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ATAF harps on taxing informal sector to drive revenue mobilization

The African tax Administration Forum (ATAF) has called for a renewed focus on the informal sector taxes as a way to boost revenue mobilization for member states.

Emphasis on taxing the sector has heightened as the sector which is estimated to be between 21- 70 percent  of the GDP of African countries and accounts for between 30-90 percent of employment in the region has remained one of the most difficult sector to tax as most of the businesses activities in the sector are concealed from the Tax Authorities.

Logan Wort, Executive Secretary, ATAF speaking at the Experts meeting on taxation of the informal sector, titled is “The Taxation of the Informal Sector in Africa” on Tuesday in Abuja said that Africa’s tax to GDP ratio averaged around 15 perecnt remain the lowest in the world and results in budgetary deficits in most countries in Africa adding that the need to reduce and eventually eliminate these deficits is necessary if Africa is to meet its development needs.

He further explained that noting that fact that most businesses in the sector are small and fragmented making it inefficient for the revenue administration, coupled with thefact that taxing the informal sector is viewed as politically unpopular and politicians are unwilling to risk losing the high number of votes represented in the sector has made it difficult to enforce compliance.

“The low tax to GDP ratio has been attributed to among other things, low tax capacities and tax inefficiencies. This is exacerbated by tax avoidance, tax evasion and a large informal sector”.

“While it may be argued that taxing the informal sector may yield low returns in the short run, the benefits are worth the effort. Bringing the businesses into the tax net instills a tax paying culture in the businesses, which ensures tax compliance when the businesses expand”.

Muhammed Nami, Chairman, Fedreal Inland Revenue Service in his remark stressed 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.

“The informal businesses that contribute to tax revenues are likely to assert their rights to receive certain services from government, thereby ensuring national development and accountability”.

“Paying taxes is likely to promote responsiveness by the state to the needs of the informal sector in a bid to encourage voluntary compliance. It is also likely to encourage collective action, collective political engagement and bargaining by the informal sector”.

The chairman explained that it is important for Africa to widen its tax base through the informal sector so as to reduce its budget deficits and increase revenue mobilization. “That is why recently, the President of Nigeria, Muhammed Buhari, signed the 2019 Finance Act”.

“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. 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 percent to 7.5 percent”.

“However, these businesses would eventually enter the tax net through continuous assessments. This Act is expected to impact positively on the small businesses as well as the Nigeria economy, in the long run”.

The Chairman speaking further said that most enterprises within the informal sector create unfair competition for those operating in the formal sector, which has led to a drastic reduction in the income generated by the formal firms and also reduces the taxes paid.

“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”.

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