Small Business & Informal Sector Taxation In Developing Countries

By: Alex Ampaabeng(PhD Researcher in Taxation)

SupervisorsProfessor Andy LymerDr Dan Herbert

ESRC Week Presentation – New Birmingham Library

07th November, 2013

How do we tax these?

Typical

Ghana

Informal

Sector

Taxable?

How big is the problem?

• Makes up 80% of Ghana’s economy (World Bank, 2007)

• Operators usually rely on cash transactions, (Grown and

Valodia, 2010);

• keep no official or proper financial records, (Aryee, 2007,

IMF ,2010)

• operate in small scale (Aryee, 2007; Russell, 2010)

• High corruption countries

• Above all, in economies with minimal trust in government!

--With P. O .Box system--

Famous quotes about the Informal sector

‘‘the obvious benefits for entrepreneurs who operate in the informal

economy are avoiding costly and burdensome government regulations

as well as high and complex taxes’’, (World Bank, 2004; p26).

the role of the informal sector in providing employment and income

opportunities is very important in reducing the extent and intensity of

poverty’, (UNESCAP, 2006: p8).

the informal sector is usually comprised of ‘taxpayers who often fail to

register voluntarily’ (Terkper 2003),

In developing countries, most people survive from small activities

such as street hawking sweet and shoe shining to grocery shops

and taxi cabs, (World Bank, 2004).

Fail to comply with tax obligations and usually tax authorities use

forces (World Bank, 25004, Aryee, 2007; IMF, 2010)

Project aim:

‘To explore the design of Personal, small business and

informal sector taxation in developing economies’

• How does a formal tax compliance process influence

voluntary tax compliance in the informal sector in a

developing country?

• Are there more effective ways to tax informal economic

activities in developing countries than are currently

employed?

Research Approach & Methodology

Interviews Field Trip /

Enforcement

Questionnaire

T.A DO-PUS.O

GRAAMA KMA

Recruitment:Social GatheringsChurch EventsSII

snowball

A. Legal Entity B. Form of Operation C. Registration

• Grocery

• Entertainment Sports &

Leisure

• Fashion & Clothing

• Health & Spiritual Care

• Electrical & Electronics

• Other

• Agriculture

• Finance

• Travel & Tourism

• Construction

• Manufacturing

• Communication & Personal

Services

D. Nature of Business

On a field trip with Tax officers

81

19

81

127

87

13

93

7

39

61

Tax Knowledge

0

10

20

30

40

50

60

70

80

90

100

YES NO LOW GOOD HIGH YES NO YES NO YES NO

Proper use of Tax Rev

Selected responses

Has/will accept bribeTax EducationTax Education

Famous field quotes

I do not have any understanding for the Ghana tax system. The tax system

works in a way that you do what they want you to do when they arrive on

your premises, or you face closure (Mrs. F, Hair dressing saloon owner)

‘‘I think in a way how the tax system works is discouraging for business as

you pay fixed amount regardless of income’’ (Mr, C. Taxi driver).

‘‘…..I think the information available from the GRA is very bad. I have never

come across any tax education/information on radio, TV or the papers’’ (Mr K. Carpenter)

‘‘after all there will be lots of people who will bribe their way through, so

why not do the same’’ (Mrs B, Bar owner)

Famous field quotes

‘‘…..they just don’t care how much you make in a day. The

taxes I pay each month is more than my sales, not even

profits. I’m leaving the business next month, because I can’t

take the harassment. I will sell from home, and if they are

bold men, let them come to my house for taxes’’ (Mrs D,

Grocery shop owner)

…..every morning, Field officers will always ask me ‘‘hey massa,

honor your obligation ’’, then I just give then GHs2 for each day’

(Mr A, Mobile phones dealer)

Results of questionnaire, Tax officers interview & field

are trip currently being analysed

Famous field quotes

‘‘…..They know they are required to pay taxes, so what kind

of tax education is required of the GRA?’’ (Tax Revenue

Officer - GRA)

Full details available at

www.angelscollege.com

Thank you

Questions &

Suggestions.