Blockchain has the ability to not only re-invent the tax system but also re-brand its already tainted history in Africa
- Kenya’s government has increased its direct tax rate from 25% to 30% to recover the hard-hit economy.
- Blockchain application in the financial sector has led to the development of Africa’s fintech Industry which Statista estimates to reach $12 billion by 2025.
There are two major Tax systems; Direct and Indirect tax systems.
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The fourth industrial age steadily settles in the minds and hearts of Africans. Many wonders if the continent will have the means and funding necessary to achieve the status of a “developed continent.” The continent has various activities that have steadily increased the economic growth of individual countries. Although, none is as old as the government-imposed taxation system.
This mandatory practice is a crucial component in ensuring that a country’s economic state does not decline. Fortunately, with Web3 steadily redefining the world’s financial system, blockchain in the taxation system is now practical. Today, not only has this new technology revolutionized the VAT system, but it has also led to the development of decentralized applications and Africa’s blockchain adoption rate.
Below is a sneak peek at how blockchain can curb the various norms and issues faced within the taxation process of most African countries. In addition, we will highlight several scenarios of how blockchain in taxation will essentially redefine its deteriorating reputation among many African citizens as a facilitator of impunity.
Understanding the concept of taxation and its impact in Africa
When the typical individual hears the term tax, they often frown upon the fact that a significant portion of their hard-earned income will go to the government. This habit is even worse in Africa due to the high tax rate, yet citizens witness little to no development in several countries. Unfortunately, many tend to ignore the fact that the taxation system of any government is a crucial factor in the economic growth of developing countries.
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Taxation, by definition, is when a taxing body, or the government, imposes various financial obligations on its citizens. Since ancient times, tax has been a primary form of ensuring a country has enough resources. One of the few facts many cannot fully accept is that taxation is unlike any other form of payment since it is essentially forced or is a mandatory activity.
Failure to comply with the set taxation law of any government often leads to severe legal actions. Due to this, many attribute the taxation system of any government as a form of robbery or oppression, yet the bitter truth remains; a country cannot survive without tax.
Taxation systems vary across different jurisdictions, but they all serve the primary purpose of ensuring the economic growth of developing countries. As time passed, other justifications for a taxation system emerged. They included funding government expenditures and running free education and health institutes.
Types of the Taxation system.
In any country, different income resources range from individual to corporate income. Each kind of economic activity has its respective taxation system in place. There are numerous types of taxes, each ranging up in the different economic activities conducted. They include income tax, corporate tax, capital gains, property tax etc. Despite this, each tax system falls under two major types;
- Direct Tax – This tax deals with an individual paying straight or directly to the government. With Africa steadily advancing in technology, this tax payment method has recently received several upgrades and is digitalized. Direct taxation systems include; income tax, poll tax, land tax and property tax.
- Indirect Tax – This type of taxation system involves three or four entities, unlike the direct taxation system, which only involves two; the government and the citizen. A single entity collects it in the supply chain, such as the manufacturer or the retailer and pays the government. However, the consumer still indirectly pays for it. You can witness this taxation system on receipts after purchasing a product. Upon a closer look, you will usually notice a section detailing the tax imposed on the goods. This is one of the most common forms of economic growth in any developing country. Any increase or decrease in tax rate always affects the overall prices.
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Blockchain in the taxation system
Africa’s blockchain adoption rate steadily increases as developers find more intuitive ways to implement decentralized applications in different industries. Its first and fundamental application in the financial sector has led to the development of Africa’s fintech Industry which Statista estimates to reach $12 billion by 2025. As a result, various African countries such as Kenya, Nigeria, South Africa and Egypt are warming up to this new technological revolution.
The characteristics of blockchain technology; decentralization, immutability, real-time and transparency, can potentially revolutionize Africa’s taxation system. The use of smart contracts can automate any financial transaction while still maintaining transparency and integrity.
In addition, it might be able to address some of the compelling issues hindering various African taxation systems today.
Demerits of Africa’s taxation
It is a common fact that African nations have struggled with implementing taxes to bring about economic growth. In truth, most individuals rather avoid paying tax mainly due to two key elements. The first is high tax rates in various African countries.
