Africans Are Ditching Digital Payments For Cash Amid Rising Costs & Taxes

African countries are experiencing a trend that some industry stakeholders have described as the undoing of gains made in digital payments adoption due to rising costs and tax burden. Governments, in an effort to increase revenue, have jacked up taxes on mobile digital payment channels such as money services, impacting both consumers and businesses. This shift, experts believe, is endangering the progress made in the financial sector, hindering financial inclusion, and posing challenges to economic growth.

In East Africa, the Kenya Revenue Authority (KRA) has intensified compliance checks, prompting a significant number of businesses to abandon mobile merchant payment accounts in favour of cash transactions.

“It is already noted that [closure of Lipa Na M-Pesa merchant accounts] is what is happening in the market. We are working on strategies on how we can work around this,” Caroline Rotich, the KRA’s chief manager in the Domestic Taxes Department, said last week. Small Kenyan businesses, as Nation reported last November, are quitting Safaricom’s Lipa Na M-Pesa Buy-Goods Payment option spooked by charges on the services which eat into their incomes.

Starting in July, small businesses in Kenya generating annual sales between KES 1 M (~USD 6 K) and KES 25 M (~USD 166 K) are now obligated to pay turnover tax at a rate of 3 percent of their total annual sales, marking a significant increase from the previous 1 percent charged on sales ranging from KES 1 M (~USD 6 K) to KES 50 M (~USD 333 K), as Kenya’s tax body ups the pressure—including by means of deploying an army of agents and summoning data from telcos—to hit its staggering mandate of nearly KES 2.5 T (~USD 16.6 B) in collections for the financial year ending June 2024.

Previously reliant on Lipa Na M-Pesa Buy Goods Till numbers, Kenyan businesses are now reverting to cash payments. The KRA’s crackdown and increased taxes on small traders have inadvertently brought about a hostile environment for digital payments.

Tanzania, too, has been hit hard by escalating taxes on mobile money transactions. Introduced to fund development projects, these levies have led to a decline in mobile money revenues, despite efforts by the government to reduce the tax burden. Person-to-person and cash-out transactions have plummeted, forcing Tanzanians, especially vulnerable and low-income populations, back to cash transactions.

“The reduction in affordability of mobile money therefore threatens to reverse the commendable financial inclusion gains as Tanzanians revert to cash, particularly amongst the vulnerable and the poorest segments of the population,” the GSMA wrote in a recent report.

This trend is not limited to Kenya and Tanzania alone. Several other African nations are grappling with similar challenges. For instance, Uganda and Nigeria have also faced criticism for imposing heavy taxes on mobile money transactions. Such trends highlight the need for thoughtful policy-making that fosters economic growth while ensuring the benefits of digital financial services are accessible to all, especially those in vulnerable economic positions.

Across sub-Saharan Africa, problems are arising around the apparent cash replacement drive being pursued by governments. Digital financial solutions, including mobile money services, once hailed as a cornerstone of financial inclusion, are under threat.

As tax burdens increase, there’s a danger of reversing the commendable gains made over the past years. The imposition of high taxes is not only discouraging digital transactions but also encouraging the use of unregistered cash transactions, fostering a shadow economy and hindering tax collections.

Digital financial services have played a pivotal role in Africa’s financial landscape. With millions of users, these services have facilitated billions of dollars in transactions, contributing significantly to the economy. They offer transparency, traceability, and a convenient method for tax payment and collection. However, the imposition of exorbitant taxes threatens to erode these advantages, jeopardizing the very essence of digital payments.

While governments have a legitimate need to increase revenue, industry activists say it’s essential to strike a balance. A common refrain is that excessive taxation on e-payment services risks undermining the progress made in financial inclusion and economic development.

Finding innovative solutions to boost revenue without stifling the digital economy is crucial, some insiders reckon, otherwise, the unintended consequence might be a regression from digital progress to cash-based economies, reversing the strides made in the past decade.

Featured Image Credits: Kenyan Enterprise