Taxation and Informal Sector: A Case Study of Bolgatanga Municipality

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Many developing countries including Ghana are faced with the problem of raising the necessary revenues to meet governments’ expenditures. Governments’ budgeted revenues usually fall short of the expected expenditures. Owing to the lack of liquidity on the international market due to the current financial crisis domestic revenue mobilization is seen as the most reliable source of revenue mobilization. Taxation is therefore seen as the most efficient and effective means of raising revenue domestically for the government. One major sector of developing countries that should have contributed greatly to domestic revenue mobilization through taxation is the informal sector given its employment size and contribution to GNP of low-income countries. But the tax inflow from the informal sector relative to its sheer size is just a drop in the national coffers. Over the past years almost every aspect of dealing with the informal sector has been a problem which has defied all measures aimed at improving the relative share of taxes of the sector. In this regard, the study sought to find out why non compliance with income tax is high in the informal sector and besides, explore further the challenges in taxing the informal sector in Bolgatanga Municipality. In order to achieve the objectives of the study, a sample size of seventy-five (75), comprising seventy (70) tax payers and five tax officials in the Bolgatanga Municipality responded to the administered questionnaire. At the end of the study, it was established that factors such as application of sanctions, regular tax education, anticipation of benefits, high tax rates, among others affect compliance level of the tax payers while capacity constraints, large size of the informal sector, large size of the tax district, improper books of accounts were some of the challenges facing the tax district in the Bolgatanga Municipality. Measures such as intensive and regular monitoring; capacity building; logistical support; regular tax education and advertisement; effective customer relations among others were recommended as means of raising compliance level of tax payers as well as reducing the challenges in taxing the informal sector in the tax district.
A Thesis submitted to the Institute of Distance Learning, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of Commonwealth Executive Masters in Business Administration,