Taxation of the Informal Sector


Insufficient tax collection issues in developing economies are complex; often cause by inadequate logistical support, planning and control among others. Ghana continues to depend on foreign aid to support its developmental projects, perhaps due to overreliance on tax revenue from the formal sector. This empirical study was undertaken to identify the variables that make informal sector “difficult-to-tax”, examine the factors accounting for tax non-compliance in the informal sector and give some recommendations on the way forward in the taxation of the informal sector.

Only in the 14th century did the word “tax” appear in the English language. It comes from the Latin word taxare, which meaning “to assess.”Before that, the comparable word ‘task,’ originating from Old French, was used in English. For a while, the terms ‘task’ and ‘tax’ were used interchangeably, with the first requiring labour and the latter money. After that, the word tax came to indicate something tedious or difficult. The forms of tax are basically direct and indirect taxation.

Levying compulsory contributions by governments on individuals, entities and/or properties to support the cost of national activities has largely been accepted as the main source of revenue for the Ghanaian economy because it forms the greater percentage of the total revenue collected in any fiscal year (Ali-Nakyea, 2014).

Ghana has increased its tax mobilization efforts in the formal sector in recent times. These increments, however, seemed insufficient to support governments’ budget for development, which in turn push governments to donor partners and other international organizations (World Bank [WB], European Union [EU], International Monetary Fund [IMF], among others) for support, which usually come with strict and unfavorable conditions (Fagariba, 2016).

The 2021 Budget Statement of the Ministry of Finance (BS-MoF) sparked debates, discussions and predictions (Peprah, 2021), which seemed to suggest that Ghana might, again, turn to IMF for support as a result of the country’s inability to meet her 2020 revenue targets despite comparable increase in revenue mobilization (BS-MoF, 2021, Peprah, 2021).

A quick analysis of the 2021 Budget Statement, as shown in Table 1, revealed that the informal sector is still not being considered as a potential source of revenue mobilization even though the sector, according to the Ghana Statistical Service (GSS) Regional Spatial Business Report (2016), employs majority of the working population.

Table 1

Contribution of Self Employed (Informal Sector) to Ghana’s Budgets

  2024 2023 2022 2021 2020 2019
TIP(GH¢000) 46,863,019 39,961,065 34,534,563 29,932,715 23,570,154 22,683,104
CSE(GH¢000) 1,000,192 997,050 894,760 626,520 394,236 421,058
Trend (%) 2.13 2.50 2.59 2.09 1.67 1.86

Legend: TIP=Taxes on Income & Property, CSE=Contributions from the Self Employed

Source: BS-MoF, 2021

From the table, the infinitesimal revenue from the self employed (informal sector), which oscillated between 2019 and 2021, is projected to decline after 2022. It seemed clear that governments have been overly concentrating on the formal sector with respect to taxes from income and property. The excessive focus on the formal sector and the neglect of the informal sector may be accounting for the shortages in tax revenue of the country. The informal sector has and is still being neglected as a potential source of government revenue. The Ghanaian economy is largely made up of self-employed individuals and small-scale enterprises (Osei-Boateng & Ampratwum, 2011). These informal sector entities provide diverse sources of income which, if fully taxed, could increase governments’ revenue and reduce, if not eliminate, budget deficits because it has a great potential for strategic domestic revenue mobilization

The informal sector is characterized with low level of organization; little or no division between labour and capital as factors of production on a small scale and where labour relations are primarily based on casual employment, kinship, personal or social relations as opposed to formal, contractual agreements. According to Osei-Bonsu and Ampratwum, the informal sector workers are largely self-employed persons.

Collection of taxes from the informal sector seems to present various challenges for governments in Africa due to the assertion that the informal sector participants either deliberately avoid payment of taxes or are not captured in revenue authorities’ tax net. In Uganda, it was indicated by Southern and Eastern African Trade, Information and Negotiations Institute (SEATINI) that the country’s tax base is very narrow because profitable small businesses and workers in the agricultural businesses do not pay their taxes (World Bank, 2018).

SEATINI (2017) further asserted that many of the informal sector workers, especially those in agriculture, are not in the habit of recording their revenues and other financial information, and therefore have no basis for which to be charged taxes. In Zimbabwe, Munjeyi et al., (2017) found that the lack of commitment by Zimbabwe Revenue Authority staff and corrupt practices destroyed public confidence and trust in the nation’s tax system, thus causing those in the informal sector to avoid paying taxes.

