Africa: Taxing Africa’s Informal Economies – The Promises and Pitfalls of Technology

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Changes in the world of development finance – especially the sharp decline in financing Foreign aid And less Cheap loans for low-income countries – They paid taxes back to Spotlights.

Africa has entered a new phase.”Tax era of development“With external financing drying up, many African countries now rely more on their ability to raise money through taxes. But large parts of African economies are informal, and this is widely seen as an obstacle to collecting tax revenues.

for me Last workIt also shows that countries with high levels of informal activity tend to collect lower tax revenues and face other related challenges.

Governments struggling to pay wages and provide public services have two main options:

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Raising more taxes from the formal sector by increasing rates, introducing new taxes, or cutting tax incentives (which is unpopular among companies that already pay)
Extend taxes to include the informal sector, where most people work and most businesses operate, even though they already bear partial burdens Tax-like fees and other informal payments.

Achieving the second faces many obstacles.

approximately 85% of working-age people in sub-Saharan Africa are informally employed. This makes it very difficult for tax authorities to track economic activity or enforce compliance. The informal sector makes it difficult for governments to build the three capacities needed for effective taxation: Identify, detect and collect.

Technology provides an answer to all three challenges. But, as my research shows, it is not a complete solution. Poorly designed tools can amplify existing challenges or create new inequities, weaken trust, and push people back to cash.

Technology is a double-edged tool

Identifiability is the ability to know who should pay taxes – whether individuals, companies or properties – through reliable records and databases. Detection capability involves checking whether people and companies are reporting the correct amounts. This is often done by using information from third parties such as electronic receipts and mobile money records. Collection ability is the ability to ensure that taxes are paid smoothly and securely.

Technology can enhance all three:

Digital ID systems make it easier for taxpayers to comply with their obligations
Electronic transaction data helps detect unreported income
Online filing or automated withholding systems make payments easier for taxpayers while reducing face-to-face interaction, which is inefficient and can lead to fraud.

Emerging technologies such as Artificial intelligence and machine learning They are now used to assess taxpayer risk, flag suspicious filing patterns, detect potential fraud, and prioritize audit cases more accurately and efficiently than manual selection. Basic hardware, digital infrastructure, and reliable data systems must be in place before meaningful progress can be achieved in this area for low-income countries.

One way governments try to tax the informal sector is through “Simplified tax systemsTechnology plays an important role.

For example, Rwanda Experience shows How powerful digital invoices are. When larger companies need valid electronic invoices to claim expenses, they push this requirement onto the smaller suppliers they buy from, increasing tax compliance. Rwanda Electronic billing machines It has also shown that voluntary VAT compliance is possible when technology streamlines the process, reduces paperwork and bridges the information gap.

In Kenya, the government introduced eTIMSa paperless digital system that stores receipts electronically. It works through electronic tax records that validate, sign and encrypt sales data and then send it directly to the Kenya Revenue Authority.

Taxation of digital financial services

Digital financial services are now part of daily life across the continent, especially mobile money and digital wallets. In recent years, governments have also begun to use services as a tax base. The idea is that even if informal traders do not pay formal taxes, many of them still make electronic payments through systems such as mobile money or e-wallets.

In Ghana, the government imposed an electronic tax on electronic transactions of 1.75%, with an exemption of 100 cedi (US$10). After public opposition and a significant shift to cash, the price was reduced first and then later It has been completely removed in 2025. This was supposed to limit formalization efforts and reverse financial inclusion.

The art of the possible

Taxation in low-income countries is often the “art of the possible.” Evidence suggests that taxes on mobile money could significantly reduce the use of digital financial services – Up to 39% in some settings. The burden is particularly heavy when bank penetration is low. Rural and unbanked users have no real alternatives to mobile money. They must either pay the tax or resort to ineffective and often more expensive options.

Governments balance Competing priorities. They want to promote digitization and support digital financial services markets, while also expanding financial inclusion by keeping formal financial services affordable and accessible. At the same time, they have to increase sustainable revenues.

Technology must be part of the solution, but it requires a strong foundation.

There is a more fundamental problem that goes beyond the technology that helps digitize paperwork or enable instant filing. As wealth moves digitally – apps, platforms, e-wallets, blockchain, and even cryptocurrencies – tax systems must evolve with it. Countries cannot keep pace with this development unless they invest in 21st century tax skills and digital infrastructure to move beyond analogue tax systems.

In countries with high rates of informality, technology can support tax modernization, but it also faces significant limitations. These are linked Poor infrastructure, human behavior, institutional or legal constraints.