Zimpapers Logo

Informal sector players feel the tax man remains unfair to them

Sanderson Abel
Evidence around the world, even from Zimbabwe shows that a large informal sector acts as an important shock absorber for an economy gripped by fairly lengthy periods of sluggish employment and income growth.

Our experience during the 2000-2008 economic crisis supports this argument.

The greater proportion of the populace is being supported by the incomes that are coming from the informal sector.

The trend of growing informality at the expense of the documented economy depicts the operation of very serious structural constraints for the country’s formal sector and for its overall — long-run growth prospects.

Does the informal sector

support the fiscus?

The performance of informal sector has a major impact on the performance of the wider economy.

Despite the sector not falling under the armpit of the tax man, the sector indirectly contributes some significant mount to the fiscal revenues through VAT.

Given that the informal sector employs a significant amount of the people who are supporting the majority of the households in the country, their purchasing activities of the various household consumables and capital goods significantly contribute to the VAT collection.

In most circumstances, the formal sector sources its inputs from this sector, which allows them to increase their production and resultantly amount of tax in the form of corporate tax, pay-as-you-earn, value added tax among other taxes paid by the corporate world.

The other side of the matrix is where the informal sector buys goods and services from the corporates where they also pay VAT.

Given the linkages between the formal and informal sector, it is important to understand that the sector contributes to the revenue inflows to the treasury. Therefore, measures must be put in place by the Government to promote this sector and this can have a bearing on national revenue generation.

Despite the contribution of the informal sector to the fiscus, the informal sector players feel the tax man remains unfair to them. One of the challenge is that the tax and regulatory burdens are heavy on them, which prevents informal businesses from formalising, or are driving formal firms into the informal economy.

There is therefore need to critically look at the tax and regulatory environment and the associated bureaucracy that one needs to go through to set up a formal institution. Relaxing some of the regulatory requirements while the process of compliance of various requirements can be staggered can assist in the process of formalising these businesses.

How can this contribution to the fiscus be harnessed?

For the country to enjoy maximum benefits from the informal sector, there is need to better understand their characteristics and tame these for the benefit of the country.

Activities that are undertaken in the informal sector are usually characterised by unregulated and competitive markets; small-scale operations with individual or family ownership; ease of entry; reliance on locally available resources; family ownership of enterprises; labour intensive and adapted technology and absence or limited of access to institutional credit or other support and protections.

The informal sector is characterised by; absence of official protection and recognition; non-coverage by minimum wage legislation and social security system; predominance of own-account and self-employment work; absence of trade union organisation; low income and wages not transferred through the banking system; little job security and no fringe benefits from institutional sources.

The Government and interested groups should assist the informal sector players so that they can contribute significantly to the fiscus.

Role of training and

capacity development

It is important to understand that some of the informal sector players are not financially educated enough to understand the tax issues, hence the need for capacity development in the sector.

The success of the informal sector lies in them acquiring skills that will transform their businesses, which include cultivating in the informal sector entrepreneurs, the skills of changing their business models to those which are tax compliant.

Given the level of competitiveness of some of the informal players in terms of quality of goods, if they are taught that Government tender systems require tax compliant businesses, they might be incentivised to formalise their businesses.

The banking sector plays a critical role in their advisory function. This is only possible when informal sector players are able to sell their ideas to the financial institutions for better advice to increase their compliance with the tax laws.

The banks can be the leading source of information and tools for the development of bankable proposals for these informal organisations should they want to turn their operations into formal businesses.

 Sanderson Abel is an economist. He writes in his capacity as senior economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can contacted on [email protected] or on numbers 04-744686 and 0772463008