Taxing the informal sector may not work

market
Credit: Yepoka Yeebo*

Whenever the problem of inadequate tax revenue is mentioned, people (me included), talk about widening the tax net and capturing some of the tax from the shadow economy. According to the Ghana Living Standards Survey 6 (GLSS 6) 88% of employment is in the informal sector. 35% pay VAT through purchases but only 23.6% pay personal income tax.

Looks like a straight rip-off doesn’t it? Especially to people whose tax is deducted at source due to PAYE. Well, two bits of news.

First a study by Friedrich Ebert Stiftung found out that 80% of the people in the informal sector acknowledged that they must pay taxes. That’s a good sign. At least it means they are aware of their civic duty. So what’s left is to provide a convenient system through which they can make payments.

But, it gets a little more interesting. GLSS 6 also find out that these people may not even be liable to pay tax. The B&FT reports that 75.6% of the workers in the informal sector earn less than the poverty wage of $2 a day. That is less than GH¢8, the minimum wage. The reviewed PAYE schedule, which Terry Abban explains on his blog, raises the maximum tax exempt income from employment to GH¢216 a month or GH¢10.8 a day (assuming 20 working days in a month).

Of course there are people in the informal sector making way more than those in the formal sector and paying meagre salaries to boot. However it appears many in the sector barely make enough to get by. Policy makers have to consider this when they are communicating about taxation. And those who constantly talk about widening the tax net should consider that there may not be as much fish to catch as they thought.

*You should read this fascinating report about the economic power of market women from which I took the picture. 

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Jerome Kuseh

Accountant | Economist-in-Training | Financial Analyst
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3 comments

  1. This issue came to mind just yesterday. I thought covering the informal sector will be the best thing to happen to Ghana and many other African countries. The “agony” of paying direct taxes will most likely positively influence the ordinary man’s view on governance. People will be much more interested in how gov’ts use their taxes than which party’s leader is Tall or arrogant or An Akan or Frafra.

    • You’re right. Paying taxes makes you more concerned about what the government is doing with your money. But from the figures, most of the people in the informal sector don’t even earn enough to pay direct taxes.

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