Informal sector on tax radar as east Africa boosts spending

Governments in East Africa will levy more tax on their informal sectors as they seek to accelerate growth through increased spending, while economies slow in other parts of the continent.

Kenya will reintroduce a new tool to collect revenue from hard-to-tax parts of the economy, Treasury Secretary Henry Rotich announced in his budget speech on Wednesday. His counterpart in Uganda also set out plans to improve compliance in the informal sector.

“Everybody must pay taxes, including the informal sector,” Rotich said. “We must widen the tax net so that every eligible tax payer, including the informal sector, pays tax.”

Treasuries in the region are seeking new ways to raise revenue as their economies enjoy the positive spillover effects of a global slump in commodity prices that have made oil imports cheaper. The World Bank forecasts economic growth of 5 percent or more this year for Kenya, Tanzania, Uganda and Rwanda, which all presented budget plans on Wednesday, while it slashed its projection for Nigeria, one of the continent’s largest crude producers, to 0.8 percent.

Economic Contribution

The informal sector contributes about 55 percent of sub-Saharan Africa’s gross domestic product, according to the African Development Bank. In Kenya, it employs 12.6 million people out of a total workforce of 15.2 million, Kenya National Bureau of Statistics data show. In Uganda, one in five households have an informal business, while almost half of Tanzania’s non-farm employment is informal, the World Bank says.

Kenya, East Africa’s biggest economy, will raise spending for the fiscal year starting July 1 by 28 percent to 2.3 trillion shillings ($22.8 billion), Rotich said. Uganda will raise expenditure 6 percent to 26.4 trillion shillings ($7.9 billion) and Tanzania plans expenditure growth of 31 percent to 29.5 trillion shillings ($13.3 billion), their finance ministers said.

‘Improving Efficiency’

“The strategy for domestic revenue mobilization in the financial year 2016-17 is to expand the tax base by gradually formalizing the large informal sector, improving efficiency in tax collection and compliance,” Ugandan Finance Minister  Matia Kasaija told lawmakers in Kampala, the capital.

Kenya is targeting revenue of 1.5 trillion shillings and wants lawmakers to grant the Kenya Revenue Authority powers to gather more information on taxpayers to be able to catch evaders, Rotich said. Uganda plans to raise 12.9 trillion shillings and Tanzania is seeking to collect 15.1 trillion shillings.

In the case of Kenya, “broadening the tax base is good,” Alan Cameron, an economist at Exotix Partners LLP in London, said by phone. “A large part of the overall investment in the country comes from the public sector, so the extent that they can fund that through taxes as opposed to through debt issuance, that’s a good thing.’’