Tax revenues could make an important contribution to the development of African countries. But the informal sector and under-collected financial flows mean that taxes are often not collected at all.
Huge sums of taxpayer money are lost in African countries every year. The reasons lie in the lack of logistical support for business transactions and the lack of control options. The real dilemma: The majority of the working population in Africa is employed in the informal sector – in the markets, in agriculture, in crafts, construction and transport. The majority of small, independent companies are not registered, they pay neither taxes nor social security contributions.
The majority work in the informal economy
The tax revenue that is not recorded could make a significant contribution to improving health and education, expanding infrastructure and other urgently needed development projects in African countries. According to the International Labor Organization (ILO), two billion people worldwide work in the informal economy, in Africa the share is 85.5 percent.
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According to figures from the World Bank, the so-called shadow economy in sub-Saharan Africa amounts to almost 90 percent – with a contribution of 40 percent to the gross national product. In this situation, according to the World Bank, the traditional tax system is neither efficient nor fair.
Fair taxation possible?
What could fair taxation look like that doesn't plunge the poorer sections of the population into an even deeper crisis? John Gartchie Gatsi from Cape Coast University in Ghana initially advocates a stronger integration of the informal market: “If we enlarge the informal sector and formalize it through various political measures, we will gradually transfer part of it into the formal sector, and citizens will have to pay taxes as normal,” Gatsi said in a DW interview.
But there are still a few hurdles to be overcome on the way there: “We have recognized the importance of digitization and the automation of systems, but have not implemented them consistently.” Like many African countries, Ghana has also developed national identification systems. But instead of taking cues from countries like Germany or Sweden, Ghana uses the personal identification number solely to determine who is a citizen and can vote, Gatsi said. European governments, on the other hand, also used this ID system to network economic activities and thus create more transparency.
A blacksmith in Ghana: Many small businesses are unregistered and don't pay taxes
Ghana has partially bridged this gap by linking SIM cards for mobile phones with their national identification number. In combination with mobile payment options – such as those also available in Rwanda, Tanzania and Kenya – this results in more clarity about money flows. But the systems must become more efficient and less expensive, warns Gatsi.
Stricter laws required
According to Gatsi, the IDs could be made even more usable. The idea: “When people need government benefits, they have to provide their ID, which shows records of how much they earned from a particular project and whether or not they paid taxes on it.” If this was not the case, the service could be linked to the repayment of the outstanding receivables.
In addition, the economist recommends a law that also makes those who make payments to informal parties liable for taxes. However, there is often a lack of political will, also for fear of losing potential voters Sector: Young men wait for work with their wheelbarrows on the outskirts of Abuja
In the Nigerian state of Lagos – also one of the largest metropolitan regions in Africa – a combination of political commitment at the top, structural reforms in the administration and public relations have improved the collection of municipal taxes, says Paul Melly, Africa expert at the London think tank Chatham House. For him, a non-bureaucratic procedure for collecting taxes is important in order to offer a simple solution and incentives to pay even for informal workers.
Simplify payment options
“The best way to do this is through a mix of strong enforcement on high earners and simple online payment mechanisms that allow people to pay taxes without fear of losing the money,” Melly told DW. There is also a need for better ways of quickly measuring the amount of tax liability and keeping the bureaucracy in check.
One reason for the reluctance of taxpayers is the assumption that the tax will not bring them any advantages, says Melly. Kenyan economist James Shikwati confirms this: One reason for this is the perception that governments receive money from abroad to support their operations and there is a lack of trust in the government, Shikwati told DW: “Even if informal business people are willing to pay taxes, they think the money will only end up in corrupt pockets.”
Taxes? Yes – but fair!
Shikwati refers to a statement by the Kenyan tax authority, according to which the state loses almost three million US dollars a year from the informal sector. If the government really cares, it should provide the necessary incentives to make informal sector actors see it as a good idea to pay taxes, Shikwati says. Pure expectations on the part of the government will not get us anywhere.
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A study by the pan-African opinion research institute Afrobarometer could encourage African governments: According to the data collected in 2019/2020 in 18 African countries, a majority of Africans are in favor of their governments levying taxes. However, according to the Afrobarometer, many Africans doubt that the tax burden in their country is distributed fairly, and only half believe that their government uses tax revenues for the benefit of its citizens.
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