By Ephraim Ofori NUMOSUOR
The informal sector is the lifeblood of Ghana’s economy. It provides employment to an estimated 80percent of the workforce, spanning street vendors, artisans, market traders, and small-scale business owners.
However, despite its dominant role in job creation, its contribution to Ghana’s Gross Domestic Product (GDP) stands at a modest 27percent, according to data from the Ghana Statistical Service (GSS).
This discrepancy raises an important question: why does a sector that employs the majority of Ghanaians contribute so little to national revenue, and how can policymakers address this imbalance without stifling small businesses?
The informal sector’s taxation dilemma
The low contribution of the informal sector to GDP is largely tied to taxation challenges. Ghana’s tax system, like those of many developing economies, is structured around the formal sector, where businesses are registered, revenues are tracked, and tax obligations are enforceable.
In contrast, the informal sector operates largely outside regulatory frameworks. Many businesses are not registered, making it difficult for tax authorities to track income and enforce compliance. Moreover, informal workers often earn low and inconsistent incomes, making the standard tax regime impractical for them.
According to the Ghana Revenue Authority (GRA), the informal sector contributes less than 2percent of total tax revenue. This leaves the burden of taxation disproportionately on formal businesses and salaried workers, who often bear the brunt of tax hikes to compensate for revenue shortfalls.
The cost of exclusion
The lack of tax integration in the informal sector has several consequences:
- Revenue loss for government – Ghana misses out on a significant source of potential tax revenue, limiting funds available for infrastructure, social services, and economic development.
- Limited access to financial services – Many informal businesses struggle to access credit and investment opportunities because they lack tax records and financial histories.
- Inequity in taxation – The current system places a disproportionate burden on formal businesses and salaried workers, discouraging tax compliance and widening economic inequality.
Learning from global best practices
Ghana is not alone in facing the challenge of taxing the informal economy. Several countries have successfully implemented innovative strategies to integrate informal businesses into their tax systems:
- Rwanda: Simplified tax regime for small enterprises
Rwanda introduced a flat tax system for small and micro-enterprises, based on turnover rather than complex profit calculations. Businesses earning below a certain threshold pay a small, manageable tax, which encourages voluntary compliance. Ghana can adopt a similar tiered tax system, making it easier for informal businesses to pay taxes without feeling overwhelmed.
- Kenya: Digital taxation through mobile money
With over 90percent of its population using mobile money, Kenya implemented a tax system that allows small businesses to remit taxes through mobile payment platforms. Ghana, with its thriving mobile money sector, can leverage similar digital solutions to facilitate tax collection in a convenient and efficient manner.
- Brazil: Incentives for formalization
Brazil’s ‘Simples Nacional’ program simplifies taxation for small businesses and offers benefits such as access to social security and business development support. As a result, millions of businesses have transitioned from informal to formal status. Ghana can explore a model that offers clear benefits, such as health insurance, pension schemes, or business grants, to incentivize tax registration.
A way forward for Ghana
To successfully integrate the informal sector into the tax net, Ghana must adopt a pragmatic approach that acknowledges the unique challenges of small businesses while ensuring they contribute their fair share to national development. Here are some key recommendations:
- Implement a tiered tax system – Introduce a simplified tax regime with lower rates for small and micro-businesses, ensuring taxes are proportionate to income levels.
- Leverage mobile money and digital payment platforms – Enable tax payments through mobile money to make compliance easy and accessible.
- Tax rewards and incentives – The government can introduce tax discounts, rebates, or loyalty programs for informal businesses that voluntarily register and pay taxes. For example, businesses that consistently file their taxes could receive reduced tax rates in subsequent years or be eligible for government contracts.
- Public recognition and certification – The government can establish a public recognition system where compliant informal businesses receive a certification or an award. This can enhance their credibility, attract customers, and even make them eligible for financial support, such as low-interest loans from banks.
- Taxpayer lottery and prizes – Some countries use tax lotteries to encourage tax compliance. Ghana could adopt a system where taxpayers, including those from the informal sector, stand a chance to win prizes such as cash, business grants, or equipment when they pay taxes on time.
- Provide incentives for registration – Offer benefits such as access to credit, business training, and pension schemes for businesses that formalize their operations.
- Educational campaigns and community engagement – Many informal sector operators may not fully understand the benefits of taxation. Public education campaigns can be launched to explain how tax revenue is used for infrastructure, healthcare, and social programs, emphasizing the collective benefits of compliance.
- Strengthen enforcement through data analytics – Use technology to track transactions and identify businesses that should be contributing to the tax system.
In conclusion, the informal sector is a vital part of Ghana’s economic fabric, and integrating it into the tax system is essential for national progress. Rather than imposing punitive measures, Ghana must create an enabling environment that encourages voluntary compliance through incentives, simplified tax structures, and digital solutions. By rethinking taxation, Ghana can unlock significant revenue potential, ensure fairness in the tax system, and foster sustainable economic growth. The time to act is now, an inclusive tax system is not just about raising revenue; it’s about building a stronger, more equitable economy for all Ghanaians.
>>>the writer is a Financial Economist | Research & Policy Analyst. He can be reached via [email protected]
