The informal economy provides livelihoods and jobs to millions of individuals around the globe. The International Labour Organisation (ILO) estimates that 70% of the labour force in the emerging and developing countries is employed in the informal economy.
In Zimbabwe, the informal economy`s contribution is around 64% of the GDP, indicating its significant presence in the country.
Over the past few months, owing to the closure of firms, particularly in the retail sector, there has been a growing concern that competition from informal economy firms is impeding job creation among and profitability of formal sector firms.
Informal businesses are regarded as unfairly competing with formal businesses as they do not pay taxes and do not comply with regulations supporting the parasitic view of informality. However, it is not true that stakeholders in the informal are not paying tax.
Clearly, businesses and workers in the informal economy do not pay income tax like their formal counterparts, and do not remit Value Added Tax to the Government of Zimbabwe as they are not registered.
Nevertheless, informal business pay Intermediated Money Transfer Tax (IMTT) when they transact and VAT on the inputs they purchase without ay possibility of refund which is available to registered businesses in Zimbabwe.
In addition, informal workers and businesses are frequently subject to taxes, which are imposed either nationally or locally (at the municipal level) through a variety of levies, charges, and licensing fees.
Given that informal businesses are viewed as having an unfair advantage, the controversy regarding the taxation of the informal economy should actually be a top priority for the Government of Zimbabwe has generated debate.
- Issuing invoices in the informal sector
- Zimbabwe’s informal economy taxation and formalisation
Keep Reading
Since taxable incomes in the informal sector are typically low, one of the primary arguments against taxing the informal economy is that it is typically impossible to generate a significant amount of revenue from informal sector-specific tax heads.
Presumptive tax is not the major contributor of government revenue despite the dominance of the informal economy in the country.
Taxing the informal economy (particularly using indirect taxes: IMTT & VAT) runs the risk of being extremely income and gender regressive (equity argument), since a large number of informal workers are women, marginalised and poor.
Making sure that taxes and other levies are formulated and implemented in a way that does not perpetuate economic and gender inequalities should be an important consideration for the Government of Zimbabwe when imposing taxes on the informal economy.
On the benefit side, because the informal economy accounts for a sizable and steadily increasing portion of Zimbabwe's GDP, taxing it broadens the tax base and sources of government revenue.
This revenue is important for the country as it is running a fiscal deficit amid service delivery, debt servicing and other economic development pressures.
In addition, taxing informal small businesses, even if it may not generate much revenue currently, helps to bring these businesses within the tax system and, should they grow over time, ensure more tax compliance.
In simple terms, it is about fostering a tax compliance culture within the informal economy. A similar argument flips the conventional equity argument by arguing that formal corporations may consider informal enterprises' nonpayment of taxes to be an unfair practice.
This might depress overall tax morale and discourage larger businesses from being tax compliant, which would result in less revenue for the government.
Currently, formal businesses, especially those in the retail sector, are of the view that unfair competition from informal businesses are posing an existential threat as the informal sector businesses offer goods at lower prices and do not comply with statutory obligations, making it harder for formal retailers to compete.
It is important to note that, if attempts to tax the informal economy are accompanied by coercive or corrupt behavior, tax compliance among informal businesses is reduced, and formal firms' concerns about the unfairness of the tax system are intensified.
Crackdowns in the informal economy have simply encouraged informal traders to become more creative in their tax and regulatory evasion for more than a decade.
Since direct interaction without appropriate controls frequently encourages bribes and undermines attempts to enforce tax compliance, tax officials working with the informal sector need protection against corruption.
Although the planned interagency taskforce is a positive move, it runs the risk of becoming a failure if it is not automated, supervised, or taskforce officials are not well-paid well.
Given their small size, and mobility, efficient taxation of informal businesses needs both more quasi-voluntary compliance among these businesses and more effective enforcement.
The incentives for informal sector firms to voluntarily enter the tax base are closely connected to the broader question of formalisation, as firms are likely to enter the tax net in order to access the potential economic benefits of formalisation.
The prevailing strand of reasoning views formalisation as a rational choice: firms will formalise if the benefits (advantages) exceed the costs (drawbacks).
The costs of formalisation in Zimbabwe include the time and resources spent on registration or licensing, the cost of tax compliance, and the expense of adhering to employment laws and other regulations.
Benefits often include access to credit and financial markets, government procurement contracts, and state-provided services and facilities.
Benefits also include avoiding the regular expenses of informality, such as paying bribes and the necessity to give free services or products to officials, relocate or close businesses to avoid taxes.
It is important to note that, the benefits must be significantly greater than the costs in order to drive informal businesses to formalise.
The costs of formalisation in Zimbabwe are relatively high as there are number of licencing fees and processes that need to be paid ad completed respectively prior to registration.
While cost-benefit analysis has been the popular position on informality in Zimbabwe, informality can be regarded primarily as an issue of empowerment, rather than as a choice. Some workers and owners of businesses in the informal economy are from the most marginalised communities and informality emanates from a lack of viable alternatives, rather than a conscious decision.
Issues with capacity, such as illiteracy, a lack of skills, the transience of the business, uncertainty, and the prevalence of cash transactions, as well as issues with the enabling environment, such as a general lack of trust in the government and difficulty accessing a variety of services, such as information, accounting, security, justice, and insurance, may prevent informal firms from formally registering.
The lack of empowerment has two policy implications for: first, tax regime in Zimbabwe should be adjusted to the features of informal businesses, such as illiteracy, a lack of trust, and knowledge; and second, business environment reform programs must be supplemented with other policies.
Therefore, securing property rights (which are frequently the cause of transience), improving security (safety from theft or harassment), and establishing appropriate infrastructure (particularly ablution facilities), are all crucial components of the policy, which go beyond taxation, and lowering registration costs.
Furthermore, information and credibility are two major strategic issues that formalisation policies should recognise and address.
Since many intended beneficiaries in the informal economy are simply unaware of the programs aimed at them, information is crucial for their empowerment.
The significance of credibility stems from the fact that informal businesses require guarantees that the government will fulfil its end of any agreement (such as less harassment by officials) if these businesses formalise.
This is because successful formalisation policies are significantly hampered by businesses' fear of being taken advantage of by authorities.
Since many formalisation is hinged on credibility, it is important for the government of Zimbabwe to constantly have dialogue with both the formal and informal to improve general faith in the authorities.
*Banda is a well-being economist and public policy analyst. These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Private Limited, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. — kadenge.zes@gmail.com or +263 772 382 852.
