SDG 8: Decent Work and Economic Growth | SDG 10: Reduced Inequalities
Ministry of Finance | Reserve Bank of India (RBI)
The IMF Working Paper (WP/25/255), “Taxing Mobile Money: Theory and Evidence,” examines the growing trend among developing countries to levy taxes on mobile money transactions, arguing that this practice threatens financial inclusion by making digital transactions less attractive. The analysis develops a model to characterize how these taxes affect payment choices and generate significant economic distortion.
Key Findings on Mobile Money Taxation:
Central Role of Mobile Money: Mobile money has become a central digital alternative to traditional banking in developing countries, offering crucial financial access to populations traditionally excluded from formal finance.
Core Economic Prediction: The IMF model predicts, and empirical evidence suggests, that the imposition of such taxes significantly reduces mobile money use. In Africa: active accounts ↓20%, transactions ↓10-50% (2-3 yrs post-tax); banked users cut usage ~20pp (substitute to banks), unbanked/rural less responsive but hit harder.
Generation of Excess Burden: The tax creates an excess burden (or deadweight loss) because it distorts user behavior, discouraging people from using the efficient digital payment method and causing a loss of welfare greater than the tax collected. The paper estimates that in Africa, tax creates 35% excess burden of revenue.
Policy Challenge: This distortion threatens financial stability and access, as users are incentivized to revert to less efficient or informal methods (like cash), thereby undermining the transition to a digital economy.
Excess burden, or deadweight loss, is an economic term that refers to the loss of economic efficiency that occurs when the marginal cost of a tax to society exceeds the amount of revenue raised by the government. In the context of mobile money, this loss occurs because the tax incentivizes people to avoid the efficient digital system, causing the economy to operate below its potential.
Policy Relevance for India
This IMF study is critically relevant to India’s policy strategy, which is anchored by a zero-cost Digital Public Infrastructure (DPI) model:
Protection of UPI/DPI Model: India’s success in financial inclusion is fundamentally anchored by zero-cost digital payments (Unified Payments Interface - UPI) and low-cost banking (India Post Payments Bank - IPPB). The IMF’s finding provides a strong, evidence-based cautionary signal against imposing direct taxes on these highly successful, low-cost digital payment rails.
Preventing Financial Exclusion: Any taxation on transactions would disproportionately affect the vast majority of low-income and marginalized users who rely on systems like UPI for small-value transfers. The resulting excess burden would compel these vulnerable segments to revert to cash, directly undermining the goal of long-term financial inclusion and sustainable development.
Fiscal Strategy Alignment: The policy lesson is to avoid taxing the foundational layer of digital payments and instead focus fiscal policy on broader, less distortive tax bases or value-added services, ensuring the efficient, inclusive nature of DPI remains protected.
Follow the full report here: IMF Working Paper WP/25/255, Taxing Mobile Money: Theory and Evidence