In Rwanda, electronic tax filing and tax payment systems have been mandatory since 2015 as part of the government’s national strategy to digitalise the economy. The government has also steadfastly encouraged the adoption of mobile money services for digital merchant payments.
Recent evidence from two ICTD surveys of income-taxpayers in Rwanda reveals that not all are on board. While digital payments surged during the COVID-19 pandemic, many merchants have reverted to cash.
And despite e-tax systems being mandatory, almost a quarter of corporate income-tax payers surveyed and almost half of personal income-tax payers surveyed are still using semi-manual practices with the help of intermediaries, such as tax accountants and tax officials.
Africa: Perceived benefits of digitalising tax administration
The digitalisation of tax administration is gaining momentum in Africa. Technological solutions such as electronic filing and payment of taxes (let’s call them ‘tax e-services’), as well as digital merchant payments, are becoming more and more common.
African governments are encouraging this technology on the understanding that it will bring significant benefits to both taxpayers and tax administration, such as:
- reduced compliance costs
- more transparency and predictability of the tax system
- greater availability of data.
Using tax e-services is also expected to greatly improve taxpayers’ perceived fairness in the tax system and their intrinsic willingness to comply with it.
Surveys: income-tax payers
While the academic literature on the digitalisation of tax administration is still nascent, evidence from our two taxpayer surveys in Rwanda sheds light on the take-up of the technology. These insights may be useful to other low- and middle-income countries.
The surveys are nationally representative of both the corporate and personal income taxpayer populations:
- The first study surveyed about 2,000 taxpayers on tax e-services. Respondents were interviewed four times over two years, beginning just before the COVID-19 pandemic.
- The second study surveyed 1,100 taxpayers on their practices with digital merchant payments
While the Rwandan government is investing heavily in digital solutions, so too is industry. Banks, fintech and telecommunications companies are taking original approaches and employing often-pioneering strategies towards a cashless economy. For example, MTN Rwanda has developed a mobile money app – MoMoPay – specifically for merchants transacting with customers.
Yet, our studies show that take-up of the technology among Rwandan taxpayers is limited, albeit increasing, and often challenging:
- Before the pandemic, in 2020, as many as 19 per cent of corporate income-tax payers and 40 per cent of personal income-tax payers said they were unfamiliar with the tax e-services, even though they were mandatory.
- Even more – 23 per cent of corporate and 45 per cent of personal income-tax payers – said that they do not use tax e-services. Instead, they are likely reverting to suboptimal and semi-manual practices with the help of intermediaries, such as tax accountants and tax officials.
- Likewise, among merchants, cash is still king (88 per cent), though they also accept mobile money, either through personal accounts (50 per cent) or the business-specific MoMoPay app (45 per cent).
Pandemic positives: remarkable technology take-up
Interestingly, the pandemic played a remarkable role in fostering adoption.
Two years into the pandemic, e-services take-up had risen dramatically to 90 per cent, mostly due to social-distancing requirements and a stronger reliance on mobile money in general.
The fee waiver on MoMoPay, which the government introduced at the start of the pandemic, also pushed merchants away from cash and towards the digital financial service.
Despite this remarkable growth, important barriers to universal adoption remain.
- For instance, in 2020, taxpayers who were female, less educated and less IT-savvy were less likely to be aware of and use the tax e-services.
- While the gender gap seems to have been closed by 2022, taxpayers who are less equipped still fail to keep up with the changes.
- Similarly, larger, better equipped businesses led by males tend to adopt the merchant-specific MoMoPay, while the others rely on suboptimal solutions, such as mobile money personal accounts or cash.
- Transaction fees and charges remain a big obstacle for digital merchant payments. While the waiver of the MoMoPay fee saw a surge in app usage, its reintroduction 18 months later automatically pushed merchants back to cash. It also reduced usage of mobile money personal accounts, even though they are not affected by the fee.
Costs outweigh benefits
For those taxpayers who had adopted the technology, both studies found very limited transformative impacts on taxpayers’ perceptions, and more research is needed on this aspect.
Using tax e-services did not significantly improve their perceived fairness in the tax system and their intrinsic willingness to comply – two key outcomes expected to be shaped by technology.
With merchant payments, the only discernible effect found was for users of the standard personal accounts, which are not affected by fees – for them, the tax system is fairer.
While Rwandan taxpayers are well aware of the benefits technology brings, for many users of tax e-services, technical issues appear to be a recurrent problem. Practical usage challenges, such as a slow system during peak times, rejected declarations and an unsatisfactory online assistance platform have negative repercussions. Such costs in usage end up creating frustration and a sense of unfairness among taxpayers, largely outweighing the acknowledged benefits from using the e-services.
Limited behaviour change
The impact of adopting digital solutions on taxpayers’ behaviour is also limited, the studies found.
For adopters of digital merchant payments, VAT filing improves, but only in the short-term, with merchants quickly reverting to their pre-adoption compliance behaviour, and adjusting both sales and cost margins so that their tax liability remains unchanged.
In fact, very few (18 per cent) merchants believe that the Rwanda Revenue Authority has access to MoMoPay data, and may not see any threat of audit or higher enforcement when using the app.
Policy role, exciting ways forward
For digitalisation to be successful in a developing country – and, arguably, in more advanced economies – important adjacent factors must be in place.
In the case of Rwanda, policymakers need to invest adequately in increasing people’s awareness and adoption of e-services and digital merchant payments. Those less-prepared taxpayers need to receive targeted assistance, and incentives.
At the same time, tax administrations should tap into the potential of new data, such as that produced by digital payment systems, to enhance monitoring and enforcement.
A whole-of-government approach and collaboration between private and public institutions – quite difficult to reach in practice – are needed to enable data sharing across institutions.
These developments are exciting from both research and policy perspectives.
Download the ICTD working papers