Research Reveals African Governments Must Find Scalable Means of Tax Collection to Generate billions in Additional Income
Bento, a pan-African digital payroll and HR Management (HRM) platform with tax remittance capabilities, has today published Africa’s first-of-its-kind White Paper, titled Statutory Remittances in Africa. The White Paper delves into taxation systems in 53 African countries and underscores the advantages of governments adopting digital payroll systems to collect income tax and other obligatory deductions accurately.
The White Paper thoroughly explores the intricacies of income tax, a pivotal revenue source for African economies, comprising approximately 33% of the total income generated. While specific income tax ranges differ from one country to another, with variations such as Lesotho’s 20-30% and neighbouring Namibia’s 0-37%, the document highlights the significant disparities in African tax rates and underscores the challenges faced by tax authorities in effectively harnessing this method for revenue collection.
Essential public services such as education, healthcare, infrastructure, and defence are financed by tax revenue. But taxation is a complex process that requires careful consideration to develop an effective, equitable, and sustainable system. According to Bento’s White Paper, digital tax collection could enhance 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.
Currently, this sector also fails to significantly contribute effectively to Domestic Resource Mobilisation (DRM). Bento 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).
The White Paper posits that in the face of a worldwide economic slowdown, African nations can’t rely on foreign governments for external borrowing to help alleviate their economic woes. Worryingly, the continent experiences annual losses of as much as $60 billion due to illicit financial outflows. Bento believes that this “detrimental situation” can be fixed.
Bento’s White Paper also looked at VAT and found that in contrast to the relatively uniform application of VAT in Europe, the situation in Africa is markedly different. While this tax contributes to government revenues, its implementation varies significantly from country to country. This disparity is evident when comparing Niger and Nigeria, where the VAT in the latter is 12% higher than that in Africa’s most populous nation.
The White Paper presents thought-provoking insights and actionable recommendations to empower governments across the continent, to better utilise technology-driven approaches now available to them, thus steering African economies towards a sustainable growth trajectory. Payroll systems are slowly starting to be used as a means of tax collection on the continent. Since 2016, Kenya has mandated the electronic filing of all taxes, including employment, business, and rental income. In addition to enhancing taxpayer identification and monitoring capabilities, this digital transformation aims to reduce taxpayers’ compliance costs.
Ebun Okubanjo, Co-Founder and CEO at Bento, said, “Effective taxation has the potential to make Africa a better, more prosperous continent, allowing Africans to take charge of their own budgets. Our White Paper highlights the importance of this issue at a crucial moment when governments across the continent are striving to catalyse their economies. One solution to achieve this is through digital tax collection, which can help governments accurately predict revenue, allocate resources optimally, and strategically develop public amenities and other initiatives.
“Our White Paper also 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. 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. 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.”
The White Paper concluded that new and more innovative means of tax collection at scale, via tech-enabled digital platforms would enable African countries to increase their average tax-to-GDP ratio of 16.5%, which currently lags behind Latin America and the Caribbean (21.9%), and Organisation for Economic Co-operation and Development (OECD) countries (33.5%) and drastically improve the lives of African citizens.