Root out tax evaders by not punishing the informal sector

Economists, researchers, development and economic reform pundits the world over have for the past five years been seized of the matter of how to make the informal economy accountable to a country's Gross Domestic Product. It is no wonder then that the utterance by the Namibian Treasury that they are targeting the informal sector to pay tax, had twitter lit up like a Christmas tree, as did other social platforms.

That is just an indication of how complex, and sensitive a topic, it would be to tax an informal sector, which is otherwise known as the 'grey economy.' And it is from the concept of 'grey economy' or 'shadow economy' that perhaps the Namibian discussion on taxing the informal economy should start. It should be a discussion without emotional overtures and panic from fearing stifling the livelihoods of those dependants on the informal sector.

At the same time, the Treasury should never be allowed to morph into a hard-line technocratic institution, which simply because of the ever-shrinking revenue streams. It is indeed also correct that the country must, and should, to use the words of finance minister Calle Schlettwein, rope in entities that are non registered, cash based, whether foreign or local, and who are of a scope and size of a taxable equivalent in the formal sector.

The fact is that the informal sector is referred to as grey or shadow because the formal mechanisms used to monitor the formal sector do not exist, and the new emerging mechanisms thanks to evolution of technologies can barely apply to the entire informal sector, or able to be replicated in every country.

The Treasury is correct in pointing that there are those operating in the informal sector, through unregistered entities or as individuals, whose bank balances would have many MBA educated executives, CEOs and SOEs green with envy.

There are within this grey economy a sizable number of people who, legally and morally so, ought to be subjected to the income tax laws, or be punished as tax evaders. Yet they get away by being unregistered for tax and the entities they operate being too far from the taxation reach of the formal economy.

The question should be on how do you make such individuals and entities submit their self-assessment tax forms, without hiding behind the grey economy to under-declare their earnings. On the other hand, the Treasury should not expect every kapana selling person, taxi owner and all who sell Brazilian hair to form little companies, and pay hundreds of dollars to bookkeepers and accountants who would go through their financial books, just so that they can prove to the Inland Revenue that their income is indeed below the tax thresholds.

That would be ridiculous. For many of these people, to operate in the informal sector is not a conscious choice but is the only means they know how to feed themselves and their families.

The correct answer to the debate would be a solution that nabs the tax avoiders hiding in the informal sector, one which gradually help, but not arbitrary forcing, those entrepreneurs and firms aspiring to enter the formal sector, while at the same time safeguarding the livelihood of those whom trading in the informal sector is genuinely the only way to make a living.

Source: New Era Newspaper Namibia