Digital financial services (DFS) are transforming how individuals in Sub-Saharan Africa send money to family and friends, pay bills, transact business, use financial services, and access public services. Large segments of the population in the region are now increasingly recognizing the value of DFS over cash. Tanzania is among the countries making important progress in expanding DFS adoption and reducing cash reliance. But the high costs of using DFS can impede further uptake and may have adverse implications for the sustainability of the DFS ecosystem.

Administrative data from the Bank of Tanzania show a rapid increase in the number of active mobile money accounts in Tanzania, rising from 30.3 million in 2020 to 60.8 million in 2024, well above the country’s working-age population of 37.3 million. Mobile money accounts do not correspond one-to-one with individuals. Many users hold multiple wallets across providers to manage transaction limits, fee structures, and network coverage gaps, and “activity” depends on regulatory definitions tied to recent transactions.

However, for low-income users, smallholder farmers, and small business operators, even small levies on each transaction can add up, making alternatives such as cash, informal channels, or reduced usage more attractive. As these services increasingly become part of daily life, the question of how they are taxed has become a critical research interest, especially in terms of their impact on affordability. This raises key policy questions: are current tax policies advancing financial inclusion or undermining it? Who bears the real cost? And can Tanzania balance revenue needs with accessible digital finance?

A Complex and Evolving Policy Landscape

Tanzania’s experience highlights a broader policy dilemma with implications for inclusive growth: how can governments raise needed revenue without undermining their own goals of digital and financial inclusion? Since 2013, Tanzania has introduced a number of taxes on digital payments, particularly those related to mobile money. The government initially introduced an excise duty on money transfers, followed by a value-added tax (VAT) on service charges, and an electronic transaction levy based on the transaction value. These instruments are administered by different authorities across Mainland Tanzania and Zanzibar. In 2023, DFS-related taxes accounted for an estimated 2.71 percent of government revenue.

Despite continued sector growth, Tanzania’s tax burden on mobile money remains higher than in many neighboring countries, such as Rwanda and Kenya. This increases costs for users and adds administrative complexity for service providers, with potential implications for investment and innovation over time.

The introduction of the transaction levy in 2021 intensified these challenges, sparking widespread public backlash and prompting multiple policy revisions, including changes to rates, thresholds, and coverage. Combined with resistance from some of the leading DFS providers, these developments have created momentum for a broader reassessment of DFS taxation and strengthened calls to rethink DFS taxation to better align tax policy with affordability, usage patterns, and inclusive growth objectives.

The Rationale and Risks of Taxing DFS

Taxing DFS has become a common revenue-raising strategy across Africa. However, actual collections often fall short of initial projections, putting more pressure on already strained national budgets. Moreover, if poorly designed, DFS taxes risk being regressive, placing a disproportionate burden on low-income and financially vulnerable populations who are least able to absorb additional costs.

Beyond equity concerns, excessive or poorly targeted taxation can discourage investment in new technologies and services, stifle competition, and hold back innovation within the digital finance sector. In addition, taxes on high-frequency, small-value transactions may alter user behavior, reducing usage and potentially eroding the tax base itself. Evidence-based policy design, grounded in an understanding of how taxes affect DFS usage, affordability, and small-value transactions, is therefore essential.

What Did IPA and Fiscality Do?

Innovations for Poverty Action (IPA) partnered with Fiscality, a multidisciplinary public finance research team, to review the DFS tax system in Tanzania. The research investigated how taxes affect DFS uptake, usage, and affordability, particularly among underserved populations. The research focused on three key pillars:

• Evaluating what has worked and what has not worked in the design, implementation, and outcomes of past and current DFS tax policies, and understanding why, as a pathway to developing solutions;
• Exploring the political economy of DFS taxation—why policies were adopted, reversed, or modified—including the roles of institutions and incentives, and how they might influence change in the future; and
• Identifying missing or insufficient data, such as disaggregated transaction-level information and usage trends, to ensure policymakers have the evidence needed for informed decisions.

Generating Evidence for Reform

A central component of the research was to identify the full burden of taxes on DFS and map key institutions and market actors. These include the Ministry of Finance and the Tanzania Revenue Authority, which are responsible, respectively, for tax policy design and collection; the Bank of Tanzania, which oversees payment systems and issues related to consumer protection and affordability; and telecom and fintech providers, who operate and enable digital financial services within the broader regulatory framework.

In parallel, IPA and Fiscality reviewed taxes on digital enablers, such as mobile phones and internet access, to identify whether targeted tax reductions could improve digital access and uptake, especially for low-income and rural users.

The broader body of work also included a DFS tax model to assess how different tax design options impact revenue, adoption, and usage; an analysis of current and previous DFS taxation policies and their effects on fiscal and inclusion objectives; a regional comparison of DFS taxation approaches; and an assessment of how DFS taxes affect different users, including individuals, small businesses, women and men, and urban and rural populations. These outputs aimed to support a more evidence-based conversation on DFS tax policy choices.

Through a series of policy briefs, stakeholder interviews, and workshops with the Government of Tanzania, the research has supported renewed thinking on how Tanzania can approach DFS taxation in the future, moving towards policies that expand financial access without sacrificing fiscal sustainability.

This project is part of the Tanzania Affordable Digital Finance Research Initiative (TADFRI), an initiative hosted by Innovations for Poverty Action and funded by the Gates Foundation.