As governments worldwide, particularly in low- and middle-income countries (LMICs), push towards digital transformation, the platformisation of public services offers both unprecedented opportunities and critical challenges for social inclusion.
Digitalisation shapes governments in four ways:
- across various internal government functions,
- enabling government-to-citizen information and services,
- digital citizen participation in governance, and finally
- the influences of digital monopolies from the global north and private sector that now shape the lives of citizens and governance.
Historically, governments in LMICs have adopted reactive governance models where service requests are initiated by citizens. For instance, registering a newborn is the responsibility of the parents, who must fill out the appropriate paperwork and contact the relevant government department. The provision of services is also often fragmented but as digitalisation grows in significance, governments are looking to more centralised and proactive approaches – pushing the one-stop shop framework, where citizens can access all government services on one website. These approaches build on the three components of Digital Public Infrastructure (DPI) namely:
- digital IDs for the collection of data from citizens,
- digital payments that enable efficient evidence-based transactions, and
- data exchange supported by government-wide integration and system interoperability.
The G20 India presidency advocated for DPI in LMICs, drawing on their own experiences and recognising its potential. However, for this potential to be realised, specific mechanisms need to be in place to support governmental transitions and self-determination, ensure secure systems, and protect citizens’ digital rights. While digital platforms can potentially make public services more efficient and accessible, it is crucial to ensure that this transformation does not exacerbate existing inequalities or create new forms of digital exclusion. What lessons can be drawn from the digitalisation of tax – both as a means to promote digital inclusion and, if not properly executed, as a factor that could exacerbate it?
How Digital Inclusion Transforms Tax Reforms: Enhancing Compliance and Boosting Revenue.
Digital inclusion is pivotal for successful tax reforms as it ensures that all individuals and businesses, regardless of their socio-economic status or geographic location, can access and benefit from digital tax services. Indeed, digital platforms make it easier to adhere to tax laws: digital tools can facilitate better tax compliance, reduce administrative costs, and minimise evasion. Furthermore, by ensuring that the greatest share of the population is included in the digital tax system, governments can broaden the tax base and enhance revenue collection, ultimately leading to more robust and sustainable public finances.
For direct taxes, digital inclusion enables efficient and transparent filing processes, reducing errors and increasing compliance. As for indirect taxes, such as value-added tax (VAT) or sales tax, digital platforms facilitate transactions and enhance real-time data collection, leading to better enforcement and reduced evasion. Hence, digital tax services offer numerous benefits, including improved accuracy, reduced administrative costs, enhanced transparency, and greater accessibility, all of which contribute to a more efficient, equitable, and robust tax system.
The Role of Digital IDs and Mobile Money in Enhancing Tax Systems in Africa
1. Digital IDs to Transform Tax Systems in Africa.
Digital IDs are essential for modernising tax systems, particularly in Africa, by addressing significant challenges in identity verification and tax compliance. These digital identities facilitate and secure the identification process, ensuring accurate taxpayer identification and recording of tax obligations. By reducing fraud and improving tax collection efficiency, digital IDs broaden the tax base and foster trust between citizens and tax authorities. However, implementing digital IDs can be hindered by several challenges, such as ensuring widespread access, protecting data privacy, and overcoming resistance from populations unfamiliar with digital technologies. While addressing these issues requires investments in infrastructure, security measures, and educational outreach, overcoming them will enable digital IDs to offer immense potential for enhancing administrative efficiency, reducing tax evasion, and promoting sustainable economic growth and development.
2. Mobile Money Drives Digital Financial Inclusion and Taxation in Africa.
Mobile money is revolutionising digital inclusion in Africa, the first mobile money market in the world. This fast-growing market presents significant opportunities for domestic revenue mobilisation. By leveraging mobile money platforms, governments can reach a wider taxpayer base, including those previously excluded from the formal financial system. Given recent fiscal challenges caused by various external shocks, African governments increasingly target digital financial services (DFS) to raise tax revenue. Since 2013, 15 African countries have implemented DFS specific taxes. Although the tax revenue from these measures is notable, it often falls below projections. Moreover, tax measures also present opportunities to increase the usage of DFS. For instance, in Ghana, the e-levy merchant exemption, providing tax exemptions for digital merchant payments, actually encouraged the usage of mobile money for these payments.
