For African countries to reduce their budget deficits, they must work on widening their tax bases, the Executive Chairman of the FIRS, Muhammad Nami has stated.
In a speech delivered during the opening ceremony of the 9th Country Correspondents Meeting and ATAF 1st Experts Meeting on Taxation of the Informal Sector, the Executive Chairman of the FIRS who also doubles as the African Tax Administration Forum’s Chairman, explained that African countries must find ways to expand their tax base to fund budget deficits.
In his remarks, he noted that the informal sector in Africa today constitutes between 21 to 70 percent of the GDP of African countries and accounts for between 30 to 90 percent of employment in the region.
He went further to state that despite the large size of the informal sector, it remains one of the most difficult sectors to tax.
“… the sector remains one of the most difficult sectors to tax, with most of the businesses operating in the sector concealing their activities from the Tax Authorities. Such businesses also operate on a cash basis and maintain poor or no accounting records. Most of the businesses in the sector are also small and fragmented making it inefficient for the revenue administrations to enforce compliance. “ he stated.
He also noted that it was not politically popular to tax the informal sector.
“Taxing the informal sector is viewed as politically unpopular and politicians are unwilling to risk losing the high number of votes represented in the sector. This is because politicians usually promise informal workers protection from taxation in exchange for their votes.” The Executive Chairman noted.
Nami also noted that though it may be argued that the informal sector may yield low returns in the short run, the benefits were worth the effort. He further noted that taxing the informal sector may also be a way of promoting good governance and accountability of the State.
“Taxing the informal sector may also be a way of promoting good governance and political accountability of the State because tax strengthens the social contract between the citizens and the government. Thus, informal businesses that contribute to tax revenues are likely to assert their rights to receive certain services from government, thereby ensuring national development and accountability. The chairman noted.
Read the full excerpt of his speech here:
BEING AN ADDRESS BY THE CHAIRMAN, ATAF, Mr. Muhammed Nami, AT THE OPENING OF THE 9 th COUNTRY CORRESPONDENTS MEETING AND ATAF 1ST EXPERTS MEETING ON TAXATION OF THE INFORMAL SECTOR
ON 4th FEBRUARY 2020 IN ABUJA, NIGERIA
Board Members of the Federal Inland Revenue Service
The Executive Secretary of ATAF, Mr Logan Wort,
Coordinating Directors, Directors and Staff of FIRS
Directors and Members of staff of ATAF
ATAF Country Correspondents and Experts in Taxation of the Informal sector
Distinguished Guest Speakers
Our development partners, the African Development Bank
Ladies and gentlemen,
1. I warmly welcome you to this important meeting between the ATAF country correspondents and experts on taxation of the informal sector. I am highly delighted to receive you all to Abuja, the serene capital city of Nigeria. Indeed, this is important to me as it is my very first official assignment as the new Chairman of the African Tax Administration Forum (ATAF). I therefore thank you all for responding positively to the invitation to share your time and expertise with us to help solve one of the major challenges facing revenue mobilization on the continent. Your presence is invaluable to us.
2. The theme of this year’s Country Correspondents Conference is “The Taxation of the Informal Sector in Africa”. This annual gathering of ATAF’s focal persons in members administration affords participants the opportunity to reflect, and exchange views, on the year that has passed and to discuss the activities that form part of the ATAF Workplan for 2020. As a link between Revenue authorities and the Secretariat, ATAF’s Country Correspondents play a crucial role in ensuring that ATAF’s programmes continue to respond to members’ needs. During this meeting, ATAF, in partnership with the Africa Development Bank (AfDB), will jointly hold the 1st ATAF Experts Meeting on Taxation of the Informal Sector in Africa.
3. The meeting is expected to bring together officials from Treasury and Revenue Authorities as well as experts from across Africa to share experiences on practical and effective ways of taxing the informal sector. The objective of the meeting is to assist the ATAF Secretariat to develop, among other products, a comprehensive handbook with practical guidelines to ATAF member countries on how to tax the informal sector.
