A Logit Model of Informal Traders’ Decision to Evade Tax: A Case of Zimbabwe
Taxation and the informal sector
1. TJN-A Newsletter
Africa Ta x
Spotlight
2012, second quarter, volume 3
Quarterly newsletter of the
Taxation and the Informal Sector
Welcome to the 10th edition of the Africa Tax Spotlight, themed Taxation and the Informal Sector. In
his book, A tale of Two Cities, English novelist Charles Dickens writes, “It was the best of times, it
was the worst of times, it was the age of wisdom, it was the age of foolishness…. it was the spring
of hope, it was the winter of despair…”. How apt this statement seems to be in describing Africa in these
times of global recession, economic boom on the continent, and decreasing foreign aid. It indeed seems to be
times of economic uncertainty. In the midst of it all, taxing the booming informal sector presents the hope of
generating extra income to make up for the deficit in tax revenues, yet (as you would find), this is not without
its problems. The famous example of Mohammed Bouazizi comes to mind. He is the Tunisian fruit vendor who
self- immolated in protest of harassment by the authorities, and whose death led to the Arab spring.
employees, though most are really just self- employed
individuals. The International Labour Organisation (ILO)
thus defines the informal sector as one characterized
by ease of entry, reliance on indigenous resources,
family ownership of enterprises, small scale of
operation, labour-intensive and adapted technology,
skills acquired outside the formal school system,
and unregulated and competitive markets. There is
however need to broaden these definitions to reflect
the reality of many Africa countries.
When talking of the informal sector the first picture
that comes to mind for many is the micro and small
business such as hawkers and street vendors. The truth
however is that the informal sector in many African
countries encompasses a wider section of the economy
EDITORIAL
In this issue, we bring you discussions, cases of international best
practices and experiences from around Africa and beyond, on how
best to rope into the tax bracket this vital sector of the economy.
Most African countries are losing out on this crucial source of
revenue yet it contributes greatly to their GDPs. The East Africa,
Ghana, and Zambia cases presented in this edition all highlight
this fact.
There seems to be a consensus that African governments and
their tax authorities would have to work around the clock
to bring the informal sector into the tax bracket. Efforts by
governments to widen the tax base will greatly increase revenue
leading to a reduction in the reliance on donor funding and also
in incidences where governments are forced to increase taxes on
basic commodities. But a large chunk of this sector continues to
slip through the noose of tax authorities, even as governments
grapple with the complex problem of how to avoid this. Some
recommendations have been put forth in the highlighted cases, on
how to address this issue.
What then is this tricky informal sector? In layman terms, the
informal sector can be defined as income generating enterprises
that operate on small scale using simple skills and are not tied
to any government regulations. The difference with the formal
sector is mainly the regulation bit. The informal sector mainly
operates on small scale on a subsistence level with fewer
3. TJN-A Newsletter
Report
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Taxing the Informal Economy:
Challenges, Possibilities and Remaining Questions1
In recent years, there has been increased attention paid to the question of taxing the informal economy. Despite
the growing interest, our survey of the literature on taxation of the informal economy suggests that it has largely
focused on technical issues. In this paper we argue for research to take a more political view of the need for, and
challenges to, taxation of the informal economy in addition to the technical perspective that focuses on economic
and administrative considerations. Understanding the politics of taxation, the incentives for various stakeholders
and the institutions that underpin tax regimes is key to successful taxation of the informal economy where questions
of legitimacy and willingness loom large. Potential benefits of successful taxation in this arena include advancing
the policy agenda of tax reforms and revenue, the economic agenda of encouraging growth and the governance
agenda of strengthening accountability and legitimacy of the state.
This paper correspondingly has three main aims:
i) to survey the literature on what we do know
about taxing the informal sector and take stock of
the state of the debate; ii) to analyse some recent,
relatively unexamined attempts to extend taxation
to the informal economy, particularly in Africa and
iii) to tap into new thinking about how to strengthen
informal sector taxation and identify key agendas
for future research.
The paper begins by tracing the historical evolution
of the term ‘informal sector’ and outlines its
present, widely accepted meaning as: firms that fail
to comply with legal requirements of registration,
taxation and meeting various labour, environmental
etc. standards. We show how there is a continuum
between very small subsistence level enterprises
and larger, almost legal enterprises. The paper is
focused on taxation options appropriate for small
firms and self-employed businesses with potentially
taxable profits that are above subsistence level
and yet smaller than fully formal firms for whom
standard tax regimes are appropriate.
We then ask the question, should governments
devote scarce resources to raising revenue from
this micro, small and medium enterprise sector?
There are three main potential benefits of informal
sector taxation: revenue, growth and governance. The sector
forms a large and growing share of the GDP, and, given the
fiscal constraints of developing country governments, is an
attractive option for raising additional revenue. Moreover,
taxing the informal sector may be essential to sustaining
‘tax morale’ and a sense of fairness in taxation among the
formal sector firms as well. With respect to growth, there
is some evidence to suggest that formalization of informal
sector firms may accelerate growth and may have broader
benefits for existing formal sector firms as well. Finally, with
respect to governance the payment of taxes by firms in the
informal economy may be a way of engaging with the state,
and could lead to better governance and improved political
accountability.
Turning to the practice of informal sector taxation, we argue
that relatively standard international advice has focused on a
combination of taxing firms indirectly, imposing withholding
taxes and developing specialized presumptive tax regimes.
The simplest option for taxing small informal sector firms
has been to reach them indirectly, relying on the fact that
they will bear the costs of VAT and trade taxes paid higher
up the value chain. An alternative strategy has been reliance
on withholding taxes, with larger firms required to withhold
taxes on their transactions with small firms, which is then
remitted to government and credited against the future tax
liabilities of those small firms. Finally, most governments
have now implemented simplified presumptive tax regimes,
1 This paper was prepared for the DFID-funded International Centre for Taxation and Development at IDS. We are grateful for comments
from participants at the ICTD annual conference in June 2011 on a presentation based on an earlier version of the paper. Special thanks are
particularly due to Mick Moore for comments on an earlier draft. Matthew Benson provided excellent research assistance.
4. TJN-A Newsletter
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Report
which rely on simplified calculations of tax liabilities based
on the observable characteristics and turnover of small
businesses. These various strategies are unified in seeking to
find solutions to the joint problems of high mobility and weak
record keeping among small firms, though specific models of
presumptive taxation in particular vary significantly across
countries.
While these broad strategies are widely accepted, our review
of the literature suggests that they have made limited
progress in strengthening taxation of small informal sector
firms in practice. In seeking to understand this continuing
challenge, we consider a growing literature that focuses on
the barriers to tax compliance among informal sector firms.
Most notably, there has been increased
attention to the costs and benefits to
firms of tax compliance and broader
formalization. Increasing numbers of
surveys in particular have shed light
on the costs of tax compliance and
on the potential costs and benefits of
formalization for small firms. This ‘cost-benefit’
approach has argued for reducing
An alternative strategy has been
reliance on withholding taxes, with
larger firms required to withhold
taxes on their transactions with
small firms, which is then remitted
to government and credited against
the future tax liabilities of those
costs while increasing benefits in order
to encourage compliance, but in practice
most attention has focused on reducing
the direct costs of tax compliance,
through, for example, simplified registration, to the neglect
of broader costs and benefits. The ‘empowerment’ approach
to formalization offers a partial alternative; highlighting
the need to strengthen the ability of informal sector firms
to operate in the market through policy measures such as
improved information and skills, secure property rights and
legal empowerment.
small firms
While these frameworks offer a starting point to understand
the practical difficulties of expanding informal sector
taxation, we argue that they also leave many questions
unanswered. In terms of encouraging compliance, two big
questions demand attention. First, what types of positive
inducements to tax compliance – such as access to credit
and training, greater security of property or protection
from harassment by police and local officials – are most
important to micro and small firms? Second, how can states
and governments more effectively promote collective action
among informal sector operators, and provide institutional
channels for bargaining with them, in efforts to build trust
and encourage tax compliance and formalization? Together,
these questions represent important directions for
extending existing research and policy practice.
