Taxing informal sector will antagonise the poor

Taxing informal sector will antagonise the poor

English folklore has it that there was once a man called Robin Hood, who together with his Merry Men, used to rob the rich to distribute the loot among the poor. So, the man is your typical knight in shining armour, one would say.
I have also had the privilege of watching the 1990s movie, Robin Hood: The Prince of Thieves played by Kevin Costner. Yes indeed, he and his band robbed the soldiers and the Sheriff of Nottingham’s convoys of horses and carts of food and everything valuable, and distributed them around the group, which he had put together and was a leader of.

There is also a story of a restaurant in Madrid, Spain. It turns out the inspiration behind the establishment of this restaurant is the story of Robin Hood. Ironically, the restaurant is called Robin Hood Restaurant. This eatery serves breakfast in the morning and lunch during the day and charges its customers like your normal restaurant would.

In the evening, the proceeds collected from the morning and during lunch are used to feed the homeless. It is quite clear that the restaurant is not necessarily robbing anybody, but they do get money from the ‘rich’ and redistribute the wealth the way Robin Hood did, save for the fact that Robin Hood used force to achieve his goals. One may argue that governments achieve this redistribution of wealth via the use of taxes.
Taxes, in their many forms, are charged on economic entities by government to finance public expenditure. So, how is this related to the above tale? Think of it this way, there is a need for a road that runs through a village whose community is comprised of people with high incomes, low incomes and those with no income at all.

All the members of this society need this road, but maybe only those at the top of the income and wealth pyramid can afford to have it built. What the government would do is to proportionally charge some or all of those income earners some levy, which after collecting would be utilised to build this road.

In this way, with the road that serves everyone in place, the government would have redistributed that wealth (just as they do in that Madrid restaurant), which had previously been confined to only those at the top of the pyramid.
The Government of Lesotho, just like any government, has to impose levies on a variety of assets and many forms of income in order to finance the all-important service delivery.

Tax revenue collected in Lesotho varies from time to time due to a myriad of factors. In the recent years, tax revenue as a percentage of GDP has averaged anything between 23 to 25 per cent. This translates to around 45 per cent of total revenue collections.
Swaziland, which just like Lesotho depends heavily on SACU receipts, had their tax revenue as a percentage of GDP at 26.4 per cent in 2015/16.
Tax systems differ widely across countries and in some cases within countries. In an effort to boost its revenue collection capacity, the Lesotho Revenue Authority (LRA) has recently been the recipient of a lot of media and social media coverage.

The organisation has been the subject of a lot of critiquing by those who perceive its latest actions to be fair and justified; and in equal measure, those who see themselves as victims of its systems restructuring efforts.
The media has recently covered a story of discontentment in the taxi industry where operators object to the introduction of a flat rate tax (8th February 2018 issue of thepost newspaper). The LRA has also embarked on the campaign to improve compliance.

For a cash strapped Lesotho economy, all these are attempts to efficiently and effectively collect revenue for the government in order to facilitate expeditious service delivery.

There was also a serious outcry on social media recently concerning the alleged raking in and inclusion of the informal sector into the tax net. Due to a number of challenges involved in regulating this sector, it has always proven difficult to impose tax on it. This includes a large number of these businesses.
This sector is largely made up of people who popularly go by the nomenclature, “Baitšokoli” (literally meaning strugglers). Although unregulated, the sector holds a huge potential for an improved revenue collection.
Income tax in Lesotho is charged on income and profits of economic entities where they apply a 20 percent and 30 percent progressive two rate structure.

For the earnings ranging from M1 to M56, 964 per annum, the former rate is charged and the latter is charged on earning above M56, 964. The law also provides that a tax credit, which is a rebate made to entities that earned taxable income in a given year, be directly deductible from the earnings after applying the marginal tax rates to the income.

This is equivalent to M6, 732 for the fiscal year 2017/18. This would mean that someone who gets a monthly income of M2, 805 or lower per month is essentially exempted from paying this income tax via a rebate. How much do participants in the informal sector actually make per month?
There may never be an accurate answer to this question given the diverse nature of businesses in this informal economy. A number of countries have attempted to tax this sector, mainly using a presumptive tax regime, where tax is charged on what can be considered to be average income since actual income is almost impossible to determine.

Should the Government of Lesotho then impose tax on the informal sector? Based on the preceding discussion, the benefits of fairly and successfully doing that are unquestionably great.
Not only will the LRA know that they are able to register and regulate the larger part of their total potential tax base but the organisation would be able to help some of those self-employed sole traders graduate from the informal set up to a formal set up. In this way, the LRA would be able to offer these players incentives to comply with the tax laws whenever there is such a need.

Being able to collect more revenue would certainly be a cherry on top. More revenue of course means a potential growth in GDP. On the flip side, due to the nature of the Lesotho informal sector, monitoring of this sector for compliance purposes might prove a difficult proposition.
Maybe following the previous point, it might prove to be too costly to collect taxes from this sector rendering this effort futile. There is also another interesting dimension to this.

Other than the obvious economic considerations of taxing the informal sector, there are political connotations as well.
Politicians may be hesitant to ‘antagonise’ the electorate with this plan. The name “Baitšokoli” was born out of empathy for these sole traders and this kind of move has the potential to sway opinion regarding the LRA’s or government’s intentions.

They are seen as survivors and taxing these people might prove unpopular. Maybe the question should actually be whether or not it is worth it at all to include the informal sector into the tax net.

Mosito Ntema

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