Taxing the informal economy: Challenges and possibilities

Home Business Taxing the informal economy: Challenges and possibilities
Taxing the informal economy:  Challenges and possibilities

Edgar Brandt

Windhoek-While some economic analysts have in the past called for government to formalise the informal sector in order to broaden the tax base, others have cautioned that this can only happen if the informal sector is regulated.
However, the conundrum facing regulators is that by its very definition, the informal sector is a segment of the economy which is neither regulated nor protected by the state.

It goes without saying having a more formal economy is preferred as businesses in that space pay taxes and taxes in turn pay for public services. It is estimated that formal jobs pay up to 20 times more than informal ones and formal firms are more likely to innovate, grow and export. Also, due to its very nature, informal businesses generally operate outside the rules, whether by dodging taxes or by avoiding regulations.

Local economists agree that while there is no official data on the informal sector’s contribution to Namibia’s economic growth and activity, it is clear that the sector is significant to the economy, specifically in terms of job creation.

Claudia Boamah, an economist at Capricorn Asset Management, noted that it is clear that this sector is important in Namibia. “The visible existence of the duality of the Namibian economy points to or confirms that the informal sector indeed exists,” she told Inside Business.

“A significant number of households in Namibia depend on the informal sector for their livelihood and for education of their children, amongst other responsibilities.” Boamah thus feels the informal sector should not be taxed.
“Tax implies regulation. The growth and operations of those businesses can be monitored, if they eventually meet the criteria of formal enterprises, the idea of taxing them can be visited.”

“Considering that a third of those willing and able to work cannot find jobs, it can be concluded that the informal sector is of great importance. The Namibia Statistics Agency’s Labour Force Survey shows an informal employment rate of 66.5 percent. Aside from employment creation, the informal economy also contributes towards the attainment of poverty reduction,” Baomah added.

Mally Likukela, the managing director of Twilight Capital Consulting, pointed out that the majority of people in rural areas are fully engaged in these so-called ‘informal activities’ which in turn significantly contributes to employment in the country.

“I fully agree that government should tax the sector but on condition that government supports the sector as well. Government should formalise the sector and accord a similar protection it accords to the formal sector. The cost of doing business policies for the informal sector must be pursued to make sure that the sector thrives and is able to honour tax obligations,” said Likukela.

His only concern, he added, was the efficiency of taxing the sector. “If government does not have sufficient data on the sector, the cost of taxing the sector could be more than the benefits of taxing it. Government should first put its house in order before they start to tax this sector, or else it will cost government more and also hurt the sector more as the wrong application of the tax regime could hurt the sector more,” he warned.

Veteran economist and former executive director of the Economic Association of Namibia, Klaus Schade, weighed in on the debate to say that while there are no concrete figures concerning the contribution of the informal economy, estimates suggest that it is at least 10 percent.

“Any efforts to tax the informal economy need to balance costs and benefits. Since these are unregistered, often micro and small businesses, it will be quite labour intensive to identify and visit​ them. Moreover, informal businesses often do not keep record of their income and expenditure and hence it will be challenging to estimate their turnover and profits,” Schade commented.

A recent report by the African Development Bank, titled “Recognising Africa’s Informal Sector,” found that the informal sector contributes about 55 per cent of Sub-Saharan Africa’s GDP and 80 per cent of the labour force.
While some are advocating for the taxation of the informal sector, arguing that it could result in growth for the local economy, employment and wealth creation and ultimately improved revenue for government, other economists have cautioned that a large number of those operating in the informal sector earn considerably less than the minimum thresholds for the various forms of tax, particularly income and value added tax.