Working Paper 159

Consumers in Africa increasingly pay for their purchases through mobile money, especially since the pandemic. These transactions are known as digital merchant payments. Rwandan consumers can choose between using standard mobile money services or a specific service only for digital merchant payments – MoMo Pay. Digital payments of any kind have the potential to improve tax compliance, because they imply digital data trails and better recordkeeping. How far is this potential being realised in Rwanda? In collaboration with the Rwanda Revenue Authority, we collected survey data from 1,100 merchants country-wide and were able to correlate this with tax administrative data, i.e. the tax records of the interviewees held by the revenue authority. We also conducted focus group discussions with 15 merchants. We found that the great majority of payments are still made in cash. Larger, more knowledgeable and financially included merchants opt for MoMo Pay as opposed to standard mobile money, the latter being preferred by female and less educated and equipped merchants. At the start of the pandemic, in March 2020, for a period of 18 months, all fees on MoMo Pay transactions were waived to foster digital payments through the service. In September 2021, fees were then reintroduced. The waiver led to a significant rise in the use of MoMo Pay relative to cash. When the MoMo Pay fee was reintroduced, there was a significant shift back to cash from both MoMo Pay and standard mobile money services, even if the latter were not affected by the fee. Lastly, we measure whether the adoption of digital payments correlates with merchants’ tax perceptions and compliance behaviour. First, we show that merchants using MoMo Pay tend to disagree with the obligation of paying taxes in order to receive public services, a measure of fiscal reciprocity. Such negative correlation is probably due to the fee imposed on MoMo Pay. Furthermore, standard mobile money usage improves the perceived ease of complying with taxes, while that is not the case for MoMo Pay. Again, the fact that fees on MoMo Pay are not clearly identifiable in MoMo Pay statements complicates merchants’ reporting and reconciliation of their activity for tax purposes. When it comes to compliance behaviour with VAT, the adoption of digital payments by merchants only improves their reported VAT sales and inputs, and only in the short term, while final VAT liability does not change. This hints at perverse compensating strategies to avoid taxes. We recommend that the tax administration better understand the adoption patterns of digital payments and incentivise usage among less equipped categories of taxpayers. The tax administration would also benefit from getting access to mobile money data to better monitor and enforce merchants’ compliance.


Ludovic Bernad

Ludovic Bernad is a Supply Chain Specialist living in Rwanda. His interests include freight transport payments via mobile money, streamlining trade, and financial payment mechanisms, with a focus on Africa.

Yves Nsengiyumva

Yves Nsengiyumva is a researcher and community engagement specialist working on socio-economic development initiatives in Rwanda. He's a management consultant and also the in-country analyst for Euromonitor International.

Benjamin Byinshi

Benjamin Byinshi is a Senior Analyst who uses the mixed method research approach in agriculture and socio-economics related projects. His current focus is tax compliance, value chains and investment methods and analysis. Surveys he’s managed include Trade survey for National AfCFTA Strategy for Rwanda, Evaluation of the Local Competitiveness Facility Fund of Agriculture value chains, and Operationalisation of the Economic Recovery Fund for Manufacturing and MFIs/SACCOs in Rwanda.

Naphtal Hakizimana

Naphtal Hakizimana is a Research and Policy Analyst at the Rwanda Revenue Authority.

Fabrizio Santoro

Fabrizio is a Research Fellow at the Institute of Development Studies, and the Research Lead for the second component of the ICTD's DIGITAX Research Programme. His main research interests relate to governance, public finance, and taxation, with a strong focus on impact evaluation methodologies and statistical analysis. He holds a PhD in Economics from the University of Sussex.
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