Strategies Being Devised To Pull Informal Sector Into


With the informal sector now accounting for an estimated 40 per cent of the country’s Gross Domestic Product (GDP), the Ministry of Finance and Planning is seeking to put in place a number of strategies to pull that sector into the tax net.
In a lecture, which was organised by the Students Association of Economics at the University of the West Indies on Thursday (Oct. 16), Finance and Planning Minister, Dr. Omar Davies outlined a number of proposed measures, which he said should be implemented in 2004-2005.
Some of the policies, which are being explored by the task force which was set up by the Finance Minister, and which is headed by State Minister, Senator Deika Morrison, include a no questions asked policy.
Dr. Davies acceded that while this proposal was a controversial one, it would encourage those outside the tax net to start paying taxes, as past tax history would not be an issue. Tax credits would also be offered to small enterprises that employ more than two persons, who were not related to the principal shareholder. A rebate to persons, who abide by the rules or submit their taxes on time, is also being proposed. This rebate may also be applicable to future tax obligations, the Minister informed. In addition, state assistance and access would be linked to persons who are formally registered.
Simplification of the registration process was also being examined, the Minister said, as “the process by which persons become formalised are not very friendly to those who wish to become formalised.although we have taken some steps to simplify the process of registration, there is still some way to go in terms of making formalisation friendly”.
Dr. Davies pointed out that an informal economy was not unique to Jamaica, noting that the International Monetary Fund (IMF) recently reported that for developing countries, the informal sector would represent between 35 and 50 per cent of Gross Domestic Product (GDP); 21-30 per cent for transition economies and up to 15 per cent of GDP in Organisation for Economic Co-operation and Development (OECD) economies.
He further pointed out that a recent Inter-Development Bank (IDB) study commissioned by the Ministry had disaggregated the informal economy into three sections; pure tax evasion, which was failure to fully report earnings from legal activities carried out in properly registered businesses; irregular economy which represented the production of goods and services in unregistered small businesses; and illegal activities, which were those economic activities, which were not measured.
“It’s clear that someone could be in two or more of those groups. In several instances, there are large businesses that report certain activities and hide others,” Dr. Davies noted. Emphasising some of the reasons why it was critical for the informal sector of the economy to pay the relevant taxes, Minister Davies explained that a country’s credit worthiness and its assessment of its indebtedness relied on several critical ratios, such as, debt to GDP; GDP as a percentage of export of goods and services; and the fiscal deficit as a percentage of GDP.
He said that the Ministry’s medium term target was to reduce the debt to GDP ratio from the current 150 per cent to approximately 105 per cent. Dr. Davies further stated, “if you took the estimate of the GDP including the informal economy, the whole ratio is radically changed and what is 150 per cent becomes 107 per cent”.
The Finance and Planning Minister further explained that because the GDP was not being properly estimated, “we may be overstating the extent of our difficulties in terms of those ratios.in the final analysis, whatever the GDP is, what is important is how much taxes we collect rather than the GDP”.
Dr. Davies agreed that there was a strong basis for the fixed salary individual to feel that he or she was being set upon. “There is some justification there, in that, there are some persons with large incomes who are either paying only a part of that income or not paying any at all,” he said, adding “the reality is that there are many important areas of investment in both the social and physical infrastructure which are either being put aside or postponed simply because the level of tax revenue is not consistent with the demands of the population”.
Pointing out that the informal sector also created unfair competition to the formal sector, Dr. Davies said sooner or later some formal importers would be forced out of business, thereby reducing the formal tax pool. “There is a vested interest in us trying to reduce the extent to which those who avoid taxes, do not drive formal businesses out of operation,” he said.
Describing the informal economy as dynamic, Dr. Davies said, “it’s going to move, regardless of what we do,” however he pointed out, countries with a clear set of laws and regulations that were fairly enforced, tend to have a smaller informal economy. “If there is a certainty of action and response from the officials, that is also a framework within which people tend to toe the line. A heavily regulated economy, such as ours, with a weak administrative bureaucracy, opens the door for a growth in the informal sector”

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