The mounting fiscal pressures and debt burden plaguing most African countries have seen increased vigour in efforts to enhance domestic resource mobilisation. These efforts have taken the form of modernised tax systems, streamlining tax policies and establishing structures and guidelines for minimising/curbing illicit financial flows. Whilst there have been notable successes, as demonstrated by increased tax revenues in countries like Kenya, many countries are yet to figure out how best to tax a potential source of revenue –  the informal sector.

The informal sector forms a large proportion of the economy in many developing countries. In sub-Saharan Africa, the sector contributes between 25 and 65 percent of GDP.[1] Additionally, it is estimated that the informal sector provides employment for more than 70% of the population in Sub-Saharan Africa.[2] In Kenya, the informal sector has grown substantively over the years and is estimated to account for 35% of Gross Domestic Product[3] while in Uganda and Tanzania, the sector covers more than 50% of GDP.[4]

Size of informal sector in Sub-Saharan Africa | AfDB

The massive contribution of the informal sector to the economy is attributable to its free nature that allows for easy entry and innovation for anyone capable of monetising their skills. The sector also provides an alternative avenue for the trade of goods and services affordably, especially for middle and low-income earners.

Whilst the size of the informal sector portends the potential for broadening the tax base and bridging fiscal deficits, the nature of the informal sector makes it challenging to harness this potential. The architecture of the sector comprises largely unstructured and unregistered businesses, which makes it difficult for the government to capture their contribution to the economy using mainstream tax structures. The fluid structure of the sector means informal workers are not subjected to paying VAT as is the case with formal businesses. In essence, the tax compliance structures adopted for formal businesses are not effective in taxing the informal sector.

Over the past years, revenue authorities have been keen to streamline taxation frameworks to bring the informal sector into the tax bracket. These have mostly been in the form of a presumptive tax scheme, which manifests as a simplified tax schedule that aims to encourage record keeping and tax computation. Despite the various efforts made, the level of tax compliance among traders remains low. In Kenya, for instance, high administrative costs, low awareness and understanding of the taxes, mistrust and weak structural dialogue between the informal sector and government have contributed to low levels of tax compliance.[5] The rising cost of living also discourages most actors in the informal sector to adhere to these structures and provisions, as most seek to sustain their working capital, amid dwindling profit margins.

Jua Kali workers | Source: Business Daily

In Uganda, the presumptive tax system in place for the informal sector takes the form of a top-down approach where tax authorities impose taxes on businesses and force them to comply. The current relationship between tax authorities and taxpayers resembles that of a “cops and robbers” scenario. This has continued to erode the trust of taxpayers in government, particularly owing to the fact that, to the majority, government has failed in its mandate to deliver public goods and services effectively.[6]

In Tanzania, implementation of the presumptive income tax scheme applied to street vendors has been affected by the lack of a proper regulatory framework to accommodate the use of urban spaces. The presumptive tax requires street vendors to have a business license. But to obtain a business license, one needs a physical address whereas, street vendors operate in undesignated areas. The government, therefore, needs to collaborate with vendor associations to set up good working environments to accommodate street traders.[7]

These cases point to the need for a more pragmatic approach from the government to capture the informal sector within the tax bracket. This should begin by first strengthening communication and engagement with the informal sector actors to foster trust and incentivise them to fulfil their tax obligations. There is also need for more transparency with regard to government budgeting and the utilization of tax revenues.

It is also important to note that taxing the informal sector is not a ‘one size fits all’ affair. As such, efforts to tax the informal sector should begin with defining what the informal sector comprises. The International Labour Organisation uses various operational criteria such as registration, licensing, taxation and labour standards to define the informal sector.[8] Borrowing from this, the informal sector encompasses activities from petty traders operating in the streets of urban centres. For instance, traders involved in the sale of second-hand items like clothes, some in the business of shoe shining, street vendors, carpentry, vegetable selling, repair, construction work among others. The informal sector also comprises of better off ‘urban professionals’ such as doctors, lawyers, architects etc. who operate as unregistered businesses.

However, the definition should be further adapted to fit specific contexts. This definition is critical in establishing appropriate thresholds distinguishing those earning too little to meet VAT or income tax thresholds and those ‘hiding’ in the informal economy to evade taxes. Having a clear definition will chip into realising tax justice, bearing in mind that the informal sector already bears much of the tax burden through indirect taxes such VAT.

Lastly, taxing the informal sector should be coupled with critical reforms to curtail the loss of revenue such as reduction of loss in tax revenue through tax incentives and curbing illicit financial flows.

Until governments figure out the right taxation framework and enforcement mechanisms to ensure players comply, the sector continues to remain an untapped gold mine that has the potential to strengthen domestic resource mobilisation to fund government expenditures.

[1] https://www.imf.org/~/media/Files/Publications/REO/AFR/2017/May/pdf/sreo0517-chap3.ashx#:~:text=The%20informal%20economy%20is%20a,of%20total%20nonagricul%2D%20tural%20employment.

