Excellent piece. It will be interesting to know how much the informal sector contributes to GDP against their 'little' contribution towards tax revenue/ how much the formal sector contributes towards tax revenue against their corresponding formal sector contribution towards GDP
Excellent piece Tinashe. Reminds me of the interview of the SARS Commissioner just yesterday. While it wasn't about 'how to formalise the informal economy', their approach, philosophy, and structures to encourage people/corporates to pay their taxes is very very instructive.
South Africa is ahead on these types of topics. They also have the advantage of not having faced Hyperinflation, which in part fuels informalisation as people don't want to bank their money.
Perhaps the crux of trying to deal with the low taxation revenues problem is that the authorities may be focusing on asking and working to answer the wrong question.
It seems that the question being asked is 'How can we tax the informal sector?' when the question that should be asked is 'How can we formalise the informal sector so that it pays tax'
The consequence of asking the wrong question is that the informal sector indirect tax collection attempt measures that are being introduced in tax policy rather than being innovative are actually serving to sustain and encourage further informalisation.
So despite the growth experienced in GDP, contrary to that trend, informalisation remains high if it is not perhaps even growing higher.
Well articulated, Tinashe! I once wrote a thesis which posed that most of Zim's economic woes are merely symptoms of its governance problems, and they are only made worse by 'reactive' policies which act as band aids, not long-term solutions
Tax policy needs to work with the realities on the ground. Instead of piling pressure on the small formal sector, we should make it easier for informal traders to come on board by offering simple, low presumptive taxes and benefits like access to credit or social security. Transaction taxes like the 2% IMTT only push people away from formal banking, so cutting those and rewarding businesses that reinvest locally makes more sense. Given that the economy runs mostly on USD, tax rules should reflect that and avoid unrealistic ZWL valuations that create loopholes. And most importantly, tax shouldn’t just be about quick revenue fixes; it should support growth. Linking tax breaks to job creation and lowering VAT for productive sectors would go a long way.
The 15% Digital Services Tax is going to create an economy of circumventing it.
People who do forex trading were always funding accounts outside of the banking system.
Now more and more people will gravitate towards that. Honestly I am one of those people, I pay for a service online - it was $65 dollars but now it’s $78 taxes and charges combined.
I do not have any incentive to fund a VISA card under those circumstances.
You've hit the nail on the head, the idea is to push for formalisation in a way that makes it attractive to businesses. At the moment there is very little to encourage people to want to formalise. I once read a paper about RIF by Virginia silva I think her name was and the data suggested that RIF actually had the adverse effect of reducing the taxpayer base by like 10%.
Excellent piece. It will be interesting to know how much the informal sector contributes to GDP against their 'little' contribution towards tax revenue/ how much the formal sector contributes towards tax revenue against their corresponding formal sector contribution towards GDP
Thanks, wish there was data on that. I wonder how else that can be measured.
Excellent piece Tinashe. Reminds me of the interview of the SARS Commissioner just yesterday. While it wasn't about 'how to formalise the informal economy', their approach, philosophy, and structures to encourage people/corporates to pay their taxes is very very instructive.
https://www.youtube.com/watch?v=2YVZnX7wdq8&t=938s
South Africa is ahead on these types of topics. They also have the advantage of not having faced Hyperinflation, which in part fuels informalisation as people don't want to bank their money.
Perhaps the crux of trying to deal with the low taxation revenues problem is that the authorities may be focusing on asking and working to answer the wrong question.
It seems that the question being asked is 'How can we tax the informal sector?' when the question that should be asked is 'How can we formalise the informal sector so that it pays tax'
The consequence of asking the wrong question is that the informal sector indirect tax collection attempt measures that are being introduced in tax policy rather than being innovative are actually serving to sustain and encourage further informalisation.
So despite the growth experienced in GDP, contrary to that trend, informalisation remains high if it is not perhaps even growing higher.
This is spot on! I think taxing informal is extremely difficult like you mentioned.
Formalisation is the best way to go. Also what the data shows the more formal the more tax.
Well articulated, Tinashe! I once wrote a thesis which posed that most of Zim's economic woes are merely symptoms of its governance problems, and they are only made worse by 'reactive' policies which act as band aids, not long-term solutions
As a policy maker how would you change tax policy also considering the realisties on the ground.
Tax policy needs to work with the realities on the ground. Instead of piling pressure on the small formal sector, we should make it easier for informal traders to come on board by offering simple, low presumptive taxes and benefits like access to credit or social security. Transaction taxes like the 2% IMTT only push people away from formal banking, so cutting those and rewarding businesses that reinvest locally makes more sense. Given that the economy runs mostly on USD, tax rules should reflect that and avoid unrealistic ZWL valuations that create loopholes. And most importantly, tax shouldn’t just be about quick revenue fixes; it should support growth. Linking tax breaks to job creation and lowering VAT for productive sectors would go a long way.
The 15% Digital Services Tax is going to create an economy of circumventing it.
People who do forex trading were always funding accounts outside of the banking system.
Now more and more people will gravitate towards that. Honestly I am one of those people, I pay for a service online - it was $65 dollars but now it’s $78 taxes and charges combined.
I do not have any incentive to fund a VISA card under those circumstances.
There will be an industry for that for sure a 15% premium is hectic.
I wonder how much revenue it will generate? May not have been worth the inconvenience.
You've hit the nail on the head, the idea is to push for formalisation in a way that makes it attractive to businesses. At the moment there is very little to encourage people to want to formalise. I once read a paper about RIF by Virginia silva I think her name was and the data suggested that RIF actually had the adverse effect of reducing the taxpayer base by like 10%.
Yes from what I understand is that it started well and then later people started dropping off when the benefits faded.
So it really is a complex one to crack. It has to be something where the incentive is long term.