A recent report titled “Statutory Remittances in Africa” has unveiled a staggering financial loss of $60 billion per year across Africa, primarily resulting from the failure to implement digital tax collection systems. The report, conducted by Bento, a pan-African digital payroll and HR management platform with tax remittance capabilities, scrutinized the taxation systems of 53 African countries.
This substantial loss significantly impacts the ability of African nations to fund vital public services such as education, healthcare, infrastructure, and defense. The root cause of this issue lies in the inability of many African countries to encompass the vast informal sector within their taxation framework.
Presently, the informal sector, comprising 85% of the population (90% in sub-Saharan Africa), contributes minimally to Domestic Resource Mobilization (DRM), leading to a substantial missed opportunity.
In response to these systemic taxation deficiencies, African nations have historically turned to foreign governments for external borrowing to bolster their economies. However, given the global economic slowdown, this approach is no longer sustainable.
Bento’s Co-Founder and CEO, Ebun Okubanjo, highlighted that the annual tax loss in Africa exceeds the amount of foreign development aid received and even surpasses the GDP of the Democratic Republic of the Congo. Embracing a digital revolution in tax collection could free African nations from their reliance on foreign assistance, with the potential to substantially increase revenue by curbing evasion and encouraging tax compliance.
Solving Africa Digital Tax Loss
The report emphasizes that effective, equitable, and sustainable taxation systems require careful consideration, making digital tax collection the most promising path forward. This is especially true for Africa’s informal sector, which operates outside government regulation and often lacks source deductions for taxes, unlike PAYE systems.
Unfortunately, only a handful of African countries have successfully implemented digital tax collection, with Ethiopia and Rwanda serving as notable examples of electronic tax reporting and collection platforms that have shown promise.
In July 2023, Nigeria’s Federal Inland Revenue Service (FIRS) collaborated with the Market Traders Association of Nigeria (MATAN) to introduce a unified technology-driven system for collecting and remitting value-added tax (VAT) from their members, especially those in the informal sector. This initiative, known as the ‘VAT Direct Initiative,’ aims to raise awareness of VAT collection, simplify VAT payment processes, and expand the tax net.
While the outcomes of this partnership remain uncertain, it is anticipated that it will reduce multiple taxations, discourage illegal tax collection practices, and enhance security within the informal business sector, ultimately boosting the revenue base of states and local governments.
The report underscores the potential for technology-driven solutions to bridge the taxation gap, particularly in the informal sector. It calls for the establishment of a robust database of informal sector participants for effective fiscal management and suggests a simple and flexible taxation model that both informal sector actors and tax authorities can readily apply.
Bento’s digital solutions are highlighted as a means to streamline tax reporting and payment processes, providing real-time data to tax authorities to improve tax collection and compliance.