The taxation of informal economies is one of the key challenges for tax practitioners and policymakers in Africa. Across a range of country contexts, revenue authorities face substantial pressure to collect more taxes from unregistered firms, yet common strategies currently in place to do this tend to disproportionately hit lower income groups.
Against this background, the International Centre for Tax and Development (ICTD) launched this week a five-year research project that will probe varying perspectives on tax policy surrounding Ghana’s informal sector, with particular focus among market traders.
The study will be a collaboration with the Women in the Informal Economy: Globalising and Organising (WIEGO) and the Institute of Statistical, Social and Economic Research (ISSER) at the University of Ghana, building on years of ICTD research and policy dialogues, in partnership with WIEGO, on taxation and informal economies in the continent.
“This project comes at a really opportune time. There is an increasing consensus among different stakeholders that there are deep challenges around the taxation of city markets that require new approaches, and evidence-based policies,” said Max Gallien, co-lead of ICTD’s Tax and Informality research programme.
Moreover, “city markets present a microcosm of a lot of the wider conversations that are happening in Ghana at the moment: on tax and social contracts, services, transparency and trust. So, it is fitting that the project brings together a wide range of stakeholders,” he added.
Facilitating engagement
The project was launched in a one-day multi-stakeholder workshop held in Accra, which brought together diverse perspectives on taxing the informal sector. Participants included representatives from government institutions, such as the Ghana Revenue Authority (GRA), Ministry of Finance (MoF), and Accra Municipal Assembly (AMA), workers from the Greater Accra Markets Association (GAMA), international donors, and a range of civil society organisations.
The programme provided space for various participants to share their experiences and identify priority areas that can be incorporated into the study. It is the first engagement in what is planned to be a recurring consultation throughout the course of the project.
“The workshop was incredibly valuable, both as a space to facilitate engagement between taxpayers and tax authorities and as a channel through which critical stakeholders’ insights can feed into and help to increase the impact of our research,” said ICTD Tax and Informality co-lead, Vanessa van den Boogaard.
Inputs and suggestions garnered from the launch event will be fed into the research design to “ensure that our research questions, data collection, and outputs are useful to [our partners’] work,” she added.
“We’re confident that our research is now better able to provide insights that can help to ensure market taxation in Accra and beyond is effective, fair, and linked to service provision. We look forward to continuing to engage with our partners and stakeholders throughout the research process.”
Taxing informal economies
In an earlier blog, Gallien wrote of the various challenges traders and others in the sector face in operating informally, including a lack of access to formal finance, unsafe working conditions, and limited service provision.
Given this, integrating such operations into the formal economy has been a sentiment widely shared across different actors – from revenue authorities to labour unions, to informal sector associations.
“The challenge however lies in the fact that there is no commonly accepted definition of what everyone means by integration into the formal economy,” he said.
Meanwhile, common strategies over the last decade in addressing large informal economies largely consisted of simplified or presumptive tax regimes and mass registration campaigns, both of which have been shown by research to be ineffective and highly regressive. Thus, there is a need to explore other approaches.
These can include having a larger focus on more effective targeting of higher-income operators, better coordination between relevant government institutions, and better dialogue with informal sector operators, among others.
Recent ICTD work on tax and informality
Tax and Informality is among ICTD’s primary thematic areas of focus. Some of the most recent research and policy papers produced about the topic include:
- Simplified Taxation in Africa: What We Know – and Need to Know – this policy brief summarises what is known about simplified taxes in Africa, who pays them, and why they matter, while also highlighting gaps in the existing knowledge.
- Taxing Informal Economies: Practices, Challenges & Ways Forward – published in partnership with the African Tax Administration Forum (ATAF), this policy brief reviews the challenges and potential of taxing informal economies in the content. It finds that many strategies currently used place disproportionate burdens on low-income operators, yield limited revenue, and risk weakening taxpayer trust in revenue authorities.
- The taxed informal economy: Fiscal burdens and inequality in Accra (co-written with ISSER and WIEGO – published in the World Development journal, this paper presents the first geographically representative account of the nature, distribution, and impact of taxation in an urban informal sector.
