Widening the tax net to Ghana’s informal sector

Opinion Icon Business

Mon, 3 Nov 2014 Source: Mensah-Pah, Jerry Detse

By Jerry Detse Mensah-Pah (kwamemensahpah@gmail.com)

Ghana like many other southern countries have very large informal sector and significant rural populations, from whom it difficult for government with weak tax administrations to collect income tax. In response to this challenge as well as pressures to service it loan, government has increasingly relied on expansion of Goods and Services Tax (GST) otherwise known as Value Added Tax (VAT) for it tax revenue. Taxes on goods and service and consumables are regressive in nature. 

A tax is regressive if it represents a higher share of income for higher-income individuals than for those with lower incomes. This way richer individuals pay proportionally more of their income on tax than poorer people. Contrariwise, a tax is regressive if poorer people pay proportionally more. 

This notwithstanding, the relationship between taxation and development is fundamental. A functioning state that can meet the basic needs of its citizens must rely ultimately on its own revenues to meet development objectives. Using an impartial tax system, the state can mobilize domestic resources, redistribute wealth and provide essential services and infrastructure. However, successive governments here in Ghana struggle to collect enough taxes to fund essential services nondiscriminatory. The government of Ghana faces serious challenges as a result of weak and under-resourced revenue authorities and large informal sector in pursuit of mobilizing enough revenue domestically through taxation. Too often tax systems are heavily skewed against interests of the poor. Typically in Ghana and other African State, tax policies are biased towards collecting taxes easily which imposes a higher tax burden on poor households and formal sector employees.


Tax Justice is now a topical issue in Ghana and to a lager extent Africa hence my motivation to put forward my thought on how government can reach out to scores of citizens within the informal sector who do not pay income tax.

My thoughts are in three fold. Firstly, I think government should take advantage of reforms within Driver Licensing and Vehicle Authority (DVLA) to capture scores of commercial drivers within the informal sector. It is possible for government to develop a policy that will make commercial drivers in the informal sector present their income tax returns as a requirement in renewing ones license. This move if implemented will motivate and encourage commercial drivers to pay income taxes. I have no doubt in my mind that Ghana’s government is capable to do this to mobilize enough resources domestically to deliver services citizen need.

Secondly, government can liaise with the electoral commission to as part of registration requirement demand for Tax Identification Number (TIN) from first time registrant as voters. If TIN is used as a requirement for people to register it would encourage more people to acquire this TIN from the Ghana Revenue Authority. TIN just like social security numbers are unique numbers and quite difficult to change since it is connected to the biometric voter registration. This one too is also a recipe for government to cash in more taxes in its bid of limiting public ‘bads’ and encouraging public ‘goods’.

Thirdly and most crucially is government taking advantages of its own pro poor initiative of the National Health Insurance Scheme (NHIS). It is reported that over 24 million people have registered with the NHIS across the country. If this figures are anything to go by then I think government should not hesitate in linking up with the NHIS to also use income tax returns as a requirement to register for the NHIS.

It is argued that the income levels of informal sector and significant rural populations are not significant, I personally bet to differ because it is said in our parlance that little drops of water makes a mighty ocean.

The author of this article is an Industrial Relations and Development Practitioner. He can be reached on kwamemensahpah@gmail.com or +233(0)243164704.

Columnist: Mensah-Pah, Jerry Detse