Debating the electronic transaction levy …our reasoned opinion (final part)

This is the second part of the article published on December 7, 2021 issue of the paper.

In fact, transaction values of P2P transfers fell by more than 50 per cent. There were behavioural changes in response to the tax. Con­sumers used other cheaper alternative modes of transactions: cash and banking system became the main modes of transactions for low value transactions and higher value transactions, respectively.

Even the 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 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 policy makers 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 either the development and use of new technologies or the involvement of the business commu­nity in the 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 to make or receive secure payments just with a 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 policy mak­ers 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 the tax may have on the beneficial use of MoMo services. A radical approach targeting 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:

1) 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.

2) Effectiveness and fairness – the potential for tax avoidance and evasion should be limited.

3) Fairness, i.e. non-discrimina­tion. This principle demands that taxes should not favour any one group over another.

We suggest that the govern­ment should drop this E-Levy. It is distortionary, discriminatory and inefficient. The consequential distor­tions and the resultant dead weight 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) transfer. Such receipt 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 ‘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, the 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 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 the 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, the 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 the 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 the 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 regards 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 the formal systems. A transaction tax of 1 per cent on cash withdrawals and 0.5 per cent of E-levy on all electronic P2P transfers (MoMo, bank transfers including cash and cheque deposits transfers and electronic money transfer) may be enough to generate adequate resources.

This will serve as an incentive to settle transactions electronically, 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 in the relatively early stages in Ghana, the rate of the levy should be rea­sonable in order not to discourage its development.

Instead of imposing a levy on the MoMo payments, with the high pen­etration of mobile phones, MoMo wallets, in particular in rural areas, we recommend government to see it as an opportunity to further exploit for e-commerce. We should eliminate all barriers to e-payment usage and rather incentivise the e-payments payment 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 formally financially excluded segment of the popula­tion have 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 the digital transactions by modernizing the ICT infrastructure to ensure quality broadband connec­tivity, 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 modernized in order to continue to promote efficiency, productivity, financial inclusion, and economic growth and safeguard tax revenues. To this end, some out-of-the-box thinking might be needed to shape tax policies torope 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 to be fiscally disciplined in combating 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 with, relatively, little enforcement effort.

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 to be fiscally disciplined in combating corruption, reducing unproductive public expenditure, resource misallocation and waste.

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.

BY CHARLES GODFRED
ACKAH & KWADWO OPOKU