However, we argue that an understanding of the
barriers to more effective informal sector taxation
equally demands broader attention to political
incentives and institutional factors. Quite simply,
as it stands neither taxpayers, tax administrators
nor politicians have strong positive incentives
to strengthen informal sector taxation; there is
a corresponding opportunity to think about how
these incentives may be shifted. One possibility is
that the adoption of policies aimed at increasing
the benefits of voluntary tax compliance may,
by addressing the needs of
informal sector operators, also
make reform more politically
feasible and attractive. Efforts
to foster effective collective
action among informal sector
associations, and open up
institutional channels of
negotiation between informal
operators, larger businesses
and governments may similarly
ease expanded taxation.
It is equally possible that administrative and
institutional reform related to the collection of
informal sector taxes may be able to not only
address narrow administrative shortcomings, but
also shift incentives among taxpayers, political
leaders and administrators alike. Recent years
have seen several countries experiment with
different approaches. In Tanzania, the revenue
authority is piloting the Block Management System
that concentrates resources on one geographically
defined block at a time, with the aim of identifying
potentially taxable firms and nurturing a culture of
taxpaying. In Rwanda and Cameroon, governments
have focused on improving taxpayer services for
small enterprises and engaging through newly
created institutional spaces. Strengthening tax and
expenditure linkages through budget transparency
is another strategy currently pursued in Sierra
Leone. The Ghanaian government has attempted
what we call ‘associational taxation’—negotiation
with informal sector trade associations to help
5. TJN-A Newsletter
Anuradha Joshi (IDS, Sussex)
Wilson Prichard (University of Toronto)
Christopher Heady (University of Kent)
page
collect presumptive income taxes. Uganda and India
have experimented with auctioning tax collection
rights in the informal economy to private firms. In
Cameroon and Ethiopia, national tax authorities
are talking of ceding tax collection of small and
micro enterprises to local governments. Despite
this flurry of trials, apart from a few cases, there
is little empirical research into the motivation for
these efforts, and their outcomes, making this an
important area for future research.
While we thus speak to possible strategies for
strengthening taxation of the informal sector, we
equally highlight much that remains to be learned
about the broader development implications of
such taxation. First, there is some evidence that
taxing informal sector operators is important to
building ‘tax morale’ and a culture of compliance,
both among small firms and within the economy
more broadly, though there remains scope for more
detailed evidence to support this highly intuitive
claim. Second, there is growing evidence that taxing
the informal sector can be important to economic
growth, by encouraging the growth of small firms,
and creating a better overall business environment
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for formal sector firms. However, there remains scope for
greater research to understand how large these effects
are, which firms are most likely to benefit and, perhaps
most interestingly, what specific policies for encouraging
formalization may be most important to promoting longer
term gains in growth. Finally, significant recent discussion
has focused on the potential for informal sector taxation
to prompt state-society bargaining and broader governance
gains, but evidence remains relatively limited. There is
thus significant scope for research looking at the potential
for informal sector taxation to spur collective action and
bargaining. There is equally a need for research into the
potential for informal sector taxation to spur broader
investments in building related state capacity, be it in the
realm of policing, the provision of basic services or the
development of institutions of dispute settlement.
‘The report can be downloaded at http://www.ictd.ac/en/
publications/taxing-informal-economy-challenges-possib
ilities-and-remaining-questions-publication’
Taxation in the Informal Sector:
The Case of Sub Saharan Africa
In most Sub-Saharan African (SSA) countries,
revenue collection is negatively affected by the
existence of a large and growing informal sector,
high tax evasion, and weak tax administration
(ESRF, 1997; Tadesse and Taube, 1997). Raising tax
revenue is a major concern for most developing
countries; this is because not only is their tax
revenue collection level small, but also the tax
compliance is said to be low (Tripp, 2002). Much
of the economic activities in developing countries
occur in an informal sector that is beyond the
control of the government (Peñalosa, 2004). Many
scholars have tried to define the informal sector
concept as the economic activities/transactions
which are not captured or are under-reported in the
official statistics.
The 1972 ILO report on Kenyan unemployment was the first
step to popularize the informal sector concept, the report
defined informal activities as ‘all economic activities that are
neither monitored nor taxed by the government, and are not
included in the government GNP statistics’ (ILO, 1972:4).’
However, up to the present time, there is no universally
accepted definition for informal sector; s because of its
diverse characteristics. There are other names associated
with informal activities such as, black economy or activities,
shadow economy, the hidden economy, irregular, unofficial
economy, etc. The sector is informal in the sense that actors
are mostly un-registered, so mobile, small-scale, not recorded
in the official statistics, have little or no access to the formal
markets for goods and services etc.
6. TJN-A Newsletter
One of the overriding consequences of structural
adjustment programs (SAP), in Tanzania and other
developing countries that started in 1980’s, has
been the shrinking of the formal sector employment
and the expansion of the informal jobs (World
Bank, 2007)3. This has arisen particularly as a
result of economic reforms that started in the
80’s (Tripp, 2001 &2002). This resulted in among
other things, the public sector reform that led to
massive retrenchment of labour as most of the
Government enterprises were privatized, since
then the sector has been burgeoning over time. In
Tanzania for instance, the increase of the sector
has been a result of several factors: first, the public
sector changing from being the major employer
and subsequently retrenching a mass of employees
who joined the informal sector as self-employees.
Secondly, the inability of most workers to survive
from the low income generated from the formal
jobs. Third, the inability of the labour market to
absorb college graduates and rural-urban youth
migrants as new employees, hence joining the
informal sector as well. Further, lack of social
safety nets such as unemployment insurance and
low pension schemes, as well as the absence of a
conducive business environment which may include
cumbersome procedures for business registration
page
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2.0 Growth of the Sector
The informal sector in Tanzania and other East African countries consists of mainly the unregistered hard-to-tax
groups of activities such as small scale traders, famers, small-scale manufacturing operations, craftsmen,
businesses in the service sector; tax and truck drivers, motorcycles drivers popularly known as Boda-boda and
Bajaji in Tanzania, garage owners, repair workshops, restaurants and foods vendors, barbers, and small scale
miners. However the current trend indicated that individual professionals such as lawyers, doctors, accountants,
economists, engineers also work informally. The sector growth in many developing countries such as Tanzania and
other EAC members is estimated to be very large2 indicating that when they are not taxed, a substantial revenue
may be forgone (Taube, et al., 1996). Due to the features and characteristics of the sector that include among others,
mobile nature, small scale operation, cash transaction and unwillingness to keep business records; it is very hard
to tax the sector’s actors (that is why the sector is also known as ‘the hard –to- tax sector’).
to make the businesses formal, stringent business regulation,
existence of unfriendly tax regimes, and inadequate formal
business premises etc. (ESRF and TBC, 1997).
According to Tanzi (1982&1999), the key determinant
factor for the increase in informal activities is the rise in
tax and social security’s burdens (see also Kemal, 2007 and
Christopoulous 2002). The increase in tax rates forces people
to involve in activities where they can earn more income
and pay less taxes. Schneider and Enste (2000)4 found that
the bigger the difference between the total cost of labour in
the official economy and after-tax earnings, the greater the
incentive to avoid this difference and work informally. The
difference mainly depends on the social security system and
the overall tax burden.
Johnson et al.(1998) observed, inter alia, that countries
with more regulation tend to have higher share of unofficial
economy in total GDP. Friedman, et al. (1999) proved that
more regulation is correlated with large informal sector,
while Johnson, Kaufmann, and Zoido-Lobóton (1998) find
that countries with better rule of law tend to have smaller
unofficial economy, and transitional countries have higher
level of regulation leading to higher bribery incidence, tax
rate on official activities and large discretionary framework of
regulation and consequently large informal activities (Kemal,
2007).
