Debating the electronic transaction levy …our reasoned opinion (2)

This is the second part of the article published yesterday, December 6, 2021 issue of the paper.

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”.

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.

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?If this proposed E-Levy became law, it would mean that with effect from February 1, 2022, government would take 1.75 per cent of the value every MoMo transfer over and above GH¢100 per day.

This tax would 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 would 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 discourage the use of electronic payments while encouraging the use of cash for transactions.These unintended consequences could offset whatever advantages to be derived from the levy for revenue purposes. To illustrate, assum­ingsomeone wants to transfer GH¢10,000 to a client or a rela­tive,there are a menu of payment options to choose from:

1) issue a cheque to the person;

2) deposit cash into the person’s bank account;

3) transfer the money from a bank account to the person’s bank account via internet banking;

4) transfer the money from a mobile money account to the per­son’s bank account;

5) transfer the money from a bank account to the person’s mo­bile money account;

6) transfer the money from a mobile money account to the per­son’s mobile money account.

The E-Levy tax liability does not arise if the first three options are used; the last three options, which involves 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 the 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 mobilization.

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, cash use will upsurge 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 may 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 pay GH17.50. Thus, a transfer of GH¢1,000 to pay for goods and services – even a remittance toa relative – will attract a tax of GH17.50but if the same payment/ remittance was effected through direct deposit or bank transfer into the person’s bank account no tax obligation would 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 settlement will also affect the projected reve­nues for 2022.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 the projected. In 2020, MTN MoMo recorded a total volume of trans­actions of 2.6 billion amounting to GH¢549 billion (the total value of Mobile money transactions for all service providers was GH564 billion ).

The total revenue generated by the MTN end to end charges of 2 per cent amounted to GH¢1.3 bil­lion (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¢2.3 trillion in 2022, using the MTN average effective charge of 0.23 per cent in 2020, the 1.75 per cent E-Levy on MoMo transactions will generate revenues of GH¢4.5 billion (GH¢2.4 billion less than the projected GH¢6.9 billion in the 2022 Budget Statement).

Moreover, both the volume and value will likely decline as a result of behavioural changes in the us­age of the electronic platform for financial transactions in response to the imposition of the E-Levy. This means that the projected revenue in the budget is over optimistic.

In Uganda, for example, the imposition of one per cent 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 per cent. The IMF had warned that it was the rural poor who were likely to be hit disproportionally hard by the transaction taxes.

To be continued

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