Taxing the Informal Sector in Africa – creating a tax ecosystem
By Emmanuel Allottey
The informal sector is the largest employer in most African nations, and acts as a key economic driver. Governments generate revenue through Tax collected from individuals and businesses. The impact of COVID-19 has created a dent in government coffers, and they will be looking at avenues to increase their revenue either directly or indirectly through tax.
The informal sector remains an untapped avenue for the introduction of tax, although it may have an adverse impact on small firms. Creating a tax ecosystem is the most effective means for increasing government revenue through tax.
The African continent is rife with informal employment. According to the International Labour Organisation (ILO) there are 2 billion people working in the informal sector, that’s around 62% of the global workforce.
In Africa, a major proportion of the work force are engaged in the informal sector without a fixed and continuous income and limited participation in the formal financial services sector. The informal sector is a large contributor to the GDP and thus a significant source of tax revenue.
A tax ecosystem incorporates all forms of taxes levied and all stakeholders involved. The fundamental principle of taxing profit or value addition will ultimately evolve as the traditional sources of generating income changes. The ability to generate income or create economic value is transitioning away from working for a business or organisation that will automatically withhold tax and refer it back to tax authorities.
To close the gap of tax revenue leakage tax authorities, need to embrace the new ways of earning an income, particularly in the informal sector and introduce agile tax policies that reflect the changes in society.
The increased adoption of digital and the rise of Fin-tech has created an enabling environment for innovation in taxation. Tax authorities are setting sights on technology to enable digital collection and analysis of tax data.
To accomplish digital transformation in the tax ecosystem, collaboration between all stakeholders ranging from tax authority to taxpayers to private and public sector organisations is paramount. The digitization of the tax ecosystem not only involves conversion of paper forms into an online format and reducing the time spent on filing taxes but embracing digital technologies to augment the capabilities of the tax authorities.
The technical and political ramifications of taxing the informal sector hinder its successful implementation. Governments are facing high youth unemployment and are looking for avenues to create more jobs and support entrepreneurship, and simultaneously luring foreign direct investment by offering tax concessions to foreign companies. Creating a tax ecosystem will improve government engagement with businesses and individuals in all spheres of the economy and thus promoting legitimacy, good governance, and political accountability.