of goods or services. A gift from a ‘non-relative’ whether through electronic or cash or physical property is supposed to attract a tax of 15% (Internal Revenue Act, 2000 (Act 592)). For a given month, all that the Ghana Revenue Authority (GRA) should do is to send a pre-filled electronic Gift tax return with information from the MoMo receipt and other electronic transfers (here using a National ID card to link information about a particular taxpayer is critical).
The taxpayer is asked to fill any other sources of gifts, apply the appropriate gift tax rate, and pay the tax. If a withholding tax scheme is instituted, government can collect the portion of withholding tax at the time of transaction. The difference between the withholding tax paid and the gift tax liability becomes a refund or additional tax to be paid. On the other hand, if the receipt is income from employment, the appropriate personal income tax should be applied (Income Tax (Amendment Act), 2018 (Act 973)). If the receipt results from a supply of goods and services, the appropriate VAT rate should be applied and remitted to GRA (Value Added Tax Act, 2013 (Act 870)).
Thus, we advocate that government should rather consider leveraging the massive usage of electronic or digital payments and transactions to monitor and enforce existing tax handles. In this regard, government should encourage electronic or digital payment for goods and services, and transfers between persons. This can be achieved through negotiations with MNOs to eliminate charges on transfers and payments.
Since some service providers have already removed charges on transfers and payments, government may consider a confiscatory tax on MoMo charges with instant full redistributive transfer to users who pay charges on transfers. It is therefore recommended for the consideration of government that a withholding tax scheme be rather imposed on all recipients of P2P transfers or payments – whether the mode of transfer or payment is MoMo or through the banking system. Gift tax and VAT returns are supposed to be filed on monthly basis. An easy way of filing these tax returns (electronic) should be provided for additional tax liability payment or refund.
If government insists on maintaining the proposed E-levy in its current form, then to ensure fairness and continuous use of the electronic system of payment, a tax could be imposed on cash withdrawals (both MoMo and bank withdrawals). This will make the medium of payment or transfer neutral with regard to this tax handle. The imposition of a tax on withdrawals may, however, negatively affect financial inclusion and bank/MoMo deposits by informal players who earn cash outside the banking and formal systems.
A transaction tax of 1 percent on cash withdrawals and 0.5 percent of E-levy on all electronic P2P transfers (MoMo, bank transfers, including cash and cheque deposits, and electronic money transfers) may be enough to generate adequate resources. This will serve as an incentive to settle transactions electronically and keep the money in e-form rather than cash. The rise in ‘electronic velocity of money’ in this manner has the potential to increase government revenue collection with a smaller E-levy rate.
In conclusion, the GRA must seize the momentum brought about by COVID-19 and double-up its efforts to accelerate the growth of new digital capabilities for micro, small and medium-sized enterprises and workers to emerge stronger and contribute to tax revenue. We should update the tax regime and make it more resilient as the digital economy grows. Government could consider extending goods and services tax to e-commerce, subjecting all digital and non-digital goods and services imported or locally traded to goods and services tax or value-added tax. This will to ensure a level playing field between digital and traditional businesses and capture activities presently uncaptured by corporate tax rules.
Since e-commerce is still at a relatively early stage in Ghana, the levy’s rate should be reasonable in order not to discourage its development. Instead of imposing a levy on MoMo payments, with the high penetration of mobile phones, MoMo wallets – in particular in rural areas, we recommend government to see MoMo as an enabler to further engage in raking-in tax revenue from the growing e-commerce economy. We should eliminate all barriers to e-payment usage, and rather incentivise the e-payments ecosystem in deepening and expanding financial inclusion.
It is trite knowledge that access to financial and payment services – including savings, credit, remittances, and social welfare transfers – facilitates improved financial inclusion and severely impacts financial stability, financial security, and poor people’s economic mobility and inclusive growth. There is therefore a growing global recognition of the importance of inclusive financial systems and financial inclusion for achieving sustainable economic growth and development. The aim of financial inclusion is to enable the formerly financially excluded segment of the population gain access to certain financial services such as savings, payments, credit, transfers and insurance.
Government must be careful not to put the brakes on this positive development in Ghana. Instead of an E-levy that has the potential of reversing the gains made in financial inclusion, government should support digital transactions by modernising the ICT infrastructure to ensure quality broadband connectivity, reduce fraud, improve the e-payment environment and develop e-commerce training activities for youth, women and people living in rural areas.
Ultimately, Ghana’s tax system must be further modernised in order to continue promoting efficiency, productivity, financial inclusion and economic growth, and safeguarding tax revenues. To this end, some out-of-the-box thinking might be needed to shape tax policies to rope-in the informal sector in general and digital commerce in particular. While we do not have space in this brief to delve into the debate about the optimal size of government, suffice it to mention in concluding that it is very critical for the state to be seen as fiscally disciplined in combatting corruption, reducing unproductive public expenditure, resource misallocation and waste. This has the effect of improving tax morale – the intrinsic motivation to pay taxes – and encouraging voluntary compliance of taxpayers.
Research on tax morale confirms that taxpayers’ willingness to pay taxes is connected to their trust in institutions, perceptions of corruption, as well as satisfaction with public services. The integrity of our public finances is essential for the sustainability of our tax system. This holds the potential to increase revenues, probably more than the E-Levy can assure, with relatively little enforcement effort.
About the authors
Professor Charles Godfred Ackah is an Associate Professor of Economics at the Institute of Statistical, Social and Economic Research (ISSER), University of Ghana, Legon, and External Research Fellow at the Kiel Centre for Globalization, Kiel, Germany.
Dr. Kwadwo Opoku is an Economist and Research Fellow at the Centre for Social Policy Studies (CSPS), University of Ghana, Legon.
Professor Charles Godfred Ackah
Dr. Kwadwo Opoku
[1] Matheson, T. (2011), “Taxing Financial Transactions: Issues and Evidence”. IMF Working Paper WP/11/54.
[2] Keynes, J. M. (1936). General Theory of Employment, Interest Rates and Money (New York: Harcourt Brace & World).
[3] Tobin, J. (1978), “A Proposal for International Monetary Reform,” Eastern Economic Journal, 4(3–4): pp. 153–59.
[4] MTN Ghana (2021). Scancom PLC (MTN Ghana) 2020 Annual Report, pp 33 and pp 37.
[5] Bank of Ghana (2021). Payment Systems Oversight Annual Report, 2020 by Bank of Ghana. Pp. 27.
[6] IMF (2019). Uganda: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Uganda.
[7] Clifford, K. (2020). “The Causes and Consequences of Mobile Money Taxation: An Examination of Mobile Money Transaction Taxes in sub-Saharan Africa.” GSMA Association.