2 The ILFS 2006 indicates that the sector has grown from 35% to 40% of the GDP between 2001 and 2005 (URT, 2006)
3 A study on economic growth in Africa found a decline or stagnation of formal sector employment and increase in informal sector activities in
the 1990s (World bank, 2007)
4 According to Penalosa and Turnovsky (2004) , excessive taxation in the formal sector is distortionary as they shift capital and labour towards
the informal sector.
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(i) Revenue needs – According to Joshi and Ayee (2008),
research has indicated that the revenue lost from not
taxing the informal sector amounts to 35-55 per cent of
the total tax revenue in some countries (also see Alm et
al.(1992)). In Tanzania, the study conducted by ESRF and
TBC indicated that tax revenue collected is about 30-40
per cent of the potential revenue amount (ESRF&TBC
1997). There is no recent study to know the current
status. Taxation in this sector could help reduce the
government-donor budget dependence5.
(ii) Size and Growth of the sector – Though the statistical
figures do not exist, are controversial or contested, the
sector is growing in absolute and relative terms (Joshi
and Ayee 2008 & World Bank, 2007). Studying the sector
in Tanzania, Bagachwa and Naho (1990) discovered that
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3.0 Why Tax this Large and Highly Growing Sector?
Many scholars working on tax policy regard taxation in the informal sector as difficult, hence less attention and
interest is given to it. This because taxing this sector requires enormous effort and limited returnsare realized
(Joshi & Ayee 2008). The following factors explain why taxation in this sector is to be given more attention in the
EAC countries at this moment:
the size of the informal economy constitutes
almost half of the real official GDP; the figure
ranging from 25% in 1969 to 51% in 1985, and
currently estimated to be 40% of the official
GDP (URT,2006), it employs many people and
grows rapidly. In Kenya, it is estimated at
more than 30% of the GDP and grows more
than the formal sector. Hence it is clear
that the informal sector is important to our
economies as it employs more of the labour
force.
(iii) Impact of Informal sector in tax compliance
– Ignoring the informal sector activities
lowers tax payment morale and increases the
risk of tax non - compliance in the formal
sector (Josh and Ayee 2008). This is because
researches have indicated that formal tax
payers perceive the state as being unfair by
not taxing the informal sector (see World
Bank, 2007))6. The experience from Latin
America indicated that tax compliance is
inversely related to the size of the informal
sector. In Tanzania, studies indicated that,
one of the reasons why some people work
informally is because they don’t have to pay
income (direct taxes) tax and other regulatory
costs. If this is true, this may lower tax
compliance in other sectors.
(iv) Demand from the Informal sector -
Researches and other evidences show that
tax evasion is not the primary reason for
5 According to the Government Budget Estimates for FY 2011/12, 18% of the overall government budget and 70% of the development budget is
to be financed by Donors.
6 Gloppen and Rakner,(2002) In their study in Tanzania, Uganda and Zambia they found that the business community feels that the tax
administration has concentrated on only few known corporate taxpayers rather than on effort to widen the tax base; This leads to general
perception that the tax system is unfair and tends to reduce tax compliance for large businesses(World 2007).
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people working informally7. Informal sector participants
are willing to pay taxes especially when the payment
is exchanged with their legitimacy, predictability and
protection from arbitrary harassment from state agents
(Baro et al., 1992).
(v) State legitimacy- Broadening the tax base to include
the informal sector may not only increase revenue to
the developing countries such as Tanzania and other EAC
countries8, but also increases compliance, accountability
and improves states legitimacy (Bräutigam et al., 2008
&World Bank, 2007). This will make the
government more responsible to the citizens
as it is run from locally-earned revenue; more
revenue collection enhances capacity for the
state to provide public goods. In this case
therefore, taxation acts as a link between
the state and the citizens; when this sector
is not taxed that link might not exist.
(Easter, 2002).
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4.0 How can we Tax the Informal Sector?
Despite the hard-to-tax nature of this sector in Africa and other developing nations, Joshi and Ayee (2008)
suggested that among others, direct presumption taxation, could be applied to fit the informal sector
characteristics. Various presumptive taxation systems have been applied in many developing countries in
the past and still are; where standard, estimated and minimum lump sum tax assessment systems are
common methods of taxation for informal activities.
The occupational and sector-specific standards assessment
is a fixed lump sum tax payment to be paid by persons or
enterprises engaged in a certain business or profession.
Ghana was among the first countries to apply this method in
1963, followed by countries such as Nigeria in some states;
Mozambique, Lesotho, Sierra Leone and Ethiopia applied this
approach for more than 150 different businesses (Taube et
al 1996). In Burkina Faso, this was applied to collect specific
amount from all businesses activities with a turnover less
than a stated amount as informal sector tax contribution,
while in Gabon, a lump sum standard assessment (impot
forfaitaire sur le revenue) was used to tax small businesses,
traders, and individual transport operators. The Standard
assessment system stated above seems to be a solution for
informal taxation. However, it is not a favoured taxation
system in public finance literature and by tax administrators
as it results in poor revenue performance in almost all
developing countries, due to the fact that the method is based
on average income on occupational groupings and not true
averages. Moreover, the levies were rarely indexed to inflation
or changing economic conditions.
The Estimated lump sum Assessment System is
another way to tax informal activities. This is an
indicator based system where the tax liability is
estimated on observed features or indicators such
as business size, premises, skills of and number of
employees, location, energy and water bills, service
7 The ILFS 2000/01 indicated that many informal employees work in the sector because they can’t find jobs in the formal sector and for
businesses participants, the reasons was that informal business does not require much capital for establishment. Moreover a study in some local
government authorities in Tanzania has indicated that tax payment willingness is not a big problem for revenue collection, but trust, misuse of
funds and poor public service delivery are among problems negatively affecting tax compliance (Fjeldstad, 2004).
8 The absence of well design tax system to include the informal sector and SMEs creates a missing link from narrow tax base and weak
citizenship prevalent in many developing countries, such link exist in OECD strong Democracies (Lledo et al. 2003 and World Bank 2007)
9. TJN-A Newsletter
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capacity of the business such as a restaurants, hotel
rooms, number of seats in transport vehicles etc.
From African country’s experience, this method has
been applied in Angola, Tanzania, Kenya, Uganda,
Chad, Zambia, Malawi and Madagascar. Although
this system is favored to standard assessment, it
has a number of disadvantages. First, it tends to
rely on indicators such as capital and labour, this
means that excessive application leads to not taxing
income but factors of production. The incidence
of tax falls on factors of production that may limit
application of capital and in case of labour, may
limit employment. Moreover, the method involves
some element of discretion on assessments that
may invite corruption and inconsistencies, such
that taxpayers with similar level of income may
end in different tax burdens or equivalently,
taxpayers with different income levels required to
shoulder the same tax liability; hence presumption
taxation may violate horizontal and vertical equity
considerations.
The presumptive minimum taxes were being levied
based on the assumed minimum income level in a
given year, in some countries. This tax system was
used to assess the minimum corporate profit tax liabilities
which may be graduated yearly and was known as a lump
sum levy. For instance in the 1980s in Benin, all companies
regardless of their size or volume of operation had to pay
a minimum tax of CFA F 200,000. But in Cote d’ Ivoire, the
amount was a bit higher. In contrast, for countries like
Equatorial Guinea, Malawi, and Senegal, the amount was
uniform for all companies but rose gradually depending on
turnover. Another type of minimum lump sum tax is based on
percentage rate on gross receipts, where only few apply it;
countries such as Ghana, Guinea, Niger, Sierra Leone and Togo
apply this.
