Streamline the informal sector for inclusive economic growth

The informal sector has in many ways superseded the formal sector and is now the face of modernity rather than its antithesis. By informal economy we mean an amalgamation of unregistered and unlicensed self/family-owned micro, small and medium enterprises not protected by the State. They do not enjoy any social benefits, and often have no titled or registered assets.

This means they are inherently vulnerable, highly mobile, and insecure. As a consequence, these unregulated entities do not pay taxes, their employees are excluded from any social safety nets and they lack the protection accorded by formal labour contracts. It is easy to underestimate the contribution the informal sector makes to the economy.Uganda’s large informal sector is a cache of untapped revenue potential.

Despite government’s recognition of the informal sector, there is need for clarity on the strategic direction for addressing informality. According to the National Strategy for Private Sector Development, FY 2017/18, the informal sector contributed a significant share to GDP (43.9 per cent) in FY 2014/15, which is sizeable posing a big challenge in competition to formal enterprises.

The private sector economy largely characterised by micro small and medium enterprises (MSMEs), with low productivity and high informality.

Up to 80 per cent of the economy is comprised of informal businesses that transact in cash making it difficult to track and assess them for tax, leaving much of the tax burden to the formal sector.
Many informal small enterprises are family-owned and often do not have a fixed address and a range of factors have further stifled the MSME growth, including the high level of informality, over protection of foreign investors, long procedures for starting a business, low innovation and productivity, government’s domestic borrowing and credit access challenges .

Government support has also been minimal despite the sector’s size, a practice that will continue to suppress innovation, capacity, productivity and competitiveness of MSMEs. Communities and private partners are key in achieving this strategy.

With adequate information and awareness, they are capable of achieving the desired growth levels as they would act as a source of employment and revenue mobilization through taxes for government to finance the NDP. Informal sector, channel for depriving government of tax collection.

The World Bank (2017) noted that the majority of informal firms are evading taxation and, therefore, depriving formal firms of their hard-earned profits. On the other hand, the informal economy is conducive channel for providing a good blend for illicit activities, including illicit financial flows which deprive government of tax collection.

MSMEs typically have a high mortality rate with 90 per cent operating for less than 20 years. Many informal small enterprises (manufacturers, wholesalers, retailers, agricultural produce dealers) are family-owned and often do not have a fixed address.

The construction sector, for example, is one of the fast growing sectors, but the service is provided informally implying loss of government revenue.

The transport sector also remains unregulated with no clear records of ownership. This means that a lot of taxable transactions are not traced. This is where the real economy thrives. By their nature, it is difficult for tax authorities to track them hence lower revenues realised than the potential. Stringent measures by URA further frustrate small businesses and the difficult registration process marked by burdensome compliance procedures, complex tax regulations, and corruption also cause many to prefer informality in Uganda.

Recommendations

Government should devise a strategy of tracking all economic activities contributing to growth and drawing them into the tax bracket by implementing an effective process of business registration. A conducive atmosphere for all businesses to thrive must be availed through making access to credit cheaper and supportive registration measures to boost investment in local enterprises. These approaches will enable the mobilisation of revenue into the consolidated fund for service delivery.
Government should adopt an effective measure to regulate economic activities and no enterprise should be permitted to operate without a Taxpayer Identification Number (TIN). URA should devise a mechanism of providing tax clearance certificates to business owners which should be presented before renewing a license to encourage compliance.
Government needs to set up lawful associations within the transport business to coordinate and regulate the industry as well as collect taxes.

Ms Naisanga works with Uganda Debt Network.
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