Wrap up on Strategies for taxation of self employment sector

1. Wrap up on Strategies for taxation of self employment sector A Wrap up at the 27th CATA Annual Technical Conference Port Louis, Mauritius by Berlin Msiska, BA Ed. (Math), FCMA, MaBFD, Commissioner General Zambia Revenue Authority

2. Outline • Overview of Strategies for taxation of the self employment sector:- Barbados • Causes and factors that lead to the creation of informal sector in developing economies:- Nigeria • Key considerations and strategies in registering self employed taxpayers:- India • Compliance and tax recovery problems with self employment taxpayers:- Uganda • Effectiveness of focusing on high risk industries:- Australia • Role of automate database in dealing with the self employment sector:- Canada • Conclusion

3. 1.0 Overview The self employed sector warrants special attention by tax administrators as it represents a significant section of tax paying group and is a conduit of economic expansion in many countries. The self employed operate in nearly all sectors of the economy such as agriculture, fishing, service industry, trading, professionals such doctors, lawyers, accountants, cottage industry, construction and manufacturing. As tax administrators our goals should be to increase the percentage of tax due from the self employed, increase the number of filers, improve the quality of record keeping, increase the level of voluntary compliance and increase the tax revenue due from this sector.

4. 2.0 Causes and factors that lead to the creation of informal sector in developing economies Among many definitions the informal sector is defined as all economic activities in all sectors of the economy that are operated outside the purview of government regulation. The factors that cause the existence of the informal sector include the following: • Excessive regulatory system • High cost of entry into the formal sector • General low tax compliance culture • Bureaucracy and corruption • High level of unemployment • Low literacy level • Low income level in the public sector • Poor infrastructure facilities

5. 2.0 Causes and factors that lead to the creation of informal sector in developing economies … continued The problems that arise from the presence of the informal sector which create complications for the tax administrators include the following: • Poor record keeping culture • Lack of clear cut distinction between ownership and business capital • Lack of communication between government and the business sector The way forward of taxing the informal is to encourage them to conduct their business through organised groups such as partnership, mergers and so on.

6. 3.0 Key considerations and strategies in registering self employed taxpayers Characteristics of self employed taxpayers among many include: • Hard to tax • May be family owned and home based • Majority of transactions are cash based • Not part of formal regulatory system • Not aided by professionals hence not well informed or educated about their rights or liabilities

7. 3.0 Key considerations and strategies in registering self employed taxpayers … continued The key strategies that a country can use in ensuring that those who are self employed are registered by tax administrators include the following: • Introducing a Permanent Account Number for each existing or potential taxpayer that should be compulsorily used or quoted in the day to day business transactions such as opening of bank accounts. • Introduce presumptive income tax on non-auditable cases. • Carry out routine survey and searches of businesses in the economy. • Introduce third party reporting of transactions of existing or potential taxpayers. • Intensify taxpayer education • Introduce a tax return preparation scheme

8. 4.0 Compliance and tax recovery problems with self employment taxpayers Uganda appreciates that self employed operate in formal and informal sector. Generally compliance problems that tax administrators encounter from those who are self employed generally include the following: • Inaccurate or incomplete data on registration for tax purposes • It is difficult to access their areas of operations (homes, undocumented addresses, lack of permanent operational area-brief case business persons) • Lack of records or where records are available income may be suppressed • General lack of entrepreneurial skills among many self employed taxpayers • Self employed usually employ low skilled workers thereby negatively affecting tax compliance through poor record keeping tendencies and failure to file tax returns.

9. 4.0 Compliance and tax recovery problems with self employment taxpayers … continued Even in cases were taxpayers have been identified it is difficult to recover revenue because they may not have fixed places of abode and just general delinquency. The possible ways of resolving these problems may include the following: • Carry out physical door to door surveys to identify taxpayers • Introducing one-stop business licensing authority • Have an integrated registration system across tax types • Introducing withholding taxes especially for taxpayers who do not have permanent premises. • Design simplified tax returns. • Intensify taxpayer education • Avoid back duty liabilities to encourage voluntary compliance

10. 5.0 Effectiveness of focusing on high risk industries Many small businesses operate in industries where cash dealings are common and these tend to be high risk industries for tax administrators which results in failure to report tax due on account of poor record keeping or deliberately doing so for various reasons. Such industries can be identified through taking into account business, industry, sociological, psychological, economic factors or indicators of poor tax performance.

11. 5.0 Effectiveness of focusing on high risk industries From experience using the forgoing indicators high risk industries have Included: • Property, building and construction; • Restaurants, cafes and take away food outlets; • Licensed hotels and clubs; • unlicensed car dealers; fishing; and • Tourism sector.

12. 5.0 Effectiveness of focusing on high risk industries … continued From the Australian experience indicators of poor tax performance included: • Identifying businesses with amounts outside industry ‘norm’, • Conducting audits checking income against key indicators, • ‘Cold-calling’ businesses to check registration details, • Investigating community ‘tip-offs’, and • Investigating business to consumer transactions. However, it is important to take into account that each industry needs its own strategy. General intelligence information gathering and third party information is also important.

13. 6.0 Role of automated database in dealing with the self employment sector … continued The basic assumption or cornerstone of the Canadian tax system is that most persons are honest and given the opportunity will voluntarily comply with tax legislation. In order for automated database to be effective in capturing into the tax base those who are self employed there is need to have processes that assist in identifying taxpayers on an on-going basis. There is also need to have a unique identifier for business houses that can be used to access multiple government programs and services. This same number should facilitate tax administrators in executing compliance activities across all its tax programs.

14. 6.0 Role of automated database in dealing with the self employment sector … continued To facilitate self assessment and voluntary compliance taxpayers should be provided with clear and concise information through readily accessible channels. To facilitate self-assessment and voluntary compliance electronic services options should be available to taxpayers to enable them do business whenever it is convenient to them. Matching programs fosters compliance through use of third party databases information where information on a taxpayer’s tax return is matched to that provided by third party sources. This matching program should be extended to various internal databases and other external databases.

15. 7.0 Conclusion The presence of the self employed is a fact which many tax administrators will encounter and it is only prudent and timely that strategies to tax those in this sector should be implemented. Broad based tax policy structure that cuts across tax types should be carefully considered. Thank you