The Executive Chairman, Federal Inland Revenue Service (FIRS), Muhammad Nami has advised African Governments to target informal sector to reduce budget deficits.
He said, “if Africa is to reduce its budget deficits and increase revenue mobilization, it must widen its tax base and the informal sector provides an opportunity to do so.
“As at 2017, Africa’s Tax to GDP ratio averaged around 17%. This marks an improvement over time.
“The low tax to GDP ratio has been attributed to, among other things, low tax capacities and tax inefficiencies. This is made worse by tax avoidance, tax evasion and a large informal sector.
“It is estimated that the informal sector in Africa constitutes between 21% – 70% of the GDP of African countries and accounts for between 30-90% of employment in the region.
“Yet despite its large size, the sector remains one of the most difficult sectors to tax, with most of the businesses operating in the sector concealing their activities from the Tax Authorities.
“Such businesses also operate on a cash basis and maintain poor or no accounting records. Most of the businesses in the sector are also small and fragmented making it inefficient for the revenue administrations to enforce compliance,” he said
Nami said, “taxing the informal sector was viewed as politically unpopular and politicians are unwilling to risk losing the high number of votes represented in the sector. This is because politicians usually promise informal workers protection from taxation in exchange for their votes.
“In Malawi, for instance, the law provides for withholding tax on imported goods at a rate of 3% but the tax is yet to be implemented due to perceived political consequences (AfDB, 2018),” he said.
The FIRS boss recalls that it was in a bid to widen tax base that the President of Nigeria, Muhammed Buhari, recently signed the 2019 Finance Act.
He explained, that the 2019 Finance Act seeks to create an environment for ease of doing business in Nigeria especially for the small scale businesses in the country, noting that the Act exempts businesses with annual turnover of 25 million naira and below from charging Value Added Tax (VAT) which has now been increased from 5% to 7.5%.
He added However, that these businesses would eventually enter the tax net through continuous assessment s, saying that the Act is expected to impact positively on the small businesses as well as the Nigeria economy, in the long run.
The ATAF Chair said, the meeting, with the theme: “The Taxation of the Informal Sector in Africa”, brought together officials from Treasury and Revenue Authorities as well as experts from across Africa to share experiences on practical and effective ways of taxing the informal sector.
He said, “it may be argued that taxing the informal sector may yield low returns in the short run. However, the benefits are worth the effort.
“Bringing the businesses into the tax net will instil a tax- paying culture in the businesses, thereby ensuring tax compliance when the businesses expand.
“Taxing the informal sector is also critical because it will ensure that there is a perception of fairness in the tax system. Those who operate in the formal sector deem it unfair to have to pay taxes while those in the informal sector do not. This impacts their tax morale and can result in low tax compliance among those in the formal sector.
“Taxing the informal sector may also be a way of promoting good governance and political accountability of the State because tax strengthens the social contract between the citizens and the government. Thus, informal businesses that contribute to tax revenues are likely to asset their rights to receive certain services from government, thereby ensuring national development and accountability,” he said.