Every year, an estimated US$7.7 trillion worth of payments flow from people to governments worldwide. Not surprisingly, taxes make up a significant portion of these payments.
In 2015, a global agreement for financing the Sustainable Development Goals recognized domestic resource mobilization as essential to inclusive growth. This makes regular tax revenue more vital than ever to the future of many low-income countries.
Yet, the reality is that countries who need revenue the most are only just starting to take advantage of all the opportunities available to them. There is growing evidence that enabling people and businesses to pay taxes digitally can increase government revenue and produce a wide range of other benefits for society.
In Tanzania, our recent study found that the digitization of value-added tax payments could increase the country's annual revenue by almost $500 million per year. The Ugandan city of Kampala has already experienced such success, boosting revenue by 167 percent in a single year after automating its tax collection system.
Along with increasing overall tax revenue, digitizing individual and corporate tax payments can lower transaction costs for both the government and taxpayers. It reduces instances of fraud and corruption, increases government transparency, and improves the overall efficiency of a country's tax system. For example, when Tanzania digitized national park fees it increased tourism sector revenues by a full 40 percent.
Digitizing tax payments can help move people and businesses out of the shadow economy that flourishes in cash-heavy economies. Within one year of digitizing income and property tax payments by the Tanzania Revenue Authority, 15 percent of the tax base was making payments via mobile money, including payers who had no previous history of paying taxes.
However, according to a new study by Karandaaz, a think tank in Pakistan, only 16 percent of low- and lower-middle-income countries receive tax payments predominantly in digital form. With the benefits so clear, why is the shift to digital so slow? Because digitizing an economy cannot happen overnight. It requires visionary leadership, a systematic collaboration across multiple government agencies and institutions, an investment in infrastructure, and the incentivizing of behavior change among citizens and merchants alike.
Some countries are leading the way, however, and their lessons learned can inform others beginning on their own path toward the digitization of tax payments.
Modernizing IT infrastructure: In Kenya, people and businesses can pay for 41 different services--overseen by a variety of public sector departments--via eCitizen, a single digital payments portal managed by the ICT Authority of Kenya.
Transforming the regulatory framework to protect consumers: The Karandaaz study highlights an e-governance initiative in India's Karnataka State that provides access to a 1,000 different government services through a fully integrated mobile governance platform called Mobile One. All tax payment receipts are stored on this platform and users can easily access them on their mobile phones using either an app or a form of mobile messaging called USSD. The need for receipts as a proof of payment is particularly acute for poor people, and this ensures their payments are properly documented.
Providing the right incentives to people and businesses to switch to digital tax payments: In 2014, Uruguay temporarily offered value-added tax rebates for purchases made with debit cards or other forms of electronic payment. As a result, debit card transactions reached record levels. Another example is Tanzania, where the Government partnered with the Tanzania Trader's Association to subsidize the costs of electronic billing machines to make it easier for small traders.
There is widespread evidence that shifting to digital tax payments will reap significant financial and social dividends for countries. Every country now has the opportunity to create an economy where digital payments work well for everyone and are widely used.
Ruth Goodwin-Groen is the Managing Director of the Better Than Cash Alliance, a global partnership of governments, companies, and international organizations committed to helping countries move from cash to digital payments to reduce poverty and drive inclusive growth.
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