African Countries Seek New Ways To Solve Old Problem: How To Tax The Informal Economy

Written by Dana Sanchez

The informal sector contributes about 55 percent of sub-Saharan Africa’s gross domestic product, but it doesn’t pay taxes, Bloomberg reported in Mail&GuardianAfrica.

The World Bank forecasts economic growth of 5 percent or more this year for Kenya, Tanzania, Uganda and Rwanda, which all presented their budgets this week.

East African governments will be charging more taxes in the informal sectors as they seek to accelerate growth. Their economies are enjoying the positive effects of a global slump in commodity prices that have made oil imports cheaper, while economies slow down in other parts of the continent, Bloomberg reported.

Kenya plans to reintroduce a old tool to collect revenue from hard-to-tax parts of the economy, Treasury Secretary Henry Rotich said Wednesday in his budget speech.

“Everybody must pay taxes, including the informal sector,” Rotich said. “We must widen the tax net so that every eligible tax payer, including the informal sector, pays tax.”

With the “new” tax collection method — called a presumptive tax — Kenya will impose an advance levy on businesses that operate informally and without proper documentation, StandardMedia reported.

Matatu operators who own minibus taxis and small retailers, including those operating kiosks and stalls, are on the government tax radar as it seeks ways to broaden the tax base from just 2 million people working in the formal sector.

Until the 1990s, farmers paid taxes in Kenya before selling their produce at market, Standard Media reported. In Rotich’s proposals, farmers would revert to the old system, surrendering a fraction of their anticipated sales to an appointed agent.

Cane farmers would pay taxes to sugar millers and maize growers would pay taxes to the National Cereals and Produce Board. Matatu operators might be forced, for the first time, to pay taxes to the Transport Licensing Board on top of the existing levies before they are granted operating permits.

Uganda also plans to improve tax compliance in the informal sector.  In Uganda, one in five households own an informal business, Bloomberg reported.

The Uganda Revenue Authority closed three companies in Kampala for tax evasion, and has targeted 51 including a school, a stadium and a distillery, TheMonitor reported.

Almost half of Tanzania’s employment is informal outside of agriculture, World Bank says.

Tax revenues pay for everything governments do, or hope to do. But no politician ever got popular by creating new taxpayers, PublicFinanceInternational reported, according to an earlier AFKInsider report. Expanding a country’s tax base is treated with some caution.

Alongside the many development challenges facing African countries, few governments want to run the risk of increasing taxes they collect from individuals and businesses.

Countries that have done the most to increase their tax base have some factors in common, says Caleb Fundanga, executive director of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa. These include creating incentives to bring the informal sector into the official tax system.

Most African countries are not well equipped to take some parts of their economies into the tax system, such as the informal sector and the other components of the “unobserved” economy, Fundanga told PublicFinanceInternational.


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About Dana Sanchez

Dana Sanchez was born in South Africa and is a U.S. citizen. After working in advertising, she went back to school and earned a master's degree in journalism from the University of South Florida. As a business writer, she won regional and national writing awards. As editor of a daily newspaper, she coordinated staff writers, freelancers and photographers in the fast-paced environment of daily news. Dana was an editor at Moguldom Media Group for four years, helping to build and manage a team of staff and freelance writers. She works now on for Nubail Ventures. A long-distance hiker and cyclist, she writes about the business of technology.