[2] https://www.un.org/en/ecosoc/integration/2015/pdf/eca.pdf

[3] https://s3-eu-west-1.amazonaws.com/s3.sourceafrica.net/documents/118220/The-informal-sector-and-taxation-in-Kenya-IEA.pdf

[4] https://www.repoa.or.tz/wp-content/uploads/2021/07/Taxing-the-informal-sector.pdf

[5] https://ijlhss.com/wp-content/uploads/2017/09/Informal-Sector-and-Taxation-in-Kenya-Causes-and-Effects.pdf

[6] http://jota.website/index.php/JoTA/article/view/232/181

[7] https://www.repoa.or.tz/wp-content/uploads/2021/07/Taxing-the-informal-sector.pdf

[8] https://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/publication/wcms_820312.pdf

Suspension of the 2020 school calendar, by the Ministry of Education as a result of the COVID-19 pandemic, has elicited mixed reactions.

For students, particularly those preparing for national examinations, it is a bitter pill to swallow. It is equally unpleasant for, businesses and workers relying on the education ecosystem for their livelihoods.

However, it has a silver lining too. In it, the Ministry of Education has a rare opportunity to address ills that have, for long, crippled Kenya’s education sector. Introduction of free primary and secondary education, while realizing higher enrollment and transition rates in schools, came at a cost. It exerted pressure on already overstretched school infrastructure and diluted the quality of education in  the country.

Despite reports from media and other institutions highlighting the dire need for government to address existing capacity, infrastructural and funding limitations in  the education sector, not much has been done in that regard. Students still have to contend with the uninspiring state of schools, with those based in rural areas most affected.

Further, politicization of education in the country has made the situation worse. Critics have questioned government priorities with projects such as the Digital Literacy Programme (also known as ‘One Laptop per Child’ project) for Grade 1 kids being ranked ahead of improving infrastructure in schools. Most students in the country are yet to draw any tangible utility from the project. Also the introduction of the Competency Based Curriculum (CBC) remains an issue of contention in the sector.

Righting the wrongs

The suspension of the school calendar as a measure to contain the spread of Coronavirus, presents an opportunity for the government to harmonize the education system. It also affords a chance to relook priorities and address gaps ailing the sector in preparation for the resumption of studies in 2021.

In the National Budget for the Financial Year 2020/21, the education sector was allocated over Ksh.500 billion. These resources – especially those earmarked for spending over the next 6 months – can be efficiently allocated to  include improving basic school infrastructure. This will ensure that when learning resumes, students have decent classrooms, sufficient facilities and enough teachers to facilitate their studies.

Part of the government’s Eight-Point Economic Stimulus Package in response to COVID-19 involves improving education outcomes by recruiting 10,000 teacher interns, constructing and rehabilitating classrooms and hiring ICT interns to facilitate digital learning in schools. Whereas these are welcome moves, some argue that allocated resources are not proportionate to the magnitude of existing gaps. That is why the education sector must focus on proper prioritization and utilization of current allocations to ensure enough cents are spent on addressing the most pressing issues.

This also the time for the ministry to engage with other stakeholders in the education sector to iron out contentious issues. In recent days, lack of synergy between the government and the other stakeholders in the education sector has been pronounced, particularly with the launch of the Competency-Based Curriculum (CBC). Some stakeholders in the education sector, particularly from the Kenya National Union of Teachers (KNUT), have argued against the government implementing the programme. They insist that there is insufficient capacity to implement the new curriculum effectively. Pundits have also criticized the government for implementing the new curriculum without research-based evidence to demonstrate its effectiveness, with the current state of the education sector in the country.

The break offers a chance of the government to iron out these contentious issues by actively engaging with various stakeholders and addressing their concerns. With the government’s bet on the CBC curriculum to transform the education sector, ironing out contentious issues and strengthening the foundation and design of the curriculum will enhance chances of success.

Parents also have a role to play

For parents, whose livelihoods have been affected by the pandemic, suspension of the 2020 school calendar is a godsend. It presents an opportunity to reorganize their resources for the 2021 school calendar.

With the burden of school fees off their shoulders for this period, these resources can be channeled towards food and healthcare of their children, and other essentials. Further, the reopening of the economy allows them to invest in business ventures and save for their children’s education come next year.

The flip side

While the break allows government and parents to relook their strategies, the decision is also costly for private schools and other auxiliary personnel whose livelihoods are anchored around the education ecosystem. Unlike public schools where teachers are guaranteed their salaries, at least for the foreseeable future, in private schools, salaries are dependent on school fees. The same goes for drivers, cleaning staff and food suppliers, among others whose products and services have no offtaker.

The government needs to step in to provide necessary safeguards and to cushion private sector players in the education sector to protect jobs and  livelihoods of workers during these  hard economic times they have to withstand until learning resumes. This could be fashioned along the lines of the lifeline fund the government offered operators in the tourism industry to buoy hotels and restaurants. This will help public and private schools to weather through this period.

The onus is on the leadership of the education sector to exercise leadership and grab this opportunity to do the right thing.

The least students deserve are decent classrooms, sufficient desks and books, enough well-trained teachers and a curriculum that guarantees them a decent education.

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This article was first published on The Standard on Wednesday 22nd July 2020