Tax administrations in Africa and low-income countries (LICs) are embracing advanced digital technologies to modernize their operations and enhance revenue collection, according to a recent study by the International Centre for Tax and Development (ICTD).
This strategic shift towards digitalization aligns with broader governmental efforts in e-governance and the development of digital public infrastructures (DPI).
The study highlighted the critical role of Digital ID Systems (DIS) and Digital Merchant Payments (DMP) in transforming tax administration and revenue mobilization in these regions.
“Recent years have seen growing attention to the potential impacts of digital ID systems (DIS) and digital merchant payments (DMP), both of which are linked closely to broader discussions of the potential of DPI to strengthen development outcomes.”
International Centre for Tax and Development
Global Success Stories Validate Digital Tax Innovations
The research underscored the transformative impact of DIS and DMP on tax systems, citing successes in other regions like India and South Korea.
India’s Aadhaar system, for example, replaced traditional taxpayer identification numbers (TINs) and significantly boosted compliance with the Goods and Services Tax (GST).
Similarly, South Korea’s promotion of DMP streamlined tax compliance and tracking, resulting in improved revenue collection.
“Existing research provides a clear narrative about the ways in which investments in foundational DPI – and in strengthening DIS and DMP in particular – may translate into improvements in tax systems and revenue mobilization.”
International Centre for Tax and Development
The integration of DIS with tax systems promises improved data quality and effective interagency data sharing, crucial in regions where tax registries are often unreliable. This integration has already yielded tangible results in countries like Uganda and Ghana.
“For instance, Uganda’s integration of DIS with the National Identification and Registration Agency (NIRA) resulted in the ‘Instant TIN’ system, simplifying online tax registration,” the study highlights.
Similarly, Ghana’s collaboration between the Ghana Revenue Authority (GRA) and the National Identification Authority (NIA) led to a threefold rise in tax registrations by leveraging the Ghana Card PIN.
Overcoming Challenges in Maximizing Digital Tax Solutions
Despite these successes, challenges remain in fully capitalizing on DIS and DMP. Limited coverage of DIS and data quality issues pose barriers to maximizing tax potential and revenue mobilization.
“While DIS expansion improves tax base coverage, its direct impact on revenue mobilization is uncertain,” the study points out. “In Ghana, taxpayers registered via PIN show mixed compliance outcomes, underscoring the need for targeted strategies.”
International Centre for Tax and Development
Moving forward, the research advocates for comprehensive policy, institutional, and administrative reforms to leverage the transformative potential of DIS and DMP in revenue mobilization.
This includes strengthening data-sharing mechanisms, embedding technology within broader administrative reforms, and adopting targeted approaches to tax administration.
“That data sharing is critical to allowing governments to access and use electronic payment data, and to maximizing the value of DIS in linking taxpayer information across government systems to identify unreported incomes or provide support.”
International Centre for Tax and Development
“The expanded adoption of DIS and DMP offers significant potential for tax administrations,” the study concludes.
“Realizing these gains requires legislative reforms, interagency collaboration, and enhanced data governance protocols to unlock the full potential of digital technologies in strengthening tax systems.”
International Centre for Tax and Development
As such, the ICTD study underscores the strategic importance of digital IDs and payments in revolutionizing tax administration across Africa and LICs.
While significant strides have been made, realizing the full benefits necessitates holistic reforms and strategic interventions to bridge existing gaps and achieve sustainable improvements in tax system performance.
The path forward entails leveraging technological innovations to enhance data quality, streamline compliance processes, and target noncompliant taxpayers effectively, ultimately paving the way for more efficient and equitable tax systems.
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