Digital payment systems drive growth in emerging countries

20 October 2016

Digital payment systems can drive sustainable growth in emerging countries. Many emerging countries are grappling with the challenge of how to modernise their economies, improve transparency, advance financial inclusion and, most of all, drive sustainable growth. One country that has achieved very strong results through its digital payment initiatives is Tanzania.

By digitising the payments made to the government by businesses and people, Tanzania has already:

  • empowered its tourism sector, by reducing, by over 40%, economic leakage from cash payments such as entrance fees for conservation parks, thus supporting investment and employment in the process
  • cut inefficiencies, including the reduction of customs clearance times for imports from nine days to less than one day
  • increased transparency between citizens and the government by digitising tax payments, which provides electronic proofs of payment and protects people against fraud.

Tanzania’s results in driving the transition from cash to digital payments are very impressive. “The country has developed significant experience that has enabled it to achieve revenue gains at double digit rates while also delivering social benefits for its citizens,” said Dr Ruth Goodwin-Groen, Managing Director of the Better Than Cash Alliance—a global partnership of governments, companies and international organisations that aims to accelerate the shift from cash to digital payments in order to drive inclusive growth and reduce poverty.

Other countries in the region have put in place initiatives to digitise payments and, while many are in the early stages of their transition, the benefits are quickly being realised and becoming evident:

  • Kenya is targeting to double tax collections over the next three years through its electronic tax filing system iTax.
  • In Uganda, the Kampala City Authority’s automated tax collection system boosted revenue by 167% in a single year.
  • Rwanda drove by nearly 80% the adoption of electronic VAT payments by SMMEs.

Another way in which the governments of emerging countries can boost tax revenues is through an electronic fiscal system. Avatar Technologies offers the only Electronic Revenue Assurance (ERA) solution which has been specifically designed to address tax compliance issues. This ERA solution can effectively support the tax systems of emerging countries. It is Cloud-based and highly secure and works in real-time to create an environment that promotes tax compliance. In this way, it benefits both taxpayers and governments.

The ERA solution is simple and affordable. It promotes fairness and transparency, thus supporting the World Bank’s three pillars of reform:

  • simpler and cheaper
  • fair
  • transparent

 Already-existing devices and Smartphones can be seamlessly integrated into the solution and the ERA devices are robust and have a high level of autonomy. This means they allow for both remote audit and activation, and, as such, can be used in businesses which are located in remote areas.

The Avatar solution provides the governments of countries that have adopted it with an Innovative Financing mechanism enabling them to secure funds for development, while compensating for dwindling foreign aid and avoiding additional dependence on foreign debt.

 The real-time electronic invoicing—also called e-invoicing— which Avatar Technologies can make possible could be a real boon for the government. In addition, to encourage tax compliance, several African countries have embarked on innovative initiatives such as receipt-based fiscal lotteries. While obtaining a receipt for any legal transaction does not cost the consumer anything extra, it becomes valuable as it serves as lottery ticket. In this way, transactions are more likely to be part of the official (not the shadow) economy and VAT can be collected by the tax authorities. For the tax authority, the cost of administering the lottery and of paying the related prizes is, in turn, far outweighed by the extra revenue of an increased tax base and the citizen-policing effect of detecting VAT-dodging businesses. 

Specific steps that countries can take to increase their fiscal space include:

  • strengthening tax audits
  • simplifying tax systems
  • increasing the focus on larger taxpayers
  • modernising collections.

 The electronic fiscal solution Avatar Technologies can provide would standardise and simplify internal processes, close major tax loopholes and improve collection procedures. Given the tremendous funding needs to meet the continent’s development goals and the scope to raise revenues from a diversity of sources, Avatar’s ERA solution represents a major opportunity for African countries. The time to boost revenues through digital payment systems is now.