By Alex Moyem Kombat(Dr)
Taxes hold significant importance in constructing and maintaining global economies. They generate the income required for national progress.
In most nations globally, taxes are typically gathered from both the formal and informal economic sectors.
While various measures and strategies have been implemented to maximize tax revenues from both the formal and informal sectors in developed nations, this is not the case for developing countries such as Ghana.
The taxation of both the formal and informal sectors, particularly the informal sector, poses a significant challenge in most developing nations, and Ghana is no different.
In Ghana, the responsibility of assessing and collecting taxes, along with associated interests and penalties owed to the government, falls under the jurisdiction of the Ghana Revenue Authority (GRA). This mandate originates from the GRA Act enacted in 2009, also known as Act 791.
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) and the Income Tax Amendment Act 2021 (Act 1071), along with various associated tax regulations, authorize the Ghana Revenue Authority (GRA) to levy taxes on the country’s informal sector.
These regulations mandate the GRA to ensure that payments are made as taxes at predetermined rates: a fixed amount for taxpayers with turnovers under GH₵20,000 and 3% for those with turnovers between GH₵20,000 and GH₵500,000.
In addition, there is a tax system based on the modified cash basis (MCB), which relies on assessments. Furthermore, the GRA implements a 3% Value Added Tax (VAT) Flat Rate Scheme within this industry.
The Ghana Statistical Service (GSS) indicates that the informal sector comprises 80% of Ghana’s workforce, whereas the formal sector accounts for just 20%.
The Ghana Living Standards Survey (GLSS) 7 indicates that out of those engaged in informal work, exactly half (50.1%) are based in two specific areas: Ashanti region accounts for 26.3%, while Greater Accra contributes another 23.8%. The remaining portion is distributed across the country’s other fourteen regions.
As stated by Women in Informal Employment: Globalizing and Organizing (WEIGO), 92% of working women are engaged in informal jobs, as opposed to 86% of working men.
Even though the informal sector accounts for 27.4% of GDP, it generates less than 5% of overall tax revenue.
Nevertheless, according to data provided by the Ghana Revenue Authority, tax revenues from the informal sector’s self-employed individuals (primarily derived from direct taxes, withholding taxes, motor vehicle income tax, tax stamps, and the 1% port withholding fee) saw an increase from Ghc
¢
365.70 million in 2018 to GHG
¢
1,433.23 million in 2024, indicating a growth rate of 292%.
The tax revenue experienced an annual growth rate averaging 24.4% during this timeframe. Furthermore, earnings from the VAT Flat Rate Scheme for businesses operating informally in the sector saw an increase 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.
In spite of these achievements, GRA encounters numerous obstacles in taxing the informal sector. Among these issues are:
(1) Individuals often hire artisanal workers such as carpenters, masons, tilers, welders, plumbers, among others, through non-formal channels and make payments directly without withholding any taxes owed to GRA.
(2) Small and medium-sized businesses frequently operate outside regulatory frameworks—especially those failing to register with the Registrar General’s Department/Registrar of Companies—which complicates efforts to monitor and collect taxes from them.
(3) Verifying revenue declarations made by informal sector taxpayers proves challenging because many lack adequate accounting practices.
(4) There is reluctance towards official registration processes along with misconceptions about MMDA fees being equivalent to legitimate taxation duties.
(5) Informally employed persons involved in nocturnal marketplace operations pose additional difficulties for tax collection mechanisms.
(6) Insufficient public awareness campaigns combined with mistrust toward governmental institutions hinder progress.
(7) Limited adoption rates regarding technological solutions within this economic segment further complicate matters.
(8) Poor documentation habits alongside insufficient knowledge concerning basic finance management skills affect compliance levels across different strata of self-employed citizens including experts in various fields.
(9) Non-compliance with charging the requisite three percent levy based upon goods sold also impacts overall collections significantly.
Additionally, both the temporary cessation of the tax stamp system and reduced vehicular excise duty intake were necessitated initially amid the global health crisis but continued post-lifting restrictions despite facing logistical hurdles associated with resuming normal operational procedures.
Nevertheless, GRA has developed various administrative strategies and initiatives aimed at enhancing adherence to tax regulations and tackling the issues related to taxing the informal sector.
These include: (1) the use of Ghana card to identify\xa0 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#\xa0 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.
Given the difficulties encountered in taxing the informal sector, the author suggests revising the adjusted tax threshold from GHC 500,000 down to GHC 200,000 and changing the VAT threshold from GHC 200,000 up to GHC 500,000 to enhance revenue collection within this segment.
Moreover, the author suggests allocating a portion of the taxes collected from informal sector contributors towards pension and healthcare programs to incentivize their participation. Additionally, they recommend organizing lotteries as another method to motivate these taxpayers to comply with tax payments.
Additionally, employing Point of Sale (POS) terminals and an electronic invoicing system for Value Added Tax (VAT) management could enhance revenues under the VAT Flat Rate Scheme, particularly among informal sector taxpayers who typically make these payments.
Once more, enhancing tax education for this group of taxpayers could lead to better adherence to tax laws. Additionally, it is suggested that individuals utilize the services of informal sector workers such as carpenters, masons, tilers, welders, plumbers, blacksmiths, among others, and have these professionals hold back a portion of their payment as withholding tax for the Ghana Revenue Authority (GRA).
In conclusion, the author suggests that GRA join forces with informal sector organizations to enroll all their members with GRA. This would simplify tax assessments and collections within this sector.
The author serves as an Assistant Commissioner for Research & Policy at the Ghana Revenue Authority. For those who wish to get in touch with him, please do so using the following options:
0249-644467/[email protected]
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