The other method is the lump-sum minimum plus a
percentage of gross receipts applied in few countries such
as Madagascar. The greater of the lump-sum levy and a
specified percentage of gross receipt was applied in some
Francophone West and Central African countries such as
Burkina Faso, Cameroon, Comoros, Congo and Gabon. This is
calculated as % of gross profit, % of net assets, paid up capital,
turnover, whichever is the highest (Taube, et al., 1996). Some
countries applied this system to tax individuals’ incomes,
i.e. professionals and the self-employed. These countries
include: Burkina Faso, Burundi, Zambia, Chad, Gabon, Niger
Nigeria, Cameroon, Tanzania, Uganda, Kenya, Ghana, Central
Africa, Congo and Equatorial Guinea, where minimum taxes
and individual’s assumed ‘personal income of professionals’
turnover is applied as a base. This method was motivated by
the fact that government could get substantial income tax
from lucrative activities that seem profitable such as mining
activities and multinational companies that often show loses
for income tax purposes; it also acts as a safeguard against
complete tax evasion and underreporting of profits (Alm, et
al., 2004).
Although presumption minimum taxation is regarded as
an effective instrument to raise more revenue in informal
businesses, employment and lucrative businesses, more
innovation in this taxation method is still needed to suite the
current environment. Measures may include improving the
business environment, improving tax audits, monitoring and
enforcement for tax compliance, and incentives to informal
operators can be given for tax registration. Education on
tax compliance and more importantly, education on how tax
revenue contribution can improve public goods provision could
also help.
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10. TJN-A Newsletter
5.0 Progress in Taxing the Informal Sector:
Although broadening the tax base to include the informal sector is a challenging issue, Joshi and Ayee (2002),
provided the Ghanaian case study where associational taxation for informal transport operators was applied to
collect tax revenue from informal activities. The government of Ghana employed the use of a Sticker System, tax
stamp, offering incentives and also use of presumption taxes. However, all could not produce the expected results,
as concluded “there is no single mechanism for taxing the informal sector, but a combination of approaches;
prospects for making a significant advance is not bright, however, efforts must continue”.
page 10
allows individuals or firms to pay previously
unpaid taxes without being subject to
criminal penalties.
VII. For curbing tax evasion and enhancing
voluntary compliance by tax evaders
(including informal actors), TRA has taken
deliberate initiatives to receive information
from different parts of the country (known
as Whistle- blowers Mechanism)
VIII. Close monitoring and rigorous enforcement
for tax compliance by all taxpayers etc.
The theories and the empirical literature have
indicated the importance of taxing this large and
highly burgeoning sector. However, due to the
hard-to-tax nature of the sector there are many
challenges for taxing the sector, hence tax evasion
and non-compliance is a common problem for
many of informal sector actors. This challenge is
also linked to a governance problem, and hence
suggests the presumption taxation as a way to
tax the sector. Although it may not be a perfect
solution, the application of presumption taxation
and other measures stated above could be a starting
point to extend income taxation in the informal
sector in Africa. Moreover, it is believed that
through the presumptive taxation method, there
may be substantial spillover effects in terms of
facilitating a gradual shift of informal small-scale
and business enterprises into the formal sector
(Taube, et al., 1996). Other measures may include:
improving the business environment, using physical
surveys i.e. door-to-door surveys to identify and
register liable taxpayers who are not currently in
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Case of Tanzania
Tanzania is among several countries whose tax reform has
tried to include informal activities in the tax net. Currently
the Tanzania government in cooperation with the Revenue
Authority (TRA) has established a Block Management System
(BMS) where one tax collection officer works at the grassroots
level or streets (called blocks) to identify businesses for
registration and to ultimately include in the tax net. The other
effort in Tanzania includes the registration and formalization
of the informal sector assets (estimated at 98% of all assets
are informally owned) by an institution known as MKURABITA.
Other measures are: improving the business environment by
reducing constraints that impede business registration and
working, providing the informal SMEs with business premises
(e.g MACHINGAs and Mama Lishe etc); all these efforts are
geared towards assisting the informal activities graduate from
informal to formal activities where they can legally contribute
to GDP by paying taxes amongst others. Other measures taken
by the Tanzania government through TRA comprise:
I. Taxation schemes (laws) Simplification
II. Geographical capturing of information and correct
level of economic activities and gathering valuable tax
information
III. Application for withholding taxation for operators
with no Tax Identification Number (TIN) or informal
operators for income taxation
IV. Providing SMEs with permanent trading sites and
infrastructure.
V. Identifying, registering, training, and guiding SMEs on
business management basics, such as bookkeeping,
marketing and obtaining loan facilities.
VI. Encourage tax amnesties to traders. Tax amnesty
11. TJN-A Newsletter
page 11
the bracket. Others are simplifying tax systems,
improving tax audits, monitoring and enforcement
for tax compliance and more importantly, improve
taxpayers education on how more tax revenue
contribution can improve public goods provision.
This article is based on the paper by the same
author, ‘Taxing the Informal Sector: Challenges for
Revenue Enhancement in Tanzania’.
Mbilinyi Apronius Vitalis
Assistant Research Fellow
Economic and Social Research Foundation (ESRF)
comparatively slow. An important part of the explanation for
this slow progress lies in the fact that key stakeholders are
frequently resistant to reform.
Taxpayers may benefit in the long-term from formalization,
but these benefits are dependent on governments adopting
policies to benefit small firms, including increased access to
credit, opening up new market opportunities, providing access
to training or protecting them from harassment by public
officials. In the absence of such benefits, taxation amounts
simply to an additional business cost.
For their part, governments have been reluctant to expand
taxation of the informal sector owing to the relatively
limited revenue benefits, and fear of a public backlash
against increased taxation. They have instead preferred to
keep taxation low in exchange for political support in what
researchers have called a “devil’s deal”.
Finally, tax administrators themselves, while aware of the
potential benefits of taxing the informal sector, often face
weak incentives to implement such changes. For one, they
Articles
Source:safipa.com
Making Effective Taxation of the
Informal Sector a Reality
Historically, the taxation of small businesses operating in the informal sector has been given limited priority. The
costs of collection are high relative to the limited revenue potential, while taxing small operators risks reducing
the economic dynamism of small firms while imposing additional burdens on already vulnerable groups.
Despite these concerns, in recent years
policymakers have taken a growing interest in taxing
informal sector operators. This reflects at least
four factors. First, a concern with revenue, as the
informal sector continues to comprise a large share
of many African economies. Second, a concern with
equity in tax enforcement, as weak and uneven tax
enforcement among small firms may damage the
broader culture of tax compliance. Third, a concern
with growth, as there is growing evidence that small
firms that join the formal sector may grow faster
as they gain access to new services and markets.
Finally, fourth, a concern with governance, as the
taxation of small firms can be a starting point for
expanding political engagement and bargaining
between small firms and governments, as small
firms come to demand services in exchange for their
tax payments.
However, while attention to taxing the informal
sector has increased in recent years, progress in
implementing more effective taxation has been
12. TJN-A Newsletter
often face significant pressure to meet government
revenue targets, and this creates incentives
for focusing on larger firms. As importantly,
tax administrators themselves frequently view
collecting taxes from small firms as a particularly
unpleasant, demeaning and poorly rewarded
posting.
The key message is that more effective taxation of
the informal sector demands not only the design of
better tax policies, but efforts to build support for
reform by making the expansion of informal sector
taxation more attractive to taxpayers, governments
and tax administrators.
A key component of such efforts lies in developing
approaches to improved compliance that move
beyond coercion and threats to depend increasingly
on bargaining and exchange between governments
and taxpayers. That is, by providing reciprocal
benefits to taxpayers in exchange for their tax
payments, governments may encourage more
voluntary tax compliance among small firms.
