Creating strategies to widen the tax net in the informal sector of the economy at the Internal Revenue Service

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Date
2004-11-24
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Abstract
The problem of revenue mobilization is one of the foremost for a developing country like Ghana. Government needs revenue for both capital and recurrent expenditure. Revenue generation has traditionally been from two major sources. These are indirect and direct taxes. Since independence indirect taxes have been the major source of government revenue. Direct tax contribution to the national revenue effort has averaged about thirty-one percent from 1999 — 2002. There is therefore the need to increase direct tax contribution to national revenue. Direct taxes in Ghana are collected by the Internal Revenue Service and the various tax components reveal a very disturbing situation. The contribution of those in the informal sector as against those in the formal sector is very low. The informal sector constitutes a very significant portion of the Ghanaian economy. However the informal sector contributes an average of eighteen percent of all direct taxes collected in the country from 1999 — 2002. The situation is totally unacceptable as most affluent people in Ghana are employed in the informal sector. Most of the huge buildings in most of our cities apart from government buildings are owned by them. Most of them own very big businesses and most are found at the central business district of the cities and commercial towns of this country. These are the people who ironically do not contribute much to the national revenue effort. The study therefore seeks to identify the causes of low tax generation from the informal sector and whether the institutions responsible for raising revenue have not lived up to their responsibilities. It also continues to find government’s role in helping to minimize this problem by looking at the relationship that exists between government and the informal sector. To realize this goal a total of four hundred and thirty five respondents were sampled. The respondents comprised members of GUTA, private medical practitioners, lawyers, accountants, architects and graduate spare parts dealers. The analysis of the data gathered from the sample had 95% confidence level and revealed interesting findings. The study established that the process of tax assessment and collection is largely taken out of the hands of the taxpayer. Consequently taxpayers have a very low level of tax awareness about the tax system. It became evident from the analysis that only twenty percent of respondents knew in detail how they were affected by income tax. Furthermore most taxpayers have very low level of education coupled with the lack of record keeping and lack of institutional capacity of the Internal Revenue Service make dealing with the informal sector a very difficult problem. To improve the situation there is the need to get taxpayers know about their tax affairs by getting them involved through education and also increase the capacity of the I.R.S. through training and provision of resources.
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A thesis submitted to the Department of Economics and Industrial Management, Kwame Nkrumah University of Science and Technology in partial fulfilment of the requirements for the award of Master of Business Administration, 2004
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