On 4 April 2023 a webinar was held to present the results of two studies on presumptive tax regimes and the informal sector, and to draw lessons for the future design of such taxes.
The webinar was co-hosted by the International Centre for Tax and Development (ICTD), the OECD, the University of Ghana’s Institute of Statistical, Social and Economic Research (ISSER) and Women in Informal Employment: Globalising and Organising (WIEGO).
Following the crisis caused by the pandemic, developing countries are looking for new ways to improve domestic resource mobilisation. One way to mobilise resources is to bring informal businesses into the formal tax system. Presumptive tax regimes could be structured in a way that incentivises businesses to join the formal economy.
Although presumptive taxes are being discussed, there is not much data about the taxes that informal workers and businesses are currently paying. The webinar presented a study of presumptive tax by the OECD and a study by ICTD on tax and contributions in the informal sector in Ghana.
The OECD presentation noted that it had published a study of presumptive taxation. A decision to operate in the informal economy depends on a number of factors including the tax burden, complexity of the tax system, possibilities for tax avoidance and evasion and tax morale. There are also non-tax factors such as the structure of the economy and the labour market; complexity and enforcement of regulations; and the level of corruption.
Informality is not an absolute status – non-registered businesses may still pay tax, such as value added tax on their purchases and expenses. Registered business may also be partly operating in the informal economy.
Registration of businesses should not be done mainly to collect tax revenue (at least in the short term) but to increase levels of compliance and to facilitate business survival. Businesses also need incentives to join the formal sector. Granting access to social benefits and public services to registered businesses is therefore vital. The tax system may need to be revised and simplified so there is not too great a burden for small businesses. High compliance and enforcement costs do not help or incentivise businesses. Simplified tax compliance rules can encourage business formalisation.
The ICTD survey of the informal sector in Ghana looked at what types of taxes and fees informal businesses were paying. The survey covered 2,700 informal workers in the Accra metropolitan assembly area during April/May 2022. The criteria for inclusion were that the businesses were not registered (and therefore part of the informal economy) and had less than 10 employees. Of the workers and businesses surveyed, 61% had no employees, and around 22.5% had workers from their own family in the business. Around 74.2% of the people surveyed were women. The sample included street workers, market traders and home-based workers.
Three types of presumptive payments are being made. The Tax Stamp is paid to Ghana Revenue Authority. This is a lump sum payment for the official stamp to display. The Daily Toll is paid to the Accra Municipal Assembly, generally by market traders and street vendors. The Business License is also paid to the Accra Municipal Assembly. This is paid annually and graded according to the size of the business. The market traders are the most likely to pay at least one form of tax.
All three of these three presumptive payments are highly regressive. The daily toll is quite high and is paid daily but can amount to hundreds each year. The tax stamp and business license are not charged at the same rate for every business but are still regressive. The income of the larger businesses is many times the rate of the smallest businesses and the tax is often a much smaller percentage of their income. Also, businesses may not really pay the graduated rates in practice, and more data is needed on how they engage with the authorities in this respect.
Around 50% to 75% of the workers in each quintile also made other payments of fees and charges (not including the e-levy which was not introduced at the time). This also does not take into account payments for water, electricity services etc. The lowest quintile pays around 17% to 18% of its income in formal and informal taxes, which is far too high. There are concerns over affordability and regressivity. The design of the taxes needs to be reviewed.