Managing tax collection in the informal sector of Ghana: case study of Kumasi Metropolis

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Taxation has been a major source of revenue to government in most developing countries. The situation is not different in Ghana. In Ghana, it is estimated that tax contributes about 15% to the GDP and over 80% to the total government revenue. However, with increasing informal activities in the economy, tax revenue is likely to lose its significance if a more pragmatic approach is not employed in tax collection. Pragmatic approach could only be employed properly in Ghana when more is known about the informal sector because the sector houses about two-thirds of Ghana’s economic activities. Unfortunately, most of these economic activities are not recorded making proper tax assessment difficult and sometimes impossible. Despite its significance share in the economy, its contribution to tax revenue is far lower than its capacity to pay tax. The relative share of tax from the sector has also been described as deteriorating from 21 .27% in 1983 to 6.6% in 1999. Many factors may be accountable for this. Part of this could be attributed to misconceptions about the sector. Too many a people, the informal sector is a haven for tax evaders and illegal economic activities. This partly underlines why the formal sector suppresses the informal sector with threats and brutalities such as destroying of goods traded in, stores, shops, selling trays and beating. An issue worth noting is the negative tradeoffs between cost of and revenue generated from such practices. Another reason for the fast deteriorating of informal sector’s tax revenue could also be due to lack of empirical studies in the sector. It must be emphasized that while there could be an iota of truth in the misconception, one should not lose sight of revenue potentials of the sector. At least De Soto et al (1986) and Ninsin (1991) have described its contribution to economic development as remarkable. The study revealed that informal sector has high capacity to pay tax though its tax revenue is far lower than its capacity to pay for which tax officials and policy makers are partly to be blamed. Though tax officials have ways of detecting tax evasion, yet the penalties for the different tax offences are not deterrent enough if they are applied at all. Consequently, there is much tax evasion in the informal sector. These have been made possible because of high tax rates, lack of motivation and logistics for tax officials, over dependence of tax officials on informal operators, low tax education, misuse of taxpayers’ money by the state, and other inappropriate management practices in tax collection. (Author’s fieldwork) Most taxpayers lamented that there is lack of public goods and subsidies, which should have been provided with tax revenue to make cost of living affordable. But this is not the case in Ghana. Hence most taxpayers see no need to continue paying tax. Moreover, some tax officials assist taxpayers to evade tax. Of critical need for improving tax collection is the high level of public debt and its servicing. For instance, the external debt was estimated as US$6001 million as against domestic debt of ¢5797.28 billion. Unfortunately, the study revealed that the informal sector which accounts for about two-thirds share of the economy only contributes only just about one-third of the total tax revenue in Ghana. To step up tax collection in the informal sector in particular and improving revenue mobilization in Ghana as a whole, it is the hope of the author that the suggestions of the study would be considered as tools for policy making.
A dissertation presented to Department of Economics and Industrial Management, College of Arts and Social Sciences, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment for the award of Master of Arts in (Industrial Management), 2000