A critical review of the taxation of the informal sector in Zimbabwe
Taxation is considered a source of stable, predictable and sustainable government revenue, yet taxation of the informal sector continues to be an intractable challenge for developing nations such as Zimbabwe. Tax compliance is arguably very low in this sector and tax revenues correspondingly minimal, notwithstanding the continued burgeoning of the sector which, heightens tax evasion and avoidance leading to an even greater decline in overall tax collections. This robs the government of finance and impedes economic development. Taxation of this sector remains an absent or nascent block in contemporary tax discourse as the discussions often concentrate on enhancing formal sector tax compliance on tax heads such as VAT, corporate tax and PAYE among others. Zimbabwe has a large and growing informal sector and introduced presumptive tax in 2005 and further enforced it in 2011, after the economy dollarized in an effort to broaden the tax base and increase government revenue. The sector is contributing very little to the revenue basket and the country continues to face budget deficit challenges. It is against this background that this study sought to review informal sector taxation in Zimbabwe. This study makes a contribution to the tax body of knowledge as informal sector taxation continues to be a topical and extant issue. In addition, the study tackles the methodological gap by employing the sequential exploratory mixed method research approach in an area that is predominated by the use of singular methods, which is either qualitative or quantitative research in isolation. Data was gathered through the use of in-depth interviews, document analysis and questionnaires. Thematic analysis was employed with the aid of NVIVO and SPSS. The study found that most challenges of informal sector tax compliance emanate from the institutional environment, the nature of the sector as well as the design of informal sector tax systems (presumptions especially the “one size fits all fixed rates”). The constraints are namely bureaucratic and stringent regulatory systems of operating formally, high tax rates, low incomes and corruption which is fuelled by political interference. The low compliance was further compounded by the weak capacity of ZIMRA. In light of the above findings, the study recommends that the key to unlocking the potential contribution of the sector lies with the government, as several policy implications are drawn. Policy makers will need to improve and simplify the registration requirements and processes, the labour laws, tax policy and administration if they are to bring the informal sector into the tax net and harness its revenue potential. Simplified tax legislation, a well-researched tax system supported by a capacitated tax administration that upholds relational reciprocity and a government that fulfils the implied social contract will complement these ameliorations. Training, stakeholder engagement, tax education and development programmes will go a step further to improve the informal sector tax compliance capacities and capabilities.