East African countries need to establish a tax regime to legitimise the informal business sector in the region. This will see the sector help increase the region’s combined gross domestic product of $66 billion by 44 per cent or $29 billion, on average.
A new survey titled “Harmonisation of EAC Tax Policies and Laws: Proposals for Taxation Regime for Fostering Small Business Development and Regional Economic Growth,” found that the informal sector constitutes nearly 60 per cent of Tanzania’s GDP, 45 per cent in Uganda, 41 per cent in Rwanda, 39 per cent in Burundi, and 36 per cent in Kenya.
“Because of their size, if they are formalised and brought under the tax net, they have a significant potential and role in addressing key development challenges like poverty, unemployment and industrial development in the region,” the report, conducted jointly by the Nairobi office of the Consumer Unity and Trust Society and GTZ, says.
But it is quick to note that the tax regime for small businesses in the region must be tailor-made to ensure efficiency and equity, and encourage compliance and harmonisation.
Formalisation would open up various market opportunities for the sector as well as make it easier for such businesses to access formalised credit and government procurement. This would ultimately open up new avenues for their growth and potential to operate as as bigger firms.
EAC partner states are currently harmonising their tax regimes and policies under the ongoing Customs Union and the Common Market.
The report says that formalising the informal sector, particularly the micro, small and medium enterprise will make the EAC integration a more people-centred process.
It blames the regional governments for subjecting such businesses to various punitive measures if their presence and operations are detected by the officialdom, which considers them unofficial.
“Most of these businesses run a high risk if detected, and thus they maintain a budget for bribery, which is sometimes as high as 20 per cent in transition economies,” says the report, adding that due to their informality, they have limited access to public services and are poorly protected by national security systems.
The informal sector is credited with fuelling growth in the service industry in many developing countries, mainly in Africa.
It is estimated that over 30 per cent of the gross domestic products of 37 African economies comes from the informal economy apart from South Africa where it constitutes 28 per cent of the GDP
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