Africa loses $60 billion a year due to non-implementation of digital tax collection- Bento Report

Africa loses $60 billion a year due to illicit financial outflows attributable to the non-implementation of digital tax collection. This is one of the findings contained in a report titled: Statutory Remittances in Africa. The report which examined the taxation systems in 53 African countries, was released by Bento, a pan-African digital payroll and HR Management (HRM) platform with tax remittance capabilities.

Essential public services such as education, healthcare, infrastructure, and defence are financed by tax revenue. However, the system in many African countries has failed to meet up and guarantee that they generate enough taxes to meet their national needs. This is largely due to the failure to capture the large informal sector in the taxation system.

Currently, the informal sector also fails to significantly contribute effectively to Domestic Resource Mobilisation (DRM). The Bento report considers this a missed opportunity, one that prevents African nations from capitalising on taxes from a sector where 85% of its population are participants (90% in sub-Saharan Africa).

This acute failure in taxation systems has forced many countries to go hat in hand to their Western counterparts for help. However, in the face of a worldwide economic slowdown, African nations can no longer rely on foreign governments for external borrowing to help alleviate their economic woes.

Speaking on the findings, Co-Founder and CEO at Bento, Ebun Okubanjo, said the amount lost by African countries is more than the amount of foreign development aid that comes into the continent.

“Our White Paper reveals that African countries lose at least $60 billion in taxes, which is more than the amount of foreign development aid and slightly more than the GDP of The DRC. If we embrace a digital revolution, Africa will not need to rely on foreign backers for support. We have the people and the solutions to collect taxes more effectively. Efficient tax collection can significantly increase revenue generation by reducing evasion and promoting adherence to tax regulations,” he said.

Digital tax collection could solve taxation of the informal sector

The report noted that taxation is a complex process that requires careful consideration to develop an effective, equitable, and sustainable system. This is why digital tax collection remains the best way to maximise the sector. This is especially true for the informal sector in Africa, which consists of economic activities outside of government regulation and supervision and where taxes are not deducted at source on wages, in contrast to PAYE.

The report notes that the informal sector, which frequently operates outside of government
control represents a wasted opportunity for Domestic Resource Mobilization (DRM). The most significant challenge has been accountability, as many Africans question how their taxes are used. This continuous problem emphasizes the crucial need for new techniques for tax collection, primarily through technology.

Only a few African countries have found a way to digitally collect taxes from the informal sector. These countries include Ethiopia and Rwanda. As indicated by the experiences of their electronic tax reporting and collection platforms, technology has already shown promise in transforming tax collection.

In July 2023, Nigeria’s Federal Inland Revenue Service (FIRS) announced a partnership with the Market Traders Association of Nigeria (MATAN) to collect & remit value-added tax (VAT) from their members—especially those in the informal sector—using a unified systems technology. MATAN has more than 40 million traders as members spread over 774 local governments, 36 states, and the Federal Capital Territory (FCT),

The collaboration which is known as the ‘VAT Direct Initiative’ aims to promote awareness of VAT collection and remittance in the marketplace and informal sector, while also simplifying VAT payment and remittance for the marketplace and informal sector using a purpose-built digital platform. The partnership will see the FIRS collaborating with the association to deploy technology to enumerate traders for collecting and remitting VAT to the Service, consequently leading to an expansion of the tax net and increased revenue for the Federation.

While it is yet unclear the result of this partnership, it is, however, expected to curb incidents of multiple taxations, and discourage touting and illegal tax collectors, while also ensuring security in these informal business places. Ultimately, it is expected to widen the tax net and consequently improve the revenue base of the States and Local Governments at the sub-national level.

In conclusion

The report demonstrates, through the experience of countries like Ethiopia and Rwanda, that technology-driven solutions can assist in bridging the taxation gap, especially for the informal sector. It, however, recommends that establishing a robust database of informal sector actors that can serve as a decision-making tool in the fiscal management of the sector is necessary.

It also recommends that it is essential to establish a taxation model that is simple in its application by informal sector actors and flexible in its governance by the tax authorities.

“Bento software is one of the solutions that can help African governments by enabling them to generate and submit tax reports and payments electronically, reducing administrative burdens. With real-time reporting, tax authorities can access up-to-date information on tax collections and trends. ,” Bento CEO, Ebun Okubanjo says.

See also: All you need to know about FIRS plan to collect VAT from market traders using tech