The E-levy and a basic principle of consumption taxation

The deputy majority leader, Alexander Afenyo-Markin, has disclosed that the finance minister, Ken Ofori-Atta, will withdraw the controversial electronic transactions levy (E-levy) from Parliament and reintroduce it at a later date.

Like a consumption tax, the E-levy will be imposed on the value of transactions. A basic principle of consumption taxation is that the tax must be imposed on the value of goods and services to consumers. If I spend 1000 cedis at a restaurant, this amount is the value of the food/drinks to me. Therefore, a consumption tax (e.g., VAT) may be imposed on the 1000 cedis worth of consumption.

If I pay the 1000 cedis via momo (i.e., electronic payment), I consume two distinct services/goods: (a) the food and drinks, and (b) the convenience of paying by momo (call it “electronic payment service”). The value of the electronic payment service to me is not 1000 cedis (or the value of the food/drinks). The value of the electronic payment service to me is the price I am willing to pay for using it, just as the value of the foods/drinks (to me) is the price I paid for them. Thus, the value of the electronic payment service (momo) is the transaction fee (price) charged by the telcos (i.e., MTN, Vodafone, etc) and it is this fee that may attract a consumption tax. This is why a consumption tax (like VAT) on financial services is typically restricted to explicit fee-based financial services. It is imposed on fees.

Suppose the telco’s transaction fee is 1%. Then the value of the electronic payment service to me is 1% of 1000 cedis = 10 cedis. If the electronic payment service is not a VAT-exempt or zero-rated service, then VAT should be imposed on 10 cedis (not on 1000 cedis). At a rate of 18.5% (VAT, NHIL, GetFund, and Covid-19 levy), the electronic payment service tax (the e-VAT) as a percentage of the value of the food/drinks is 0.185*10/1000 = 0.185%. Call this the effective electronic payment service tax. According to a paper by Dr Abdallah Ali-Nakyea, a tax expert, the E-levy rates in Tanzania and Cameroon are 0.1% and 0.2% respectively.

Even if Ghana’s VAT rate was so high that the effective electronic payment service tax was close to the 1.75% E-levy on the total value of transactions, this would not be a justification for the E-levy. Principles and processes matter. If the telcos were to reduce or increase their transaction fee, the effective electronic payment service tax will change. The E-levy does not respond to changes in the transaction fees of the telcos. For example, Vodafone has no transaction fees for momo. So, going by this consumption taxation principle, using Vodafone’s momo service should not attract an electronic payment service tax. However, for the purpose of collecting the E-levy, the government may use the fees by other telcos as a benchmark for Vodafone’s customers.

On the grounds of equity and their importance to life or economic activities, certain goods and services are exempted from VAT. In Ghana, examples are agricultural food items in raw state; all live animals and animal products in raw state; agricultural chemicals, fishing equipment; locally produced pharmaceuticals; medical services and supplies; educational services and supplies, etc. The E-levy will be imposed on these VAT-exempt goods and services. Once you pay for these VAT-exempt goods and services with momo, the E-levy will be imposed on the total value of the transaction. This defeats the purpose of making such goods/services VAT-exempt or zero-rated goods/services.

The E-levy will be imposed on pure transfers (e.g., transfers to one’s relatives, friends, etc). This is not acceptable. Gifts (a transfer) are taxed. But a gift tax has a narrow focus. It is not a tax on the use of a pervasive mechanism (momo in this case) that facilitates the flow of money in an economy. If a gift tax had far-reaching effects like the E-levy tax and was enforced, people would be so upset. Imagine that a government imposes a tax on all gifts during Christmas holidays, Valentine’s day, all birthday celebrations, weddings, funerals, etc.

The E-levy, as structured, violates the basic principle of consumption taxation explained above. It is not imposed on the value of the electronic payment service but on the value of the transaction that is facilitated by the electronic payment service. The values of all transfers or all payments via momo are being incorrectly treated as income or consumption. Of course, there is also the issue of whether an economy that wants to reduce the use of cash and promote digitization should tax electronic payment services. It is not surprising the value of momo transactions decreased by 3 billion cedis in December 2021.

Ideally, there should be no tax on momo; no E-levy! On the grounds of equity and its importance in facilitating economic activities, momo should be treated as a service in the same category as the aforementioned VAT-exempt or zero-rated goods and services. But if Nana Addo’s cash-strapped government is bent on imposing a tax on momo, then it should modify the E-levy as follows:

1. Whenever possible (if it can be determined), transfers should not attract the E-levy.
2. Payments for VAT-exempt or zero-rated goods and services should not attract the E-levy.
3. For goods that are not VAT-exempt or not zero-rated, the consumer pays between 17.5% to 19.5% VAT (depending on whether the good or service attracts the covid-19 levy and/or tourism levy). The E-levy should be imposed at a lower rate.
4. The E-levy should be imposed on the transaction fees (charged by the telcos), not on the value of transactions.

If the government is unwilling to follow the first three suggestions, it should at least follow the basic principle of consumption taxation in #4. There are principles of taxation. It cannot be “anything goes”. Otherwise, a government might as well tax the air that we breathe.