By reducing political resistance to informal sector
taxation, strategies grounded to a greater degree
in reciprocity may be able to shift the reform
dynamics away from the “devil’s deal” and towards
a more cooperative relationship. Such strategies
depend on slowly building trust between taxpayers
and governments, such that taxpayers trust that
they will receive benefits in return for their tax
payments and government trust that taxpayer will
increasingly comply with tax demands. Fostering
such trust is likely to depend, among other things,
on increasing transparency in relation to taxation
and on developing institutional channels for
associations of small taxpayers to enter into more
regular and open dialogue with government.
A second key component is likely to be institutional
reform within tax administrations in order to
strengthen incentives for tax administrators
to emphasize informal sector taxation and the
establishment of more positive relationships with
taxpayers. At a basic level this means reforming
administration in a way that rewards effective
implementation of informal sector taxes, rather
page 12
than the taxation of small firms being treated as an activity
of secondary importance. Efforts to create administrative
units focused specifically on small taxpayers are a move in this
direction.
A more novel alternative is empowering local governments
to collect the bulk of taxes from small firms. Lacking other
revenue sources, local governments have potentially stronger
incentives to prioritize informal sector taxation, and to build
closer relationship with small taxpayers. However, experience
suggests that such an approach is only likely to be successful if
central government play an important role in building capacity
at the local government level.
Of course, the most appropriate solution in any particular
context will vary, and depends on a careful understanding
of the particular barriers to making effective taxation of
the informal sector a reality. What is essential is a growing
understanding that political and institutional barriers to
reform are at least as important as limitation in technical
understanding and capacity. Accelerating reform demands
an approach to reform that emphasizes the need to engage
with taxpayers, to strengthen reciprocity, to encourage more
voluntary compliance and to develop institutions that provide
better incentives to tax administrators.
Wilson Prichard
University of Toronto
Articles
13. TJN-A Newsletter
Taxing the Informal Sector in Ghana
entrepreneurs and women in economic endeavours,
represented by the Ghana Association of Women
Entrepreneurs (GAWE). The national and district
tax officials were also captured under the survey
to solicit from them, their mode of operation and
challenges with respect to tax collection in the
informal sector.
The study revealed that the tax system – at least for
women in the informal sector - is not accountable,
responsive or fair and is, therefore, not building
a good relationship between the state (or local
government) and its vulnerable citizens. The study
found that 95% of the women surveyed pay some
form of taxes/levies but 57% say they do not feel
well informed on why they should pay tax and over
50% say they do not see their tax money going
towards service provision or public works projects.
This was elaborated and addressed in the focal
group discussions, where women gave suggestions of
how to improve public tax education.
Key suggestions include radio programmes in local
languages, holding public meetings, meeting with
various market groups and women on market
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Articles
In many developing countries, both the government and the people they govern have wide expectations with
respect to development, albeit with little or no hope of achieving it. The principal duty of a government is the
fiduciary role it has to play to bring development to the doorsteps of its people. In the quest to achieve this,
many governments are faced with several challenges, one of which is the challenge of revenue generation and
its encumbrances. In developing countries, there are many challenges facing the taxpayer as there are equal
challenges facing the tax collector.
Even though there are two main avenues through which
a government can generate revenue, which are external
borrowing and internal generation of revenue through taxes
and levies, the latter option is seen as the most reliable
way of generating revenue. However, in as much as it is
relatively easy to tax the formal sector, the informal sector,
which serves as the hub of employment for a large number
of people, poses a big challenge to tax officials. They are yet
to find the cure in order to maximize revenue in that sector.
Indeed, the informal sector has been estimated to constitute
between 30% and 60% of the total economy in most developing
countries.
Quite recently, a research, ‘Tax & Gender’ was conducted
by the Ghana Integrity Initiative, the local chapter of
Transparency International, to assess the impact of taxation
on women in the informal sector but with the overall
objective of influencing tax policy and practice for greater
mobilization of domestic revenues in the informal sector and
to improve the contribution of these resources to poverty
reduction and active citizenship. The research sought to find
out why the majority of women are engaged in the informal
sector and to identify the barriers women face in the payment
of taxes as well as the burden of taxation on them.
The concept of the ‘Tax and Gender’ research was initiated
by Christian Aid Ghana as an offshoot of an earlier research
‘Taxation and Development in Ghana’. The findings of the
latter research confirm that taxation is an important catalyst
for political accountability and progress towards country-led
development by reducing the state’s dependence on donors.
Setting this proposition against a further research which
concludes that about eighty per cent (80%) of women are
involved in the informal sector, the tax and gender research
was designed to find, but not exclusively, the impact of
taxation on women in the informal sector.
The project was targeted at small and medium scale
businesswomen through national consultations with women
14. days, and education on record keeping. The issue
of expectations of national government and local
assemblies was also addressed. The women were
able to identify the benefits they expect from the
payment of taxes (but which half of them currently
do not see). These expected benefits include
good drinking water, hospitals and clinics, schools
within close reach, good roads, good sanitation
and adequate and neat toilet facilities and clean
markets.
About 30% of women say they encounter very
harsh attitudes in their interactions with the
tax collectors, and anecdotally, it showed that
women do not feel they have a way to make
complaints about tax collector behaviour or about
service provision. The study also showed that the
majority of women in the informal sector have very
low levels of education, with only 28.4% of our
respondents possessing more than basic education.
Just under half of the women surveyed report no
challenges in interactions with tax collectors. The
others, comprising roughly 50% of women, face
challenges, with 30% saying they encounter very
harsh attitudes from the tax collectors. Some
women have their possessions seized and their shops
locked up by the authorities if they are unable to
pay, and others report being asked to pay bribes or
other favours and in-kind payments. One complaint
that women had about timing of tax payments was
that sometimes national and local tax collectors
would request payments very close to each other
and it made it difficult for them to pay both.
It is important to remember here that tax collection
in the informal sector in Ghana happens on a
primarily face-to-face basis. Various tax collectors
come to each shop or market and assess the amount
of tax to be paid. This figure is not based on income,
profits or amount of business that day. Rather, it is
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Articles
based on the type of business, size of business premises, and
location of business, etc. This method of assessment leaves
quite a bit of room for interpretation and it could mean that
a seamstress in a wooden shack with 20 customers per week
(and therefore a fair amount of income), will pay significantly
less than the seamstress in a concrete structure who has only
2 customers per week and can barely cover her operating
costs.
The findings provide that 75% of the women surveyed say they
are never asked to show records of their accounts. Only 40%
of those surveyed say they keep any record of their accounts,
and the majority of those responses came from women with
secondary or higher levels of education. These figures show
two important issues: 1) that more education tends to lead
to better business record-keeping, 2) if tax collectors are not
asking to see records, then many women may not even know
they should be keeping records, and 3) it also means that
more payments than necessary are estimated on the above-mentioned
scale.
Additionally, some of the local level tax collectors may not be
well informed about the method of tax assessment and may
not be able to answer questions from the women, which may
lead to a confrontation on both sides.
In practice, the collection of taxes from the informal sector is
difficult, as there are few records of accounts, many people
earn very little income while others are often invisible to the
authorities because they may work from their homes, work
at night, or are part of a long chain of production. Because
of factors such as these, it is difficult for tax authorities to
determine how much tax – if any - should be paid.
The study also showed that the contribution of the informal
sector to domestic revenues mainly through taxes and levies is
limited due to several challenges such as limited government
and local level administrative capacity, extremely small tax
base, financial malfeasance and apathy among sections of the
public towards payment of taxes.
In practice, the collection of taxes from the informal sector is difficult, as there are few
records of accounts, many people earn very little income while others are often invisible to
the authorities because they may work from their homes, work at night, or are part of a long
chain of production. Because of factors such as these, it is difficult for tax authorities to
determine how much tax – if any - should be paid.