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In developing countries, many individuals rank between low and middle-income earners and only have a few high-income earners. The second attribute is the deep seeded corruption in several African countries. The latter resulted in little to no economic improvements despite the high tax rates the government imposed on its people. When combining both factors, it is hard not to see why most African citizens try to find ways to avoid paying their taxes.
Unfortunately, the Taxation system of any economy is a fiscal tool for domestic resource mobilization. Thus without a proper system, it will be an endless tag of war between citizens who do not see the point in paying taxes and a government trying to find ways to improve the livelihood of their citizens.
A prime example is Kenya’s current economic tax rate. The new government is trying to make up for the debts acquired by its predecessors. They have imposed increased tax rates within the country. Businesses and corporates have significantly felt this. To achieve its agenda Kenya’s government increased its Direct tax rate from 25% to 30%. In addition, the country re-introduced a fee on all mobile-to-bank transactions made. This significantly increased the prices of virtually every commodity within its economy.
As a result, many of its citizens were displeased mainly due to the well-known rate of corruption within the governments.
What difference will blockchain in the taxation system make for Africa
Africa’s blockchain adoption rate is a testament to how blockchain technology can improve virtually any industry developers apply. Due to this fact, Africa’s taxation system is no different since blockchain can ensure the rapid economic growth of its developing country merely by creating a better system.
Reduced fraud and corruption
Africa has made a name for itself with ingenuity and innovations within the tech industry. Unfortunately, not all individuals use their talent to improve their economy. Fraud and corruption have run rampant within Africa’s ecosystem to appoint it’s no longer a hidden vice. Fortunately, the application of blockchain in the taxation system ensures two key factors that will curb the plague of fraud and corruption; transparency and immutability.
Because blockchain provides provenance, and traceability, it can redesign the VAT system of any government. This will lead to the development of a VAT blockchain system. It allows the system to interact with the user directly and prevents any alteration or false additions to the VAT blockchain system. This ensures that the system maintains a complete audit trail throughout the process. This prevents anyone from “paying” their way out of the system.
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Today Africa’s taxation system is digitalized and allows a citizen to pay their taxes directly from their hone. Unfortunately, this system is mainly run on Web2 facilities and is prone to several system issues. A VAT blockchain system automates the entire accounting and payment process. This ensures that each citizen can pay their taxes on time and in full. In addition, utilizing decentralized applications in a tax system can effectively lower the tax rate.
To further elaborate on this scenario, we have to account for three factors; corrupt officials, fraudulent citizens, and the total number of citizens in a country. The first two are the primary reasi why the economic growth of developing countries is steadily declining. In addition to its immutability, the government and its citizens will know how much the country has acquired in one financial year. Its automation ensures that the country’s funds do not “disappear” increasing the accountability of a nation.
Blockchain technology can transform indirect tax
Blockchain in the taxation system can redefine indiret tax and how an African government can handle it. It is still a distributed ledger, and it can reduce the complexity within supply chain management. Since indirect tax involves goods and services, not many individuals understand how its functions. This gives room for various illicit activities to occur during the process.
Fortunately, since direct tax often follow a chain of transaction and their tax liabilities and obligations depend on various “events”, implementing a decentralized application is efficient. In addition, it also ensures that a proper and immutable ledger is maintained and available to everyone. This increased performance of service and delivery of goods. In addition, it reduces cost by reducing the number of entities involved in the entire process saving money not only for the government and suppliers but also for the customers who pay the taxes.
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Re-Building trust in the tax system
The fact remains that without a VAT or PAYE blockchain system, many will still distrust the system. To mitigate this deeply etched distrust, blockchain in tax systems can operate in full view and show the citizens where their tax is. This builds trust in a country’s government enabling easier cooperation between them and their citizens. This is a crucial fact since it is well-known that an incompetent government soon faces the wrath of its citizens. It also increases the economic growth of developing countries by accounting for all a country’s assets.
The steady growth of Africa’s blockchain adoption rate ensures that governments have ample choices for blockchain developers.
Blockchain in the tax system can ensure the economic growth of developing countries. If a government implements decentralized systems, it can turn the tide of its economic, social and political change. Corruption is one of the few factors that essentially kill the potential of a nation. South Africa’s power outage is a prime example of how deep-rooted corruption works against a nation. If Africa’s blockchain adoption rate is to improve, implementing a VAT blockchain system is a concrete strategy for going about it.