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Home / Is taxing Namibia’s informal sector a priority?
Is taxing Namibia’s informal sector a priority?
2018-08-01Staff Report 2 The Ministry of Finance is reported to have announced that it will start taxing the informal sector – though Minister Calle Schlettwein later came out to say any such plans were not immediate. The informal sector in Namibia consists of countless small businesses like barbershops, hair salons, taxi operators or bus operators, hawkers of bananas, apples, vegetables, oranges in open markets, under trees, on pavements, plumbers, welders, builders, tilers, shebeens, gambling machines, kapana practitioners and many others. The definition of the term informal sector is somewhat disputed by scholars. To simplify it, it is simply business activities that are not recorded in order that they contribute to gross domestic product or simply business activities unregistered with institutions like the ministry of trade, Social Security Commission, ministry of finance, affirmative action and, consequently, do not pay taxes. The informal sector in Namibia is of vital importance as it provides employment to an estimated 150 000 people, contributing to an estimated 12 percent to the Gross Domestic Product (GDP). The government budget deficit has grown by more than 30 percent in the past financial years. The only way they can finance the budget deficit is to increase taxes by widening the tax net. Government collects taxes for three broad reasons, namely to provide revenue for the state, redistribute wealth from the rich to the poor and to avoid negative externalities through the so called ‘sin taxes’ like cigarettes and alcohol. If the Namibian government decides to go ahead with taxing the informal sector, this would come with a number of challenges. Firstly barbershops, taxis, bus operators and many of these informal businesses are operated by liquid cash and not formal business bank accounts. Secondly, these informal businesses have no bookkeeping records, which are required in tax assessments. Thirdly, there is no database of businesses within the informal sector especially hair salons, barbershops, although taxis and bus operators to register their taxis and buses. Fourthly, it is also difficulty to place these businesses in an appropriate tax base, and to simply state that any business which makes above N$50 0000 should pay taxes is not sufficient. Also, most informal sector entrepreneurs do not appreciate and understand the reason for paying tax. There are also issues and challenges of identifying the residential addresses of informal tax payers since most of them live in informal settlements. Balancing costs and benefits of taxing informal sector is difficult as it might be a more costly operation than the revenue collected. Lastly, the current tax operations are designed for formal sector with voluntary tax compliance and taxing informal sector would require investing in a new system. However, the government can use different methods to tax the informal sector. They can use the direct presumption tax, which simply involves assessing the minimum profit tax liabilities which is increased every year. A second method is the occupational and sector-specific standards assessment. This will involve putting the occupations into categories like artisans, arts, and market-women/men, domestic where a pre-determined tax amount should be paid. The government can also use an estimated lump sum assessment system, an indicator based system where the tax liability is estimated on observed features or indicators. The features are things such as business size, premises, skills of and number of employees, location, energy and water bills or service capacity of the business such as restaurants, hotel rooms, and number of seats in transport vehicles. Then the government can also use the unions and associations of the informal sector as collection agents like the taxi associations because these unions have details of their members and can easily collect the taxes more effectively. The formal sector in Namibia is shrinking and the informal sector is growing fast. Current massive retrenchments in fishing and mining sector will definitely serve to grow the informal sector further. The biggest contributor to GDP and revenue generator in a few years to come might be informal sector. Therefore it makes perfect sense that increasing attention to the taxation of the informal economy is based in the need to raise and increase government revenue. The government still needs to raise enough revenue to build and run schools, roads, bridges, pay old age pensions, hospitals, and clinics. It really makes perfect sense that the government prioritises taxing the informal sector, as it can also be argued that it is also the informal sector participants who benefit most from free education, public hospitals and schools. So they should contribute to the fiscus. Currently, about 10 percent of the population pays 90 percent of the taxes. As well, when informal sector firms do not pay taxes, it is viewed as a source of unfairness by the formal sector, which reduces the general tax morale. This means that the rich, the big companies and larger firms are in turn discouraged to pay tax leading to reduced government revenue. Gradually, when government tax the informal sector, it will increase its tax net and encourages formalisation and economic growth. 2018-08-01Staff Report 2