TJN-A Newsletter
15. TJN-A Newsletter
page 15
However, it is important to note that many self employed
professionals such as lawyers, footballers, actors,
photographers, masseurs, musicians, etc. are easily identified
and yet do not pay taxes because of weak implementation
of the tax system. In the 2011 Annual Budget, however,
Ghana’s Ministry of Finance & Economic Planning (MOFEP)
indicated that a special desk would be set up in the Domestic
Tax Division (DTD) of the Ghana Revenue Authority (GRA) to
monitor compliance of professionals to their tax obligations.
To help create awareness and build the capacity of women
in the informal sector, the Ghana Integrity Initiative, in
further collaboration with Christian Aid and the Institute
for Democratic Governance (IDEG) is implementing another
project, Action for ‘Local Employment, Accountability and
Resource Mobilisation’ (LEARN), to address some of these
cardinal issues through public sensitization, tax training,
economic literacy training and advocacy work with major
stakeholders.
The LEARN project seeks, among others, to help mitigate the
many challenges that taxpayers, particularly women in the
Articles
Taxing the informal sector:
In the recent past, there have been various debates about the need to tax the informal sector. Some observers
view informal sector taxation as a way of improving the government’s fiscal revenue position. Others see it as a
way of broadening the tax base and distributing the tax burden more equitably. Both the government and civil
society organizations have at one point or another expressed the need to extend more taxation to the informal
sector. These calls are not misplaced as studies have clearly pointed out that in addition to revenue and equity
reasons, taxing the informal sector increases general tax compliance in the formal sector.
In its recent publication entitled: “Policy Insights into the
Taxation of the Informal Sector in Zambia”, the Zambia
Institute for Policy Analysis and Research (ZIPAR) analyzed the
informal sector in Zambia, estimating its size and its potential
contribution to tax revenues. The paper indicates firstly that
the Zambian informal sector has not been entirely without
taxation. Since 2004, informal sector taxation has been
introduced, starting with a presumptive turnover tax on small
and medium enterprises in 2004, a base tax on marketeers in
2005 and an advance income tax for cross-border traders in
2007.
informal sector, encounter while also empowering
and encouraging them to pay appropriate taxes. It
also seeks to open up the corridors for taxpayers
and the revenue collectors to work together
to foster revenue mobilization and promote
accountability.
At one of its sensitization and capacity building
workshops in Takoradi in the Western Region
of Ghana, Mrs. Mary Awelana Addah, a Senior
Programmes and Research Officer of GII, said that
the training covered economic literacy training
targeted at 120 women and youth entrepreneurs
in 18 districts across the country; during which
they were schooled on tax and development, book
keeping, filing of tax returns, SMEs and Tax, and Tax
reliefs among others.
Nana Yaw Saah Aboagye
Programmes Officer
Ghana Integrity Initiative
What should Zambia do?
16. Unsurprisingly, total revenue from these informal
sector taxes – as a proportion of total income tax
– has remained sluggish, only reaching a high of 2
percent in 2009. It is this under-performance of
revenue that has fuelled the debate on the need
to tax the sector more than currently exists. This
of course has been driven by the belief that there
exists appreciable taxable income in the sector and
that the sector is currently ‘running away’ untaxed.
Of course the other side of the debate has not
been without proponents. It has been argued that
whatever transactions go untaxed in the informal
sector are simply not significant enough to warrant
the cost of collecting. It is therefore not surprising
that the 2012 national budget speech did not
propose any new tax measures on the informal
sector. The question which has therefore been
begging answers is whether indeed there exists
significant taxable income in the informal sector
and how worthwhile it is to follow this income. The
answer to this question will start to lay a foundation
against which future tax policy can be shaped.
Zambia’s informal sector is quite large!! The
informal sector is subject to a wide range of varied
definitions, depending on who is looking at it. In
part, it is this attribute that makes measuring its
size a challenge. Consequently, there are various
methods for estimating the size of the sector,
including so-called direct approaches that use
surveys and indirect methods that try to make
estimates based on macroeconomic relationships.
The ZIPAR study (on which the aforementioned
publication is based) used an indirect method
called the Currency Demand method in estimating
the size of the informal sector in Zambia for the
period 1973-2010. Measured as a proportion of
formal sector GDP, informality has averaged at 47.7
page 16
Articles
percent per annum during the same period, reaching its peak
during the 1991-2000 decade where it averaged 56.3 percent.
As of 2010, the informal sector was as large as 40 percent of
GDP. Furthermore, the sector has been increasing over time at
an average growth rate of 2.7 percent per annum (compared
to a 2.8 percent growth rate for the formal sector during the
same period).
The amount of tax revenue that is forgone by not taxing the
informal sector, assuming zero collection costs, was calculated
at an average of 7.7 percent of GDP. This represents about 42
percent of total tax revenue collections yearly on average.
For the year 2010, the estimated total amount of foregone
tax revenue from the informal sector was 6 percent of GDP
or 34 percent of Zambia’s total tax revenues. But is there any
real potential for informal sector taxation? At a glance, the
estimated size of the informal sector and the amount of tax
revenue forgone from the informal sector (or potential tax
amount) look quite appealing. But, if we take into account tax
collection costs, the potential reduces. Collection costs can be
significant in this sector, as demonstrated in our assessment of
what the informal sector looks like.
The 2008 Central Statistical Office Labour Force Survey
indicates that out of the 4.6 million employed persons in
Zambia, 89 percent (4.1 million) were employed in the
informal sector while the remaining 11 percent (0.5 million)
were employed in the formal sector. Of the 4.1 million
informal sector employees, 3.4 million basically worked in
household-based activities. Furthermore, of the total informal
sector employees, the largest number, 3.2 million, were
employed in the agricultural sector while the second largest at
400,000 were working in trade. Thus, as of 2008, the informal
sector in Zambia comprised over 70 percent of entities which
can be classified as hard-to-tax entities. These are entities
that are also likely to have incomes largely below any feasibly
taxable threshold.
Therefore, the most flagrant tax evasion is likely to exclude
the bulk of informal sector participants. Rather, it is
associated with small businesses operating close to taxable
thresholds. In addition to this, ‘formal sector’ activities
like free-lancing and moonlighting among a cross-section of
professionals, untaxed house rentals from the growing high
end of the housing market, and so on, are likely to contribute
to the most flagrant evasion.
Consideration of the administrative capacity of the Zambia
Revenue Authority (ZRA) shows that the bulk of income tax
17. TJN-A Newsletter
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Articles
revenue contributions (about 75-80 percent) come from the
large taxpayers though the large taxpayer office comprising
of about 3.3 percent of total ZRA staff. The medium taxpayer
office is roughly 10 percent of the total number of staff and
they manage to rake in 18-23 percent of total income tax
revenue collections. The small taxpayer office has the largest
number of staff, at 14 percent, but only collects a meager
two percent. This essentially means that reaping the potential
tax revenues in the informal sector is bound to be a very
costly exercise, enough to wipe out any tax revenue gains so
anticipated.
What are the insights for policy? The informal sector
estimated at over 40 percent of GDP is sizable and is typical
of most developing countries. Its sheer size means that the
informal sector cannot be ignored in tax considerations. At
the same time, the characteristics of the sector mean that
mere attempts of introducing more taxes are unlikely to
yield significant net revenue. Therefore in order to tap into
some of the informal sector resources currently escaping the
tax net, a few policy options may be feasible in the short to
medium term. Firstly, it will be worthwhile to fully exploit the
personal income tax outside salary income by reducing levels
of non-compliance and improving tax morale. The personal
income tax is largely employees’ tax deducted at source (that
is PAYE). The current heavy reliance on PAYE implies that
regardless of individuals’ other incomes, tax deducted from
their salaries mostly constitutes their total and only liability
for tax. Furthermore, individuals who do not earn income
deductible at source may escape the tax net completely. Good
examples of this are freelancing by various professionals and
rental income received by a growing housing market.
Secondly, enhancing
incentives for the
formalization of small
businesses will be an
important pursuit.
