Treasury’s decision to widen the tax net to include the informal economy should be welcomed, but at the same caution should be adhered to ensure that informal traders are not taxed into poverty.
The informal economy is mainly driven by unskilled workers who cannot get into the formal economy, and as much as the informal economy continues to thrive while the formal economy teeters, there is need to protect this vulnerable class.
The issue of taxation as regards the informal economy in developing countries has received increasing attention in recent years.
Analysts have warned that the debate should focus on the wider development implications of informal sector taxation, as well as the political and institutional barriers to improved performance.
When considering the merits of committing scarce resources to taxing small informal sector firms, the debate has frequently focused on limited revenue potential, high costs of collection and potentially perverse impacts on small firms.
The issue of whether taxation of the informal economy is justified has been a subject of longstanding controversy.
In the view of critics, the potential revenue yields are low, administrative costs are high, tax incidence is likely to be regressive, and tax enforcement risks exposing vulnerable firms to harassment (Keen, 2012Keen, M. (2012), Tax and development – Again.
Treasury needs to tell us how it will deal with small and micro businesses that generate enough income to warrant taxation but find it easy to escape the attention of the tax administration, or to conceal a substantial part of their tax liability, because of their location, size, and/or nature of their business.
Government’s biggest challenge will be centered around getting sufficient data to determine the number of taxable individuals or entities. The informal sector mainly deals with basic services and products on offer such as taxi services, long distance bus services, hair salons, meat vendors etc.
It will take a dedicated unit to compile a database of all these businesses.
What modalities will be used to capture this data?
Government should also guard against suffocating the informal economy in its bid to increase its revenue.
Financial experts have long stated that the informal economy is an integral part of the country’s financial system, so much that during the current tough times when the formal economy is dragging, the informal economy continues to thrive.
In fact, it acted as a pillar to keep the country steady.
A recent report by the African Development Bank, titled “Recognising Africa’s Informal Sector,” found that the informal sector contributes about 55 per cent of Sub-Saharan Africa’s GDP and 80 per cent of the labour force.
This is a key statistic that cannot be ignored.
In fact, apart from looking at taxing the informal economy, government should focus on creating an enabling environment for informal traders to thrive.
This includes providing trading facilities which are hygiene friendly and secure.
More education campaigns on tax matters should be extended to informal traders as well.