However, these new tax instruments raise concerns about their potential impacts on digital financial inclusion. Specific taxation of mobile money can negatively affect financial inclusion, but research from the ICTD DIGITAX programme shows that this impact can be temporary and depends on the tax design and country-specific context – see the Ghana and Kenya cases. Additionally, these taxes usually trigger immediate protests and disagreement among populations, leading to policy changes, highlighting the uncertainty among decision-makers.
Policy recommendations
1. Leverage Digital Public Infrastructure (DPI) to Enhance Tax Administration
The integration of DPI – including digital IDs, digital payments, and data exchange – offers transformative opportunities for tax systems in Africa. Research highlights that digital IDs improve taxpayer identification and compliance by reducing fraud and broadening the tax base. For example, digital IDs have been successfully used to enhance tax collection in Burkina Faso, improving compliance and trust in the tax system. Similarly, digital payments can facilitate efficient tax collection, creating reliable data trails that improve tax administration and compliance monitoring. The exchange of information between tax authorities and digital platforms further strengthens the ability to detect evasion and enforce compliance, as seen in initiatives linking mobile money platforms with tax authorities. Governments must invest in expanding access to DPI, ensuring data privacy, fostering system interoperability, and building the capacity to manage and utilise data effectively for tax purposes.
2. Design Tax Policies That Promote Inclusion and Minimise Regressive Impacts
DFS usage can foster financial inclusion and generate valuable data to enhance tax revenue collection. However, specific taxation on DFS is often cited as a barrier to financial inclusion, as it could disproportionately affects low-income users. Policymakers in some countries have sought to mitigate these effects by introducing exemptions for certain transaction types or values to shape user behaviour. As mentioned above, Ghana’s e-levy policy successfully incentivised merchant payment adoption and improved perceptions of fairness in the tax system.
Nonetheless, taxes on mobile money transactions still risk excluding vulnerable populations, particularly those at the margins of the financial system. While the long-term impacts of such taxes on financial inclusion may be limited with only proven short term impacts, evidence from digital operators suggests that they can cause permanent market damage that is difficult to reverse. To strike a balance, policymakers should prioritise progressive tax designs that account for user income levels, implement exemptions for low-value transactions, and introduce incentives for broader digital adoption.
3. Improve Awareness and Adoption of E-Tax Systems
Low awareness and technical challenges often hinder the adoption of digital tax tools. In Ethiopia, low adoption of e-filing platforms was attributed to limited awareness and infrastructure challenges, with targeted campaigns significantly increasing the use of e-tax systems. Similarly, findings from Rwanda reveal that even with mandatory digital systems, less educated and female taxpayers faced barriers to adoption. Governments must invest in public campaigns and capacity-building initiatives to ensure wide participation in digital tax systems.
Way Forward
To fully harness the potential of digitalisation for inclusive taxation, policymakers must adopt a holistic approach that combines investment in technology, targeted policy interventions, and efforts to build trust among taxpayers. By aligning these strategies with the principles of digital inclusion, governments can enhance revenue mobilisation while fostering equity and transparency in their tax systems.
ICTD’s new programme on DPI and taxation, expected to kick off in December, represents a critical step forward in leveraging digitalisation to enhance tax administration in low-income countries. Building on the successes and lessons learned from DIGITAX, this initiative focuses on the transformative potential of DPI—encompassing digital IDs, digital payments, and data exchange systems. The programme will address three key research priorities:
- strengthening the impact of DPI on tax administration by exploring how these technologies can increase revenue generation equitably and sustainably while identifying the technical, institutional, and political challenges to implementation
- advancing data exchange through the development of effective governance frameworks and legal systems to enable secure and productive information sharing across institutions; and
- ensuring inclusive digitalisation by addressing digital divides and developing strategies to support access and adoption of DPI tools among marginalised groups and small businesses.
By tackling these critical issues, the programme aims to generate actionable insights that will position ICTD as a global leader in fostering effective, inclusive, and sustainable digital transformations in tax systems.
