Today in Africa, traders in markets and street corners, drivers on ride-hailing apps and single-person service providers such as barbers receive payments through mobile money or bank transfers. Payment through these means is efficient, creates a digital record, improves security and may help the business or household establish financial records. It also attracts charges and taxes.
African governments have always faced an uphill battle to collect taxes. Digital payments, mobile money, electronic invoicing and digital identity systems now present them with an opportunity to broaden the tax base and collect more. Digital transactions are more easily traceable than cash ones, making them favourable to taxation. However, if they are taxed excessively, the cost of using these payment methods could outweigh their benefit, encouraging a return to cash and less traceability.
In its State of Inclusive Instant Payment Systems (SIIPS) 2025 report, AfricaNenda Foundation reports that Africa recorded 64 billion instant payments worth nearly US$2 trillion in 2024. Every digital payment brings Africa closer to a formal, transparent economy – but every poorly designed tax on that payment gives businesses another reason to return to cash.
A higher tax on digital transactions can shrink the taxable digital base
Multiple challenges
Taxation in many African countries faces challenges that include large, informal sectors, whose activities and income fall outside conventional tax systems, and narrow tax bases. Being developing countries, they have extensive infrastructure and social spending needs, and depend heavily on taxes from the relatively small formal sector. All this is made worse by strong political resistance to higher income and consumption taxes. African governments must therefore raise revenues without undermining growth, inclusion and formalisation, which makes the presence and visibility of the rapidly expanding digital economy attractive.
Mobile-money systems, bank transfers, payment terminals, electronic invoices, digital identification and online marketplaces create records that cash transactions do not. This means that authorities can identify previously invisible businesses, estimate corporate financials more accurately, and match tax records with customs and government procurement information. They can then simplify tax registration and filing, improve administration of VAT and withholding taxes, and make enforcement more effective.
Taxing digital transactions, if not handled carefully, can quickly lead to a return to informality
Now, using digital information to administer taxes and taxing the act of paying digitally are two different things. The former makes the tax system simpler, fairer and more efficient. The latter may, if not well designed, begin to appear like punishment for formalisation. When cash is free but digital payment is taxed, government policy quietly subsidises informality. If a small business sees that using digital payment systems exposes it to paying more taxes than a similar one not doing so, it may revert to cash.
Cumulative costs
As users across the continent have experienced, a digital transaction may be affected by multiple costs: mobile-money or bank charges, electronic-transfer levies, VAT, withholding taxes, stamp duties, platform commissions, data costs, cash-out charges, and sector-specific or local-government levies. Each individual charge may appear modest but, put together, the total can be significant, particularly for high-volume, low-margin businesses.
A small retailer may receive money digitally, pay a transaction levy, pay another fee when transferring it, and incur a further charge when withdrawing cash to restock. Policymakers view each levy in isolation, but businesses experience the cumulative cost.
Possible responses include returning to cash; splitting transactions to remain below reporting thresholds; using personal rather than business accounts; moving between multiple mobile wallets; routing payments through unregulated platforms; understating the purpose or value of transactions; passing charges to consumers, refusing small digital payments; and using foreign platforms, cryptocurrencies or stablecoins.
Taxes should target economic activity, not the payment channel
The consequences of these responses would be reduced financial inclusion, greater informality, less reliable economic data and, most importantly, lower tax revenues. Beyond a certain point, a higher tax on digital transactions can shrink the taxable digital base so much that it produces lower revenues.
Public resistance
Now, let us take a look at some country experiences. I lived in Ghana for a couple of years, during which I witnessed first-hand the tension as the government introduced an electronic transfer levy. Public resistance was loud and the associated behavioural changes so clear that the government had to pull back certain aspects of it.
Nigeria, where I presently live, presents an illustration of the cumulative cost of electronic-transfer levies, bank charges and VAT, amid growing use of digital transaction data for tax administration. For now, due to the low taxes, consumer dissent is low, but once in a while someone goes on social media to complain about the multiple charges that come with digital payments. The comments that follow point to how quickly taxing digital transactions, if not handled carefully, can lead to a return to informality.
Kenya presents an illustration of both the extraordinary benefits of mobile money and the temptation to treat its success as an easily accessible tax base. Given how pervasive it is in the country, higher charges or taxes connected to mobile-money use could weaken one of Africa’s most successful financial-inclusion systems, and care must be taken not to let this happen.
Digitalisation should make legitimate taxes easier to assess and pay; it should not make digital transactions more expensive than cash. Taxes should target economic activity, not the payment channel.
A great framework for digital taxation would keep low-value digital payments inexpensive, use digital records for risk-based enforcement, reward formalisation, reduce the number of overlapping charges and levies, and protect taxpayer data.
Africa’s growing digital economy offers a good opportunity to broaden the tax base while improving financial inclusion. Tax authorities have to recognise that the opportunity could be lost if visibility is mistaken for unlimited taxable capacity. The objective should not be to extract the maximum revenue from every digital payment today. It should be to build a larger, more productive and more compliant formal economy tomorrow.