Government has in the
past used deterrent and
punitive measures to
compel businesses to
register for Income Tax
or VAT. For example, the
Advance Income Tax (AIT)
for traders was raised
from three percent to six
percent in 2009 to encourage
registration for tax purposes
and increase compliance given that traders opted to
remain unregistered even after the introduction of
AIT.
Thirdly, strengthening VAT performance will also
be important. Administration of VAT, particularly
domestic VAT, needs to be improved further. As the
most broad-based tax in Zambia, VAT captures some
of the transactions of the informal sector when
the informal sector purchases goods and services
from the formal sector. Thus, overtime exemptions
should be rationalized and streamlined.
In summary, the short-to-medium term measures
aimed at addressing informal sector taxation in
Zambia should not call for simply the introduction
of more taxes but rather strengthening existing
taxes and channels that foster formalization of the
informal sector.
Pamela Nakamba-Kabaso
Researcher and Policy Analyst
Zambia Institute for Policy Analysis and Research
(ZIPAR)
Sidney Phiri
MA Candidate
University of Zambia, Department of Economics
The paper is disseminated as part of the findings of
research and policy analysis work in progress. The
findings, interpretations, and conclusions expressed
in this paper are entirely those of the authors. They
do not necessarily represent the views of ZIPAR or
its affiliate organizations and collaborative partners.
18. TJN-A Newsletter
THEME: ‘Transforming Economic Power to Advance
Women’s Rights and Justice.’
The 12th AWID (Association for Women’s Rights in
Development) International Forum was held in Istanbul,
Turkey from the 19th to the 22nd of April 2012. The event
was attended by over 2000 women’s rights and justice
advocates from all over the world. The forum marked the 30th
anniversary of AWID.
The main input of TJN-A during the forum was the facilitation
of a session titled ‘How to Advocate for Gender Equity
through Taxation’. TJN-A presented the basic tenets of tax
justice, made linkages between taxation and other concepts
like governance and development and finally, a deeper
analysis between gender equity and taxation.
page 18
News & Events
12th AWID (Association for Women’s Rights in
Development) International Forum
Istanbul, Turkey- 19th to the 22nd of April 2012
The main objectives of the event were to:
Regional launch of the Tax Competition Studies
in East Africa
Kampala, Uganda- 13th April 2012
Tax Justice Network-Africa (TJN-A) and ActionAid International (AAI)
jointly commissioned a study to examine the role and impact of tax
incentives on the economies of the East African countries of Kenya,
Uganda, Tanzania and Rwanda. According to this research governments
in East Africa are providing a wide range of tax incentives to
businesses to attract greater levels of foreign direct investment (FDI)
into their countries. Such incentives include corporate income tax
holidays, notably in export processing zones (EPZs), and reductions
from the standard rate for taxes such as import duties and VAT.
Yet this study shows that such tax incentives are leading to very
large revenue losses for governments, are promoting harmful tax
competition in the region, and are not needed to attract FDI.
Following the re-establishment of the East African Community (EAC)
in 1999, Kenya, Tanzania and Uganda created a customs union
in 2005, and were joined by Rwanda and Burundi in 2009. This has
created a larger regional market, and means that firms can be located
in any EAC country to service this market. At the same time, however,
countries are being tempted to increase investment incentives in
q Facilitate learning on the role and impact of
economic power in diverse women’s rights
agendas, experience and issues;
q Support bridge-building across diversities
among women’s groups and movements with
other social movements;
q Advance proposals on feminist visions and
practices to resist, challenge and transform
dominant forms of economic power; and
q Identify opportunities for participants to
engage in concrete joint action beyond the
forum.
19. TJN-A Newsletter
page 19
News & Events
order to attract FDI and, they believe, increase jobs and
exports.
The launch of the tax competition studies was jointly
organized by the Tax Justice Network-Africa, ActionAid
International, SEATINI Uganda and Uganda Debt Network
(UDN).
The launch was attended by civil society representatives and
media practitioners from the East African Region and beyond.
Launch of the Tax Incentives and Revenue Losses
in Kenya Report
Nairobi, Kenya- 6th June 2012
On June 6th 2012, the report titled
‘Tax Incentives and Revenue Losses
in Kenya’ was launched at an
official event at the Sarova Stanley
Hotel in Nairobi, Kenya.
The event brought together
representatives from government
institutions, civil society
organizations, the private sector,
the IMF, and the media. Hon. MP
Martin Ogindo, member of the
Parliamentary Budget Committee
was the guest speaker and officially
launched the report.
Furthermore, the event included
a debate with a panel comprising
the IMF Country Economist, Kethi
Ngoka-Kisinguh; Co-ordinator of
the National Taxpayers Association
(NTA), Davis Adieno; Chairman of
the Board of Tax Justice Network-
Africa, Dereje Alemayehu; and the
Associate Director of Tax Services
at Ernst & Young, Francis Kamau.
The programme for the day ended
with a strategy meeting of the civil
society network, the East Africa Tax
and Governance Network (EATGN).
Some of the organizations that attended were
PANOS EA, JENGA Africa, Centre for Trade Policy
and Development, Children’s Forum Parliament,
UPFFSPD Parliament, ISODEC Ghana, AWEPON, URA,
Twaweza, CRADEC - Cameroon, Economic Justice,
Uganda Network of Businesses, National Advocacy
Coalition on Extractives- Sierra Leone, National
Taxpayers Association among others.
The launch was covered by major media outlets in Kenya, including TV-coverage
on CNBC Africa KBC, KTN, K24, , and NTV, as well as newspaper
articles in the major dailies.
Tax Justice Network - Africa Director Alvin Mosioma and Rangwe MP Martin Ogindo of
the Parliamentary Budget Committee presenting the report.
20. TJN-A Newsletter
The objectives of the launch were:
• To launch the report ‘Tax Incentives and
Revenue Losses in Kenya’
• To build public interest and understanding of
the issue of tax competition in East Africa,
the use of tax incentives in Kenya, and the
revenue losses from tax incentives in Kenya
• To build a strategy among CSOs on how to
advocate for change in relation to the use of
tax incentives in Kenya
• To bring together key stakeholders who
have influence on the tax issues in Kenya,
particularly on the use of tax incentives in
Kenya.
On June 17th June 2012, Policy
Forum, Tax Justice Network-Africa
and ActionAid International unveiled
the report ‘Tax Competition in
East Africa: A Race to the Bottom?
Tax Incentives and Revenue Losses
in Tanzania’ to 94 Members of
Parliament at an official event at
the Dodoma Hotel, in Dodoma where
the Tanzanian parliament sits and
had convened for the annual budget
session.
The MPs who were mostly members
of the Tanzania chapter of the
African Parliamentarians’ Network
Against Corruption (APNAC) were
joined by 25 representatives of civil
society, several parliamentary staff
and media professionals. Hon. Dr.
Mary Mwanjelwa, the Chairperson
for APNAC officiated the event
page 20
News & Events
The outcomes of the launch were:
- The report was launched and distributed to a wide
variety of relevant stakeholders
- A wide range of media covered the event and the report
- The advocacy messages of the report were supported by
the representatives from Civil Society
- The launch brought together a range of relevant
stakeholders with influence on tax policy in Kenya,
including (but not excluded to) a representative from
the Kenya Revenue Authority (KRA); a representative
from the Economic Processing Zones Authority (EPZA);
MP Ogindo of the Parliamentary Budget Committee, and
the Country Economist from the IMF.
Launch of the Report Tax Incentives and Revenue
Losses in Tanzania
Dodoma, Tanzania - June 17th 2012
CAPTION: Hon. Dr. Mary Mwanjelwa of the African Parliamentarians’ Network Against
Corruption (APNAC) - Tanzania Chapter launching the publication.
21. TJN-A Newsletter
page 21
and officially launched the report. Mr. Godfrey Wawa,
a member of the Policy Forum Board of Directors
(and Country Director of Forum Syd) gave a speech
on the significance and purpose of the report; and Dr.
