Question

Currently, the annual personal income tax per capita is lower than 30ghc and this is considered woefully inadequate.

Meanwhile, many in the formal sector has been over burdened with income tax, some paying above 10,000ghc a year in tax. Nevertheless, those in the informal sector are left to hide in the underground economy .

The government needs more tax revenues from the informal sector to reduce budget deficit and associated borrowing.

In the 2020 fiscal policy, government proposes to rope many hitherto out of the tax net into the tax net so as to increase taxes from the informal sector.

Required
Suggest to Government four policy measures it should implement in order to achieve the 2020 fiscal policy objective

Answer 1

Hello! Below is the answer for your question. Hope it helps.

Most of the people working in the informal sector are the ones who are in the lower income bracket. Taxing the people in the lower income bracket would hit them, who are already struggling to meet their expenses with the lower incomes they earn.

On the other hand there are many who are in the informal sector but earn very high incomes, but evade the taxes due to low chances of detection and penalties.

So the solution is to bring everybody from the informal sector in the formal sector and then tax them as per their income levels. The four policy measures in this regard can be:

1. Maximise and slowly make it compulsory to make all payments only through banking channels in the informal sector industries. This will provide information to the government as to what people working in these industries are actually earning.

2. There should be system of annual return filing and submission of information from the entities working in these informal sectors to the government. The information should comprise the names and tax indentification numbers of all the employees, their annual salaries and major expenses made by the entities and to whom.

3. There should be a large scale drive for everybody to get tax identification numbers with the assurance of no harassment or unnecessary information seeking from genuine low income people. Only people who show chances of tax evasion should be targeted and pursued.

4. The government may revise the tax brackets and various exemptions and deductions as per the earnings and tax paying capacity of all the individuals but should not burden the lower income groups with taxes. Instead it should try to bring everybody in the formal sector and then target the people indulging in tax evasions and malpractices.