Gitonga et al, (2015) studied the influence of tax rates on tax compliance in Kenya’s informal sector and found that the majority of respondents (75%) felt that tax rates, which had a significant correlation with tax compliance of those in the informal sector, were too high which demotivated the sector participants from honoring their tax obligations.

In Kenya, Kundt (2017), noted that the main challenges facing the collection of taxes from the informal sector included the difficulty in evaluating the exact size of the informal sector, the fact that broad-based taxation might come at the expense of significant administrative costs resulting from the existence of a large number of informal firms and entrepreneurs and the difficulties in monitoring them and the observation that informal firms tend to be less productive than formal ones.

In Ghana, weak and under-resourced revenue authorities, a considerably large and uncontrolled sector, and a national bias towards collecting taxes easily have been cited as some of the challenges (Mensah-Pah, 2014).Various studies carried in Ghana cited lack of tax education, negative attitude towards the Ghanaian tax system, perceptions of government spending, compliance costs, tax rates, and lack of bookkeeping skills, among other, as major challenges in taxing the informal sector (Mantey, 2015; Amanamah, 2016; Kuug, 2016; Wahabu, 2017).

Over the years, governments have made desperate efforts to effectively rope in various participants into the tax net but very little have been achieved in respect of the informal sector as evident in the BS-MoF (2021) revenue categorization. Revenue projections from the self employed is expected to decline, hence the singular question as to how to tax the informal sector to raise the needed revenue for national development still remain a national issue.

Accra Central Market (Makola Market), where most of the participants in the informal sector are engaged in retail trade, was the focus of this study. The study location is also considered as the biggest retail trade hub in the Greater Accra Region of Ghana.Makola Market, a renowned marketplace and shopping district in the centre of the city of Accra has an area size of about 6.84 acres (MoF, 2014), which is mostly characterized by the informal economy with most of their activities not regulated.

The market facilitates the wholesale and retail trading of all kinds of goods and services including foodstuffs, cookware, clothing, medications, detergents, building materials, car parts, shoes, tools, pots, pans and almost anything else that is a legally traded commodity. These goods are both home-made and imported. Jewelry made from locally handcrafted beads can also be found for sale in the market.

The study respondents included hairdressers and beauticians, dressmakers and fashion designers, artisans, food vendors, butchers, contractors and general traders. District Tax Officers were also contacted to ascertain administrative challenges that might exist in taxing the informal sector.Out of the 250 respondents who were successfully surveyed, 50 (20%) were males, whereas 200 (80%) were females. In terms of age, 10 (4%) were between the ages of 18 and 25, 66 (26%) were between the ages of 26 and 35, 75 (30%) were between the ages of 36 and 45, 30 (12%) were between the ages of 46 and 55 and 69 (28%) were above the age of 55.

In ascertaining the importance of tax payments among the informal participants, 76 percent of the respondents disagreed that payment of income taxes was important. Collaborative interviews revealed that most of the respondents did not understand why they are being charged taxes. These results confirm SEATINI (2017) assertion that many of prospective taxpayers do not understand how and why they are being charged taxes, thereby creating resentments.

The results imply that tax education among the informal sector is low, which might cause difficulty in the collection of taxes because taxable persons will find every means to avoid the payment of taxes due to low education. This might make Ghana Revenue Authority’s (GRA) work difficult when collecting taxes because the informal sector participants do not appreciate the importance of paying taxes.

Results indicated that participants in the informal sector have the perception that, the tax system in Ghana is unfair, rates are too high for them to pay and do not see the direct benefits of tax payments in the development of the informal sector hence, find it difficult to understand why payment of income taxes should be made compulsory for the informal sector participants. These perceptions propel non-tax compliance among the informal sector participants.

Results again indicated that 60 percent of informal sector participants have and do not see the need to register their businesses with the GRA. Reasons cited included unfriendly registration processes and procedures, extra payments in seeking help for registration and unavailable free time to visit GRA offices for registration, among others. Results confirm Osei-Kuffour and Yiadom-Boakye (2020) study, which find that non-flexible tax processes and procedures negatively impact Small and Medium Enterprises (SMEs).

