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Africa could earn billions in unpaid taxes

Martina Schwikowski
June 15, 2022

Tax revenues could make a vital contribution to the development of African countries. But the untapped informal sector, also known as the shadow economy, and inadequate collection of taxes stand in the way.

Nigerian Naira bank notes
Many African countries struggle with integrating the informal sector into their tax systemsImage: Sunday Alamba/AP Photo/picture alliance

Every year, African countries miss out on vast sums of taxpayers' money due to a lack of logistical support for business transactions and monitoring systems.

However, the real problem is that much of the working population is employed in the informal sector: on markets, in agriculture, the arts and craft industry, in the construction sector, or in transport.  

Moreover, many small, independent businesses are not registered — self-employed people often pay neither taxes nor social security contributions.

Women sell vegetables at a market
The majority of Africans are employed by the informal sectorImage: Sunday Alamba/AP/picture alliance

If they were collected, more tax revenues could significantly improve health and education, expand infrastructure, and contribute to other urgently needed development projects in many African countries.

According to the International Labor Organization (ILO), 2 billion people work in the informal economy globally, and in Africa, 85.5% of the population does.

In sub-Saharan Africa, this percentage rises to 90% according to the World Bank, accounting for 40% of the GNP. It is neither efficient nor fair, says the bank. 

Infographic showing Africa's untapped informal sector

Formalizing the informal sector

What might a fair taxation system look like? Professor John Gartchie Gatsi, a finance and economy lecturer at Cape Coast University in Ghana, thinks it would make sense to incorporate the informal sector into the overarching "normal" scheme for taxes: "If we grow the informal sector and formalize it through various policy interventions, we will gradually move a chunk of the informal sector into the formal sector," he told DW.

But he added that Africa faced several hurdles along the way. "We have identified digitilization, electronic and automation of systems, but we have not been consistent," he said.

Ghana — like many African countries — had developed national identification systems, he said. But instead of taking a cue from countries such as Germany or Sweden, Ghana was mainly using personal identification numbers to determine who was a citizen and could vote.

European governments, he pointed out, also used such identification systems to link economic activities and create more transparency.

Ghana had partially overcome this discrepancy by linking mobile phone SIM cards to respective national identification numbers, he said, explaining that by combining mobile payment options with personal data, greater clarity about money flows resulted. He said that such systems already existed in Rwanda, Tanzania, and Kenya but that it was important they become cheaper and more efficient.

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Stricter laws needed

Gatsi also argued that more use could be made of identity documents. "When people need government benefits, they have to provide their ID, which shows records of how much they earned from a particular project and whether or not they paid taxes on it."

IDs could thus be linked to the repayment of outstanding debts.

In addition, the economist recommended introducing a law that would make those who made payments to informal parties liable for taxes.

However, he said, there was often a lack of political will, partly because of concerns about losing potential voters.

According to Paul Melly, an Africa expert at the London-based think tank Chatham House, a combination of political commitment at the top level, structural reforms in the administration, and public relations, has improved the collection of local taxes in Nigeria's commercial capital Lagos. 

For him, a non-bureaucratic approach to collecting taxes is essential to offer a simple solution and incentives, even for informal workers.

A blacksmith at work
A study by the Afrobarometer shows that most Africans don't approve of how their governments spend taxesImage: Maxwell Suuk/DW

Simplifying tax payment

"It's possible to bring more people into the tax net through a mixture of high profile, firm enforcement of big earners," Melly told DW, adding that some simple online payment mechanisms should be made available for people to pay tax without fear that money will go astray.

"They need simple ways to quickly measure levels of tax liability so that it's not a difficult task to work out how much money an informal business should pay," he said.

Another reason for African taxpayers' reluctance to pay taxes was also the assumption that they would not bring them benefits, he added.

Kenyan economist James Shikwati said that the question of informality and tax compliance in Africa was complex. One reason was the perception that African governments received money "from out of Africa to support their operations." This, he told DW, led to a lack of trust in government. Another reason was "the perception of corruption, meaning that even if there were informal business actors willing to pay taxes, they believe that it will just end up in corrupt pockets," he said.

Young men waiting for customers with their wheelbarrows
Analysts say unpaid tax revenues could help create employment for Africa's youthImage: Thomas Lohnes/epd/imago images

Millions of dollars 'lost' in taxes

Shikwati referred to a statement from the Kenya Revenue Authority, which asserted that the state lost nearly $3 million (€2.8 million) in taxes annually from the informal sector because workers there do not pay taxes.

"If the government is interested in getting the informal sector to pay taxes, then they have to offer the necessary incentives that will make the players in the informal sector find it of value to pay taxes," he said.

According to a study conducted in 2019 by the pan-African polling institute Afrobarometer, most Africans are in favor of their governments raising taxes.

However, many Africans also doubt that the tax burden in their country is fairly distributed, and only half of those surveyed believed that their governments used tax revenues to benefit citizens.

This article was translated from German.