Taxing the Shadow Economy: Challenges, Policies, and the Path Forward
By Alex Moyem Kombat(Dr)
Taxation holds immense importance in the establishment and maintenance of global economies. It serves as a crucial source of income necessary for advancing national progress.
In most nations around the globe, 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 has not been 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 Ghana Revenue Authority (GRA), established under the GRA Act of 2009 (Act 791), is responsible for evaluating and gathering taxes, along with related interests and penalties owed to the government.
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 fiscal regulations, authorize the Ghana Revenue Authority (GRA) to levy taxes on the country’s informal economic segment.
These regulations mandate the GRA to ensure that payments of set sums are collected as taxes from entities with turnovers under GH₵20,000, while businesses with turnovers between GH₵20,000 and GH₵500,000 must pay at a rate of 3%.
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 labor force, leaving the formal sector to account for just 20%.
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.
As stated by Women in Informal Employment: Globalizing and Organizing (WEIGO), 92% of working women are engaged in informal employment, as opposed to 86% of working men.
Even though the informal sector accounts for 27.4% of the GDP, it generates less than 5% of the overall tax revenue.
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 Gh ¢ 365.70 million in 2018 to Gh ¢ 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 Gh ¢ From 219.92 million in 2018 to 483.59 million in 2021, representing an approximate growth of 120%. Despite this significant rise, the revenue experienced a minor decline 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.
However, GRA has developed various administrative strategies and initiatives aimed at enhancing adherence to tax regulations and tackling the complexities of taxing the informal sector.
The following measures have been outlined: (1) Utilizing the Ghana Card to recognize informal sector taxpayers like artisans and various professionals. (2) Educating these taxpayers about their fiscal duties through targeted campaigns aimed at groups such as market vendors—especially "market queens"—and industry bodies including GUTA, GEA, GNTDA, GHABA, the United Spare Parts Dealers Association of Ghana, the Ghana Caterers Association, the Ghana Association of Barbers & Barbering Salon Owners, CIBA, TAGG, and others associated with artisanal professions. (3) Leveraging external data sources to estimate taxpayer revenues accurately. (4) Establishing a dedicated unit within the GRA tasked specifically with nighttime market taxation and surprise inspections. (5) Simplifying procedures related to tax registration, submission, and payments. (6) Encouraging the utilization of mobile money codes *222# for paying taxes and *880# for verifying tax compliance status.
These steps are aiding GRA in boosting the adherence rate among informal sector taxpayers and guaranteeing their inclusion within the tax system.
Given the difficulties encountered in taxing the informal sector, the author suggests adjusting the revised 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.
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.
Additionally, implementing 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. It is also suggested that individuals utilize the services of informal sector workers such as carpenters, masons, tilers, welders, plumbers, blacksmiths, among others, and have these service providers hold back a portion of their payments toGRAas withholding tax.
In conclusion, the author suggests that GRA join forces with informal sector organizations to register 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 any inquiries, readers can reach out to him via:
0249-644467/alex.kombat@gra.gov.gh
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