Results further showed that 80 percent of respondents do not have proper Accounting records due to their technical knowhow in formal bookkeeping. They could also not afford the services of accounting personnel. The results imply that GRA is limited in assessing accurate and equitable taxes due to incomplete accounting records in informal sector businesses.

Respondents (96%) also indicated that they do not trust the tax system in Ghana Revenue Authority because of corruption. According to respondents, monies collected are not used for their intended purpose. Officials of the Authority are not well identified when they visit the market. Results confirm SEATINI (2017) study, which found that corruption and lack of trust discourage tax payments.

When respondents were asked whether they know about their tax obligations, 70 percent responded in the negative.These participants did not know the graduated tax rates, whether they fall below or above the free threshold. They were also oblivious of how GRA assess them for taxation purposes. Results imply that the extent of taxation education in the informal sector is low.

In terms of access to informal sector participants at the Makola Market in the collection of taxes by GRA, responses indicated that most of the informal sector participants do not have permanent business address, making it difficult to locate them, hence, the difficulty in taxing the informal sector. Challenges such as understaffing at Small Tax Offices, inadequate logistics such as computers, vehicles, telecommunication gadgets and electronic database system, poorly trained tax collection officers, poor tax collection systems and lack of motivation of tax collection officers, among others, were cited.

Results further showed that though participants who sell without permanent locations in the market were handled by the local assembly, the pressure on them to pay their taxes were less stringent than participants in the transport industry and the established and permanent stores, including containers who are made to pay taxes and given stickers to display in their vehicles and receive tax invoices from the GRA respectively.

Taxation is a major source of revenue to all economies and Ghana is no exception. Failure to address the challenges of taxing the informal sector has a significant impact on the Ghanaian economy. To address the challenges of low income tax from the informal sector, the study recommends the following:

Tax information and tax education

The extent of tax information and education in Ghana is low among the informal sector participants. This problem was quite evident from respondents’ responses. The Ghana Revenue Authority, in collaboration with the Ministry of information should intensify tax information and education using both print and electronic media. Tax information should be in all major Ghanaian languages in print as hand bills containing information on the need to pay taxes. Tax education should be pursued vigorously and on a sustained basis to encourage voluntary compliance from the informal sector participants.

Simplification of Tax Systems and Procedures

One of the reasons identified for non-tax payment by the informal sector participants was complex tax registration and filing procedures. The Ghana Revenue Authority should develop registration system to attract informal sector participants. Simple income tax return forms to encourage the filing of income tax return should also be developed. The Ghana Revenue Authority should also take steps to educate the participants on how to complete such form to encourage filing.

Mapping and Capacity building programs in record keeping

The study further recommends Market Tax Mapping (MTM) where each set of map of the market is complete within itself. Each map sheet of a tax map is expected to cover a specific area for section numbering and identification, which will help tax authorities intensify their tax collection efforts from the informal sector.

The government must also take active role in building the capacity of the informal sector participants in terms of training them to be equipped with basic financial and accounting skills so as to be able to keep the basic accounting and financial records that will enable Ghana Revenue Authority make objective assessment of their taxes. These training programs, developed by the GRA in conjunction with the Ministries of Finance and Local Government, should be decentralized to the unit committee levels so that all major identifiable informal sector participants are trained to keep adequate financial records for effective tax assessment.

Government Interventions

Governments must intervene by employing more staff at the Ghana Revenue Authority Small Taxpayer Offices to address the understaffing challenges. Various logistics needed to track and collect equitable taxes should also be provided. In situations of unexpected events, adhoc interventions from the government, in terms of tax holidays, tax cuts and tax weavers, among others, should be instituted to boost tax payers’ morale. Tax weavers to the formal sector during the corona virus pandemic were good interventions. They should be extended to the informal sector as well.

The study concludes that tax information and education, simplification of tax systems and procedures, tax mapping for identification, capacity building programs in record keeping and government interventions in logistical provisions are some ways which could enable governments to increase tax revenue from the informal sector.


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Francis Osei-Kuffour, PhD,Valley View University – Ghana School of Business

Email: [email protected]

Adwoa Damoah Ntow-Ababio ,Enterprise Life Insurance,Email: [email protected]

Williams Kwasi Peprah, Ph.D.Valley View University – Ghana School of Business Email: [email protected]



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