How Ghana Can Boost Revenue Without Raising Tax Rates: A Digital Solution

A leading finance academic from the University of Ghana Business School (UGBS) has proposed a innovative, technology-driven approach to solve Ghana’s persistent fiscal deficit challenges. Professor Elikplimi Komla Agbloyor argues that the country can substantially expand its domestic revenue base—increasing “home profit” for the state—without exacerbating the tax burden on citizens or businesses through higher headline rates. His solution involves a fundamental shift in how income from the vast informal sector is identified and taxed using digital payment platforms, learning from the failures of past initiatives like the Electronic Transaction Levy (E-Levy).

Introduction: Ghana’s Fiscal Dilemma and the Search for Solutions

Ghana, like many developing economies, faces a chronic fiscal challenge. For years, the nation has grappled with significant budget deficits, constraining its ability to fund critical infrastructure, social services, and economic development projects. Conventional wisdom often points to the need for either expenditure cuts or increased taxation. However,Professor Agbloyor’s analysis, presented in his article “Changing the Narrative: From Persistent Fiscal Deficits to Fiscal Surpluses,” suggests a third path: enhancing tax compliance and broadening the tax net through smart, digital administration, particularly within the informal sector, without altering statutory tax rates. This approach aims to transform “home profit”—a term denoting government revenue retained within the national economy—by capturing income currently slipping through the fiscal cracks.

Key Points: The Core of the Proposed Digital Income Withholding Tax (DIWT)

The professor’s proposal centers on a new mechanism called the Digital Income Withholding Tax (DIWT). Here are the fundamental tenets of his argument:

• Target the Income, Not the Transaction: Unlike the E-Levy, which taxed the value of all electronic transfers regardless of purpose, the DIWT would specifically target transactions that constitute income or payment for services.
• Leverage Existing Digital Infrastructure: It would utilize the ubiquitous mobile money and digital payment platforms (like MTN Mobile Money, Vodafone Cash, AirtelTigo Money, and bank apps) as points of data and collection.
• Use Technology for Classification: Senders would be prompted to classify the purpose of their digital payment at the point of transaction (e.g., “payment for services,” “wages,” “business payment”). Artificial Intelligence (AI) and data analytics would assist in identifying patterns consistent with income payments.
• Withhold at Source: A small, pre-determined withholding tax (e.g., 5%) would be automatically deducted by the payment service provider (PSP) from the amount received by the payee and remitted directly to the Ghana Revenue Authority (GRA).
• Low Rate for High Compliance: The proposed low rate is designed to be minimally burdensome, encourage voluntary compliance from both payers and payees in the informal sector, and align with the typically low and irregular earnings in that segment.
• Revenue Potential: By formalizing a portion of the massive volume of daily mobile money transactions (which often represent payments for casual labor, small-scale services, and micro-enterprise activities), the state could unlock a significant new revenue stream.

Background: Ghana’s Tax Landscape and the E-Levy Lesson

The Scale of the Informal Sector

Ghana’s economy is characterized by a large, dynamic informal sector. This sector, comprising street vendors, artisans, domestic workers, casual laborers, small-scale transporters, and micro-enterprises, is estimated to contribute over 40% to GDP and employs a majority of the workforce. However, this massive economic activity remains largely outside the formal tax net. Traditional tax administration methods, reliant on formal payrolls and registered businesses, struggle to reach these dispersed, cash-based, and often transient economic participants.

The Rise and Fall of the E-Levy

Introduced in 2022, the Electronic Transaction Levy (E-Levy) imposed a 1.75% tax on all electronic transfers above GH¢100. Its stated goal was to widen the tax net by tapping into the booming digital payment ecosystem. However, it faced immediate and widespread public backlash. Professor Agbloyor identifies its core conceptual flaw: it was a transaction tax, not an income tax.

It levied a charge on transfers for savings, family remittances, loan repayments, and everyday purchases—activities that do not generate taxable income for the recipient. This made it feel like a tax on basic financial activity and savings, disproportionately affecting the poor and middle class. Despite this, it generated approximately GH¢2 billion in 2024, demonstrating the sheer volume of taxable-value transactions occurring digitally. The policy was abolished following the 2024 general elections. The lesson, according to Agbloyor, was not to abandon digital taxation, but to design it correctly: tax income, not transfers.

Ghana’s Fiscal Metrics (2019-2024)

The urgency for innovative revenue solutions is underscored by Ghana’s recent fiscal performance:

• Average Overall Fiscal Deficit: ~8% of Gross Domestic Product (GDP).
• Average Primary Balance: ~2.6% of GDP deficit (a primary balance excludes interest payments on debt).

These figures indicate a structural gap between government revenue and expenditure, contributing to rising public debt and macroeconomic instability.

