By Abel Gwaindepi*
Changes in the development finance world – especially the sharp drop in foreign aid and fewer cheap loans for low-income countries – have pushed taxation back into the spotlight.
Africa has entered a new “tax era of development”. As external funding dries up, many African countries are now relying more on their own ability to raise money through taxes. But large parts of African economies are informal, and that’s widely seen as an obstacle to collecting tax revenue.
My recent work, too, shows that countries with high levels of informality tend to collect less tax revenue and face other related challenges.
Governments struggling to pay wages and deliver public services have two main choices:
- raise more taxes from the formal sector by increasing rates, introducing new taxes, or reducing tax incentives (not popular among businesses that already pay)
- extend taxation into the informal sector, where most people work and most businesses operate, though they are already partly burdened by tax-like fees and other informal payments.
Achieving the second faces many obstacles.
Roughly 85% of working age people in sub-Saharan Africa are informally employed. That makes it extremely difficult for tax authorities to track economic activity or enforce compliance. Informality makes it harder for governments to build the three capacities needed for effective taxation: identification, detection and collection.
Technology provides an answer to all three challenges. But, as my research shows, it isn’t a complete solution. Poorly designed tools can amplify existing challenges or create new unfairness, weaken trust and drive people back to cash.
Technology as a double-edged tool
Identification capacity is the ability to know who should be paying tax – whether individuals, businesses, or properties – through reliable registries and databases. Detection capacity involves verifying whether people and firms are reporting the right amounts. This is often done by using information from third parties such as electronic receipts and mobile-money records. Collection capacity is the ability to ensure that taxes are paid smoothly and securely.
Technology can strengthen all three:
- digital ID systems make it easier to match taxpayers to their obligations
- electronic transaction data help uncover under-reported 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 like artificial intelligence and machine learning are now used to score taxpayer risk, flag suspicious filing patterns, detect possible fraud, and prioritise audit cases far more accurately and efficiently than manual selection. Basic hardware, digital infrastructure, and reliable data systems need to be in place before meaningful progress can be achieved in this area for low‑income countries.
One way that governments try to tax the informal sector is through “simplified tax regimes”. Technology is playing an important role.
For example, Rwanda’s experience shows how powerful digital invoicing can be. When big companies need valid electronic invoices to claim expenses, they push this requirement down to the smaller suppliers they buy from, increasing tax compliance. Rwanda’s electronic billing machines have also shown that voluntary VAT compliance is possible when technology simplifies the process, cuts down paperwork and closes the information gap.
In Kenya, the government has introduced eTIMS, a paperless digital system that stores receipts electronically. It works through electronic tax registers that validate, sign, encrypt and then send sales data directly to the Kenya Revenue Authority.
Digital financial services taxation
Digital financial services are now part of everyday life across the continent, especially mobile money and digital wallets. In recent years, governments have also started using the services as a tax base. The idea is that even if informal traders don’t pay formal taxes, many still make electronic payments through systems like mobile money or e-wallets.
In Ghana, the government introduced an e-levy on electronic transactions at 1.75%, with a 100-cedi (US$10) exemption. After public pushback and a big shift back to cash, the rate was first reduced and then removed completely in 2025. It was deemed to be reducing formalisation efforts and reversing financial inclusion.
The art of the possible
Taxation in low-income countries is often the “art of the possible”. Evidence shows mobile-money taxes can sharply reduce the use of digital financial services – up to 39% in some settings. The burden is especially heavy where bank penetration is low. Rural and unbanked users have no real alternatives to mobile money. They must either pay the levy or resort to inefficient and often costlier options.
Governments are balancing competing priorities. They want to promote digitalisation and support digital financial services markets, while also expanding financial inclusion by keeping formal financial services affordable and accessible. At the same time, they need to raise sustainable revenue.
Technology has to be part of the answer, but it requires strong foundations.
There is a more fundamental issue beyond tech helping digitise paperwork or enabling instant filing. As wealth moves onto digital rails – apps, platforms, e-wallets, blockchain and even crypto – tax systems must evolve with it. Countries cannot keep up unless they invest in 21st-century tax skills and the digital infrastructure to move beyond the analogue tax systems.
In countries with high informality, technology can support tax modernisation, but it also faces major limitations. These are linked to weak infrastructure, human behaviour, and institutional or legal constraints.
Digital tools simply cannot function where electricity or internet access is unreliable.
The human factor matters too: even when systems work, many taxpayers lack the skills, awareness or financial capacity to use them. And tax officials may resist or misuse new tools if incentives are not aligned. The legal framework matters too since digital audits can be done at speed only for the process to slow down if courts are inefficient.
What’s needed
The basic challenge in taxation remains: no tax system can maximise revenue, fairness and simplicity at the same time. Good policy means choosing the right balance, rather than falling into trade-offs that place the biggest burden on the poorest. And people are more willing to pay when they see government giving something back in terms of essential services.
In the end, tax is political. It involves decisions about who pays, and how, which reflect a country’s priorities as much as its technical capacity.
As income and business activity shift to digital platforms, governments need modern systems that can keep up, understand how informal businesses are shifting to digital rails fully or partially and apply tax rules effectively.
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* Senior Researcher, Danish Institute for International Studies