Honest Prosper Ngowi, who reviewed and finalized the
report, made a presentation which gave the overview
of tax incentives in Tanzania, its problems and gave
recommendations of what the government should do.
The outcomes of the launch were:
• The report was launched and distributed to 94
APNAC MPs present at the event and more copies
have been left with the Office of Parliament to
circulate to other MPs who were not present at the
meeting. The Tanzanian parliament currently has
352 MPs.
• Members of Parliament showed eagerness to learn
more about the concept of ‘race to the bottom’.
• Civil society representatives present at the event
expressed interest to become involved in tax justice
issues and some have pledged to volunteer on
work involved in the popularization of the Tanzania
(simplified version).
News & Events
Launch for the Malawi Tax Justice Platform.
Lilongwe, Malawi- 21st June 2012
The Malawi Economic Justice Network (MEJN) in
partnership with AFRODAD (African Forum and Network
on Debt and Development) and Tax Justice Network-
Africa (TJN-A) organized the first meeting for the
national platform for CSO in Malawi as a way of preparing
for the research on the revenue benefits/ costs of foreign
supported investments in the extractive industries.
The meeting took place in Lilongwe on 21st June 2012.
The meeting drew participants from a cross section of
strategic CSO who have vast interest in the extractive
industry and are or have done some work around the
same.
This was a planning meeting aimed at bringing together
all relevant CSO in Malawi dealing with tax justice and
extractive industries.
The National Platform for CSOs also comes in the wake
of the recent announcement of the 2012/2013 National
Budget Statement which ushered in a new policy
dimension in terms of tax incentives amongst them,
increasing the initial investment allowance from 40%
to 100%, increasing transport from 15% to 25% and the
removal of VAT on machinery and financial services.
Furthermore, the budget statement enunciated the
removal of import duty, import excise and import VAT
on raw materials imported under the industrial rebate
scheme in order to encourage local production.
Kayerekera Uranium Mine has been identified as a
case study for starting and a research is scheduled to
commence on the same to establish some facts for
lobbying and advocacy.
The main objective of the national platform is to create
a podium for AFRODAD and CSOs in Malawi to find areas
of synergies and collaborations in research, advocacy and
campaigns on tax and capital flight. The following are
auxiliary objectives:
q Identify and collaborate with key CSOs working
on tax, extractive industries, domestic resources
mobilization and capital flight in Malawi.
q Discuss the draft Concept Note and Terms of
Reference for the research on revenue costs/
benefits of foreign direct investment in the
extractive industries: the case of Kayerekera
Uranium Mine
q Develop broader and vibrant CSO coalition on tax,
capital flight and other development issues in
Malawi
q Strengthen the work on extractive industries and
domestic resource mobilization in the various CSOs
through the cooperation between organizations
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q Create a basis for broader public mobilization and a
combined lobbying and advocacy strategy.
The platform is also built along the following expected
outcomes and outputs:
q Information is shared on what each CSO is doing
on tax justice and extractive industries in order to
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come up with a clear annual work programme for
research and advocacy on tax justice and extractive
industries in Malawi.
q A platform that will engage in issues of tax and
extractive industries and provide direction in the
work in Malawi.
Profile
PROFILE
INTERVIEW WITH SEMKAE KILONZO OF POLICY FORUM
1. Please give us a brief background of the Policy
Forum?
Policy Forum is a network of 106 CSOs that have been
brought together in their interest in issues pertaining to
Poverty Reduction, Equity and Democratization. Within
this framework, the network sees governance and
accountability as the area of its comparative advantage
and hence it is the keystone on which most of its
activities are devised. In appreciation of the immensity
of Governance and Accountability issues therefore,
and the need to maintain focus, Policy Forum limits its
activities to three main areas. These are:
1) A focus on local governance including regional, council and sub-council levels;
2) A look at public money especially at issues relating to the acquisition, management and use of
resources by government on behalf of its citizens; and
3) Augmenting the voice of citizens with the aim of empowering them to have an influence over how
they are governed and how their resources are used.
2. What is your (academic and professional) background? What does your current job with the Policy
Forum entail?
I hold a Masters degree in Journalism and Media Studies from Cardiff University, UK. I began work at
Policy Forum in 2007 as the lead responsible for media, communication and advocacy at the network’s
secretariat as part of the organization’s desire to see policy analysis information widely disseminated
to policy makers, civil society and the general public. I have since assumed the role of Coordinator,
heading the Secretariat. My role is principally to provide the overall conceptual and strategic leadership,
coordination and facilitation of the network.
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3. What are the areas of interest to which you are personally dedicated? Why are you particularly
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interested on issues of tax justice in Africa?
Personally, I am dedicated to transparency in the extractive sectors, the national budget and taxation. I
believe in responsible and accountable management of public money and that citizens and civil society
need to be engaged in this processes. This requires access to information so that we can all participate in
deciding how we can use our resources to drive development and national growth. Tax justice issues are
of particular interest to me because I think it’s illogical that African countries should depend on foreign
aid to provide health and education to citizens whilst tax havens undermine the tax base of nations
enabling the siphoning of money from the continent that would have otherwise been used in these areas.
For me, this is a contradiction that needs to be addressed.
4. In your opinion, what role should civil society organizations (CSOs) play in achieving tax justice in
Africa?
Looking at a country like Tanzania, I think there is not much public awareness about the magnitude
of the illicit capital flight problem, how it happens and its consequences on development and poverty
reduction. Recently, when launching a report on tax incentives and revenue losses in Tanzania where we
had over 90 MPs present, it was evident that even the political class did not appreciate the magnitude
and impact of the problem. Therefore, I think civil society organizations should play a more active
role to increase awareness on tax justice issues and work to push African governments to acknowledge
how international tax rules and illicit capital flight is hampering our countries’ development. At the
EAC, ECOWAS, SADC and AU levels, we can urge governments to develop proposals for automatic and
multilateral information exchange that will help track down and take action against cases of tax evasion,
for instance. CSOs in Africa can also support initiatives being devised in the north like the call for a
country-by-country reporting by multinationals as a tool to uncover tax avoidance and evasion.
5. What in your view is the role of informal sector as far as taxation of this particular sector is
concerned?
In Tanzania, there are so many impediments associated with collecting tax from the informal sector.
Firstly, many informal traders and service providers do not have premises due to their peripatetic nature
so it is difficult for tax authorities to locate them. This brings in the second point: the transactions costs
for collecting tax in the informal sector consisting of a myriad of small traders, of whom authorities
have very little information on (turnover, profits earned, etc.), is very high. Thirdly, there is the
risk that in the course of integrating the informal sector in
the tax system, the most vulnerable in society are affected
by the potentially indiscriminate nature of taxation. These
difficulties notwithstanding, Tanzania loses revenue from not
taxing the informal sector and hence needs to find the most
convenient, progressive and just ways of taxing those in the
informal sector. Moreover, taxation enhances accountability
as citizens demand returns in terms of quality public services
and investments and their readiness to pay tax will increase
with improved service delivery.
Profile
24. 6. What in your view are the most urgent steps that must be undertaken to ensure that African
countries can finance their own development? Who should undertake these?
I think African governments need a complete paradigm shift in the development discourse. it has to move
away from development aid, foreign direct investments and foreign credit as the most consistent major
sources of development finance to the recognition of domestic resource mobilization (tax) as the dependable
and sustainable source. Together with this, we have to be cognizant of the fact that illicit financial flows
out of Africa are denying us of cash that would have otherwise been used for development. This shift should
also involve an overall ‘autocentric’ development mindset which will be based on domestic, human needs
and which is participatory, led from the grassroots.
Thank you.
This document has been produced with the financial assistance of Oxfam Novib. The
contents of this document are the sole responsibility of Tax Justice Network-Africa and can
under no circumstances be regarded as reflecting the position of Oxfam Novib
