A Wrap up at the 27th CATA Annual Technical Conference

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 taxpayers 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