Taxation plays invaluable role in the building and sustenance of national economies worldwide. It is used to bring in the needed revenue for national development. Generally, taxes are collected from both formal and informal sectors in most countries across the world. Whereas measures and strategies have been put in place to harness the full tax revenue potential of the formal and informal sectors of the advanced countries, same cannot be said of developing countries including Ghana. Taxation of both formal and informal sectors especially the informal sector is a challenge in most developing countries and Ghana is no exception.
In Ghana, the Ghana Revenue Authority (GRA) is mandated by GRA Act 2009 (Act 791) to assess and collect taxes, interest and penalties on taxes due the state. The main goal of GRA in terms of the informal sector taxation is to ensure voluntary compliance through simplified registration, filing, and payment of taxes. The Income Tax Act 2015 (Act 896), Income tax Amendment Act 2021, (Act 1071) and other related tax laws empower GRA to collect taxes from the Ghanaian informal sector. These laws require GRA to enforce payment of fixed amounts as taxes for taxpayers whose turnover are below GH₵20,000 and 3% for those whose turnover ranges from GH₵20,000 and to GH₵500,000.00. There is also taxation based on modified cash basis (MCB) which hinges on assessment. Aside, GRA operates 3% Value Added Tax (VAT) Flat Rate Scheme in the sector.
Ghana Statistical Service (GSS) reports that the informal sector makes up 80% of Ghana’s workforce with the formal sector constituting only 20% of the employment. Ghana Living Standards Survey (GLSS) 7 reports that half (50.1%) of those in the informal employment are located in Ashanti (26.3%) and Greater Accra (23.8%) regions with the other half found in the other 14 regions of Ghana. According to the Women in Informal Employment: Globalizing and Organizing (WEIGO), 92% of employed women are in informal employment, compared to 86% of men.
Although the informal sector contributes 27.4% to GDP, its contribution to total tax revenue is less than 5%. However, data from the Ghana Revenue Authority shows that, tax revenue from the informal sector self-employed (mainly from the direct taxes, withholding taxes, vehicle income tax, tax stamp and the 1% port withholding) increased from Ghc 365.70 million in 2018 to GHc 1,433.23 million in 2024 representing a growth of 292%. The tax revenue grew at an average rate of 24.4% every year within this period. Additionally, revenue from the VAT Flat Rate Scheme, for the informal sector business increased from Ghc 219.92 million in 2018 to 483.59 million in 2021. An increase of about 120% although the revenue dropped slightly in 2024.
Despite these successes, GRA faces myriads of challenges in taxing the informal sector. These include (1) The informal way people contract the services of the artisans (e.g. carpenters, masons, tilers, welders, plumbers etc.) and other players in the sector and pay them without deducting any taxes for GRA (2) unregulated nature of the small and medium enterprises (SMEs) especially their failure to register with the Registrar General’s Department/Office of the Registrar of Companies makes it difficult to track and trace them for tax purpose (3) challenges verifying turnover of the informal sector taxpayers without proper business records, (4) resistance to formal registration, filing and payment of taxes due to assumption that levies/tolls collected by Metropolitan, Municipal, District Assemblies (MMDAs) are taxes, (5) difficulty in taxing individuals who engage in night market activities/trading, (5) inadequate sensitization and luck of trust in government, (6) low acceptability of technology in the informal sector, (7) improper record keeping, (8) low financial literacy and competence of some informal sector taxpayers including professionals, (8) failure of informal sector traders to charge the 3% of the value of their taxable supplies, and (9) suspension of the tax stamp and vehicle income tax during the covid pandemic period as it became a challenge collecting these tax handles even when the suspension was lifted.
GRA has however, come up with several administrative policies and measures to improve compliance and address the informal sector taxation challenges. These include: (1) the use of Ghana card to identify the informal sector taxpayers including the artisans and other professionals, (2) education to sensitise the taxpayers of their tax responsibilities and obligations and how to keep proper records mainly targeting the market queens, and the sector’s associations such as Ghana Union of Traders Association (GUTA), Ghana Enterprise Agency (GEA), Ghana National Tailors and Dressmakers Association (GNTDA), Ghana Hairdressers and Beauticians Association (GHABA), United Spare Parts Dealers Association of Ghana, Ghana Caterers Association, Ghana Association of Barbers & Barbering Salon Owners, Council for Indigenous Businesses Association (CIBA), Traders Advocacy Group Ghana (TAGG), Artisans Association of Ghana etc. (3) leveraging third party data to determine the taxpayers turnovers, (3) setting up of a team of GRA officers for night market taxation and swoops, (4) simplified tax registration, filing, and payment processes, and (5) the use of mobile money code *222# for payment of taxes and *880# for Verification of taxes paid. These measures are helping GRA improve compliance level of the informal sector taxpayers and ensuring inclusiveness in tax administration.
Based on the challenges faced in taxing the informal sector, the writer recommends amendment of the modified taxation threshold from GHC 500,000 to GHC 200,000 and amendment of the VAT threshold from GHC 200,000 to GHC 500,000 to help rake in more revenue from the sector. Additionally, the writer is proposing the use of part of the taxes paid by the informal sector taxpayers for pension and health insurance schemes as an incentive to encourage compliance. Besides, carrying out raffles as way of motivating the informal sector taxpayers to pay taxes is recommended. Also, the use of Point of Sale (POS) devices and electronic invoicing system for VAT administration can help improve revenue from the VAT Flat Rate Scheme which is mostly paid by the informal sector taxpayers. Again, intensifying tax education for this category of taxpayers will help improve compliance. Furthermore, it is recommended that people who engage the services of the informal sector artisans ((e.g. carpenters, masons, tilers, welders, plumbers, blacksmiths etc.) and other players in the sector withhold part of the money they pay for the services to GRA as withholding tax. Finally, the writer recommends collaboration of GRA and the informal sector associations to register all their members with GRA to make tax assessment and collection from the sector easier.
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