Analysis: Deconstructing the Digital Income Withholding Tax (DIWT) Proposal

How DIWT Would Function in Practice

The operational mechanism is designed for simplicity and integration:

1. Transaction Initiation: A user (the payer) opens their mobile money or banking app to send money.
2. Categorization Prompt: The interface includes a mandatory or incentivized dropdown menu to select the payment reason: options include “Payment for Services (e.g., driver, cleaner, artisan),” “Wages/Salary,” “Business Payment,” “Gift/Family Support,” “Loan Repayment,” etc.
3. Algorithmic Flagging: For users who do not select a category, or for patterns that consistently resemble income payments (e.g., regular, similar-amount transfers to a specific recipient from multiple senders), AI algorithms could flag the transaction for potential DIWT application, with a verification mechanism.
4. Withholding and Remittance: If classified as “income” or flagged as such, the payment service provider’s system automatically deducts the DIWT rate (e.g., 5%) from the recipient’s incoming amount.
5. Example: A GH¢300 payment for a day’s casual work. The sender selects “Payment for Services.” The recipient receives GH¢285, and GH¢15 is withheld and remitted by the PSP to the GRA.
6. Receipt and Credit: The recipient (the informal earner) would receive a digital receipt or statement showing the gross amount paid and the tax withheld. This creates a digital record of their income, which could serve as proof for future loans or formalization.

Distinguishing DIWT from the E-Levy: A Critical Comparison

Potential Advantages of the DIWT Model

• Revenue Mobilization: Directly taps into the massive volume of informal sector financial flows, which are currently largely untaxed.
• Low Compliance Cost: Leverages existing PSP infrastructure for collection, minimizing new administrative burden on the GRA.
• Encourages Formalization: Creates a digital footprint of income for informal workers, which can be a stepping stone to fuller tax registration, access to credit, and social protection.
• Progressive Design: A flat low rate on small, irregular payments is less regressive than a broad-based transaction tax. It targets those actually receiving payments for work/services.
• Political Feasibility: Could be more palatable than a direct tax hike, as it is framed as capturing revenue from previously untaxed economic activity.

Challenges and Considerations

While promising, the proposal faces significant implementation hurdles:

• Classification Accuracy: Relying on user self-classification is prone to error and evasion (e.g., mislabeling an income payment as “gift”). AI systems would require sophisticated training on local transaction patterns to minimize false positives/negatives.
• Digital Literacy and Access: Not all informal sector participants are comfortable with digital interfaces. The system must be extremely simple, with local language options and community education.
• PSP Cooperation: Requires a legal mandate and technical integration for thousands of mobile money agents, banks, and fintechs. Compensation for PSPs for the remittance service would be a negotiation point.
• Impact on the Poorest: Even a 5% deduction on a GH¢50 daily wage is felt. A tiered system (e.g., 0% below a certain threshold) might be necessary to protect the most vulnerable.
• Legal and Regulatory Framework: Amending the Revenue Administration Act and other relevant laws to establish the DIWT, define taxable income in this context, and set the rules for PSPs as withholding agents would be essential.
• Grievance Mechanism: A simple, accessible process for individuals to dispute a wrongful withholding tax deduction is crucial for fairness.

Practical Advice: Steps for Implementation and Stakeholders

For Policymakers and the Ghana Revenue Authority (GRA)

• Pilot Program: Launch a limited, time-bound pilot in a specific region (e.g., Greater Accra or Ashanti) with high mobile money usage to test classification tools, user interface, and revenue potential.
• Stakeholder Engagement: Conduct extensive consultations with mobile network operators (MNOs), banks, fintech associations, informal worker unions, and civil society to design a workable and acceptable system.
• Phased Rollout: Start with a voluntary opt-in scheme for large informal employers (e.g., construction firms, market associations) to build trust and demonstrate benefits.
• Public Education Campaign: Clearly communicate that this is not a new “levy” but a mechanism to ensure income earners pay their fair share. Emphasize the creation of a tax record for the earner.
• Legislative Review: Draft amendments to existing tax laws to formally incorporate the DIWT, define “digital income payment,” and mandate PSPs as withholding agents with clear obligations and protections.

For Payment Service Providers (PSPs) – Mobile Money Operators & Banks

• System Development: Invest in developing user-friendly, intuitive in-app classification features with clear, localized descriptions.
• Data Security & Privacy: Ensure all transaction data used for classification is handled in strict compliance with Ghana’s Data Protection Act, with anonymization where possible for algorithmic training.
• Integration with GRA Systems: Build secure, automated APIs for the seamless and real-time remittance of withheld taxes and generation of digital receipts for customers.
• Agent Training: Train millions of mobile money agents to assist customers with understanding the new process, especially in rural areas.

For Informal Sector Workers and Businesses

• Accurate Classification: When receiving payment for work or services, always select the correct “income” category to ensure proper tax credit and build your financial history.
• Keep Digital Receipts: Safeguard the digital receipts showing gross payment and tax withheld. These are your proof of income and tax payment.
• Understand the Rate: Recognize that the small, transparent withholding is your contribution to national development and a step towards a formal financial identity.
• Seek Clarification: If you believe a transaction was wrongly classified or taxed, contact your PSP or the GRA with your receipt for resolution.

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