Science, Finance and Innovation

Re-evaluating the taxation of mobile money

5 min


Elizabeth Bermeo

Mobile money has made financial services available to millions of previously underserved people; it has also caught the attention of governments as a potential source of tax revenue. This column highlights the dangers of such sector-specific taxation potentially reversing the gains from wider financial inclusion. The author calls for governments to tread carefully when using mobile money as a tool for tax collection. While taxing mobile money transactions may eventually increase formality and expand the tax base, it is important to raise awareness of potential unintended consequences when designing fiscal policy and revenue administration.

Mobile money is well placed to address the issue of informality that affects many developing economies and hinders domestic resource mobilization efforts. All mobile money transactions are electronically recorded, which improves the security of payments as well as their transparency. Greater transparency of earnings, transactions, and remittances could both widen the tax base and improve the efficiency of revenue collection.

However, the potential of mobile money has caught the attention of governments and revenue authorities not necessarily to enhance the depth and efficiency of tax collection, but rather as a direct source of taxation revenue. This could undermine the development gains seen to date.

Although mobile money levies offer additional revenue for governments, there is a risk that they may negatively affect the underserved groups that typically use mobile money services. This could reverse the gains achieved in financial inclusion to date, increasing inequality and undermining the attainment of development goals. 

Unpopular taxes on mobile money transfers in Tanzania

In July 2021, Tanzania introduced a levy of between TZS10 (US$0.0043) and TZS10,000 (US$4) on mobile money transactions, depending on the amount sent and withdrawn. The levy, reportedly imposed as a way to finance development projects, applied in addition to VAT (18%) and excise duty on mobile money transfer and withdrawal fees (10%).

The tax was met with criticism due to its detrimental effect on consumers’ welfare, agents’ profitability, telecoms operators’ financials, and digital financial inclusion. Tanzania’s human rights advocacy organization, the Legal and Human Rights Centre (LHRC), filed a lawsuit against the government, challenging the legality of the new tax on the basis that imposing a levy on top of regular taxes was an unfair and harmful practice. 

Widespread public outcry prompted the government to decrease the levy by 30% in September 2021. A further 43% reduction, ranging from TZS10 to TZS4,000 (US$ 1.72) was introduced in July 2022.

Consequences of Tanzania’s mobile money tax

The affordability challenge

According to a report by the GSMA (a global association of mobile network operators), until June 2021, taxes on mobile money fees represented 23% of total transfer cost and included VAT (18%) and excise duty (10%). 

But in July and August 2021, taxes on mobile money fees represented 60% of total transfer cost, on average, due to the new mobile money levy. From September 2021, the proportion of tax slightly reduced to 56% of mobile money fees following the reduction of the levy by the government.

Reduced usage

The GSMA report also notes that between June and September 2021, the total number of person-to-person (P2P) transactions reduced drastically from 30 million to 18 million (-38%) per month, while the total number of cash-out transactions reduced from 33 million to 25 million (-25%) per month.

As mobile money transactions became more expensive due to the new levy, many Tanzanians, looking to avoid additional costs, immediately reduced their usage of mobile money in favor of alternative payment methods such as cash.

Reversing financial inclusion

Unaffordable financial services pushed poorer people back to using cash. Tanzanians living in rural areas and on a low income were particularly affected by the introduction of the new levy as mobile money is often the only available gateway to financial services.

By reverting to cash, these users lost wider benefits (such as savings, loans, government benefits, and insurance), and faced social and economic exclusion. Fewer transactions meant lower revenues, which negatively affected the profitability and long-term viability of agents

Conclusions and recommendations

To balance the competing objectives of raising government revenues while minimizing the distorting effects of taxation on digital financial inclusion, the following recommendations are made.

Strengthen mobile money access and use – and digital government services

It is crucial to recognize the role of mobile money services as a key driver of financial inclusion, economic growth, and social development objectives, by removing or avoiding taxes on the use of mobile money services and especially levies on transaction values.

At the same time, there would be benefits in promoting the digitalization of government services through the adoption of mobile money payment systems to increase transparency and the efficiency of service delivery, and to increase revenue mobilization.

Minimize or remove sector-specific levies on mobile transactions to ensure fair tax treatment of the sector and unlock investment 

Sector-specific taxes are discriminatory because while they apply to mobile money transactions, they do not apply to similar payment services and over the counter cash transaction services offered by other financial services providers.

Reducing or removing sector-specific levies will make the tax regime for mobile money more broad-based, improve the financial sustainability of the industry, enhance investment in mobile financial infrastructure, and increase the adoption and use of mobile financial services. 

Simplify and stabilize taxes and fees in the mobile money sector

To minimize compliance costs, a tax regime should be simple (involving a reduced number of taxes that are easily understandable), and enforceable. Tax stability requires that governments limit unpredictable tax and fee changes as they create an uncertain taxation environment that negatively affects investment levels, ultimately decreasing competition within the mobile money sector. 

Reduce the overall tax burden on mobile money users to improve affordability and raise demand for mobile money services

The burden of taxation should not fall disproportionately on the poorer members of society. Governments should consider the implications of imposing new taxes on the usage and affordability of mobile money, particularly among low-income users. The reason is that this consumer segment tends to be more price-sensitive, avoiding the extra cost and erosion of their disposable income by shifting away from mobile money towards cash transactions when taxes are increased.

Elizabeth Bermeo
Associate Researcher, University of Bristol