5. As at 2017, Africa’s Tax to GDP ratio averaged around 17%. This marks an improvement over time. However this ratio is the lowest in the world and it has resulted in budgetary deficits in most countries in Africa. It is therefore necessary to reduce and eventually eliminate these deficits if Africa is to meet its development needs. The low tax to GDP ratio has been attributed to, among other things, low tax capacities and tax inefficiencies. This is made worse by tax avoidance, tax evasion and a large informal sector.
6. It is estimated that the informal sector in Africa constitutes between 21% – 70% of the GDP of African countries and accounts for between 30-90% of employment in the region. Yet despite its large size, the sector remains one of the most difficult sectors to tax, with most of the businesses operating in the sector concealing their activities from the Tax Authorities. Such businesses also operate on a cash basis and maintain poor or no accounting records. Most of the businesses in the sector are also small and fragmented making it inefficient for the revenue administrations to enforce compliance. Taxing the informal sector is viewed as politically unpopular and politicians are unwilling to risk losing the high number of votes represented in the sector. This is because politicians usually promise informal workers protection from taxation in exchange for their votes. In Malawi, for instance, the law provides for withholding tax on imported goods at a rate of 3% but the tax is yet to be implemented due to perceived political consequences (AfDB, 2018).
7. Distinguished guests, ladies and gentlemen, it may be argued that taxing the informal sector may yield low returns in the short run. However, the benefits are worth the effort. Bringing the businesses into the tax net will instil a tax- paying culture in the businesses, thereby ensuring tax compliance when the businesses expand. Taxing the informal sector is also critical because it will ensure that there is a perception of fairness in the tax system. Those who operate in the formal sector deem it unfair to have to pay taxes while those in the informal sector do not. This impacts their tax morale and can result in low tax compliance among those in the formal sector. Furthermore, in some instances, enterprises within the informal sector create unfair competition for those operating in the formal sector. As a result, this reduces the income generated by the formal firms and also reduces the taxes paid.
8. Taxing the informal sector may also be a way of promoting good governance and political accountability of the State because tax strengthens the social contract between the citizens and the government. Thus, informal businesses that contribute to tax revenues are likely to assert their rights to receive certain services from government, thereby ensuring national development and accountability. Paying taxes is likely to promote responsiveness by the state to the needs of the informal sector in a bid to encourage voluntary compliance. It is also likely to encourage collective action, collective political engagement and bargaining by the informal sector.
If Africa is to reduce its budget deficits and increase revenue mobilization, it must widen its tax base and the informal sector provides an opportunity to do so. That is why recently, the President of Nigeria, Muhammed Buhari, signed the 2019 Finance Act. The 2019 Finance Act seeks to create an environment for ease of doing business in Nigeria especially for the small scale businesses in the country. The Act exempts businesses with annual turnover of 25 million naira and below from charging Value Added Tax (VAT) which has now been increased from 5% to 7.5%. However, these businesses would eventually enter the tax net through continuous assessments. This Act is expected to impact positively on the small businesses as well as the Nigeria economy, in the long run.
9. Distinguished guests, ladies and gentlemen, it is from this background that ATAF seeks to use this event to create a platform for discussion across Africa, as we seek effective ways of taxing the informal sector. Given the diverse skills and experiences represented in this room I cannot imagine a better audience to come up with solutions to the challenges. I am therefore, confident that the discussions that would be held during this workshop will result in solutions as to tax the informal sector in order to build an African model of informal sector taxation.
10.As you brainstorm over this important tax matter, I will not neglect to urge you all to also make out time to visit the several places of interest which Abuja offers and enjoy the warm hospitality for which Nigeria is renowned. It is now my privilege to declare the 2020 ATAF Country Correspondents Conference and the Informal Sector Workshop open. I wish you all successful and fruitful discussions.
11. God bless you all.
Executive Chairman FIRS, Nigeria