AN INVESTIGATION INTO THE CHALLENGES OF TAXING INFORMAL SECTOR AND IMPLICATIONS FOR REVENUE MOBILIZATION IN GAROUA MUNICIPAL, CAMEROON

CHAPTER ONE

INTRODUCTION

Background of the study

The informal sector, commonly referred to as the shadow economy or sub-terranean economy, encompasses economic activities that lack official regulation or monitoring. It encompasses a diverse array of endeavours, spanning from selling goods on the street and engaging in small-scale production to providing unregistered services and working for oneself. The informal sector has a substantial impact on several developing and rising countries, often acting as a crucial provider of jobs, income production, and sustenance for a big portion of the population. As per Ardic & Faria (2018), the informal sector may be seen as a reaction to inflexible regulatory frameworks, excessive tax obligations, and restricted availability of official job prospects. Often, people and companies choose to operate in an informal manner because they believe that there are obstacles preventing them from entering the formal sector. These obstacles include complicated bureaucratic processes, expensive compliance requirements, and restricted availability of financial resources and legal safeguards (Adedokun et al., 2016). The difficulties associated with levying taxes on the informal sector have been widely acknowledged as a substantial concern for governments around the globe. Informal enterprises often operate outside the boundaries of the official tax system, avoiding taxes by conducting transactions in cash and deliberately underreporting their revenue. Tax evasion significantly reduces the amount of money that governments get, which weakens their capacity to provide public services, create infrastructure, and implement social welfare programmes (Adedokun et al., 2016). Moreover, tax evasion in the informal sector disrupts market competitiveness, since informal firms may undercut formal operations by evading taxes and avoiding the expenses associated with regulatory compliance (Adedokun et al., 2016). Unfair competition may impede the growth and productivity of formal enterprises, hindering overall economic development and worsening income inequality (Njong & Tih, 2017). Although the informal sector has economic importance, imposing taxes on it presents several obstacles for politicians and tax authorities. Informal firms are often characterised by their small size, lack of centralization, and considerable mobility, which poses challenges in monitoring their operations and ensuring adherence to tax regulations (Njong & Tih, 2017). Furthermore, individuals engaged in informal labour often participate in economies that primarily rely on cash transactions and have little record-keeping, which presents difficulties in correctly evaluating their earnings and tax obligations. The current tax rules and enforcement methods may not be well designed to deal with the distinct features and dynamics of the informal sector. Implementing traditional tax methods, such as income or sales taxes, may be challenging in informal economies because official record-keeping and reporting are uncommon (Khan & Furuoka, 2019). Informal sector taxation typically resorts to alternative techniques, such as presumption or turnover taxes, as a consequence. These strategies may be less fair or effective compared to formal tax systems (Fambon, 2016).  In addition, there are substantial challenges in attempting to formalise the informal sector and incorporate it into the formal economy. Informal enterprises and workers may be hesitant to formalise their operations because they are worried about the added regulatory responsibilities, less flexibility, and potential legal liabilities (Fambon, 2016; Njong & Tih, 2017). Governments must effectively manage the dual objectives of broadening the tax revenue sources while also promoting inclusive and sustainable economic growth.Given these difficulties, there is an increasing acknowledgment of the need for evidence-based research to guide efficient policy measures in addressing informal sector taxes. Therefore, the researcher sought to  investigate the challenges of taxing informal sector and implications for revenue mobilization in Garoua municipal, Cameroon.

1.2 Statement of the problem

In Cameroon, like in most emerging countries, the informal sector plays a substantial role in the overall economy of the country. Nevertheless, the taxation of this industry presents considerable obstacles to the efforts of generating cash, especially in towns like Garoua. Although the informal sector contributes significantly to the economy, it mostly functions without adhering to the regular tax system. This results in the loss of government income and hampers its capacity to adequately finance public project (Ardic & Faria, 2018; Khan & Furuoka, 2019). The informal sector which consists of small-scale firms, street selling, and informal commercial activities often engage in tax evasion by using cash transactions, underreporting their revenue, and participating in irregular employment arrangements. The prevalence of tax evasion affects the efficacy of official tax systems, leading to significant financial losses for governments and aggravating fiscal imbalances. The reasons that contribute to this issue include a lack of formalization, insufficient enforcement mechanisms, complicated regulatory frameworks, and socio-economic obstacles to compliance (Adedokun et al., 2016; Njangang & Nembot, 2017). Moreover, the absence of precise data about the activities and earnings of the informal sector creates additional challenges in terms of tax administration and policy development (Osei-Assibey et al., 2019). Hence, the study investigate the challenges of taxing informal sector and implications for revenue mobilization in Garoua municipal, Cameroon. 

1.3 Objective of the study

The broad objective of the study is to investigate the challenges of taxing informal sector and implications for revenue mobilization in Garoua municipal, Cameroon. The specific objectives is as follows

Ascertain the reason for taxing informal sector in Garoua municipal.

Investigate the impact of taxing informal sector on revenue mobilization in Garoua municipal.

Examine the effectiveness of tax authority in enforcing payment of tax by the  informal businesses in Garoua municipal.

Evaluate the Challenges affecting tax collection within the informal economy in Garoua municipal.

1.4 Research questions

The following questions have been prepared for the following

What is the reason for taxing informal sector in Garoua municipal?

What is the impact of taxing informal sector on revenue mobilization in Garoua municipal?

How effective is tax authority in enforcing payment of tax by the  informal businesses in Garoua municipal?

What are the Challenges affecting tax collection within the informal economy in Garoua municipal?

1.5 Significance of the study

The findings of the study will be significant to the following

Findings from this study will be significance to the tax authority in Cameroon as it will reveal the lapses in the administration of taxes to the informal sector, thereby making recommendations for an improved tax system which will cover both the formal and informal sector. The findings of this study will also add to the existing body of knowledge on informal sector taxation and also contribute to library resources which will further serve as a guide to researchers and scholars.

1.6 Scope of the study

The study focuses on the challenges of taxing informal sector and implications for revenue mobilization in Garoua municipal, Cameroon. Empirically, the study will ascertain the reason for taxing informal sector in Garoua municipal, investigate the impact of taxing informal sector on revenue mobilization in Garoua municipal, examine the effectiveness of tax authority in enforcing payment of tax by the  informal businesses in Garoua municipal and evaluate the Challenges affecting tax collection within the informal economy in Garoua municipal.

1.7 Limitations of the study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection (internet, questionnaire, and interview), which is why the researcher resorted to a moderate choice of sample size. More so, the researcher will simultaneously engage in this study with other academic work. As a result, the amount of time spent on research will be reduced.

1.8 Definition of terms

Informal Sector: The informal sector refers to economic activities that are not officially recognized or regulated by the government. These activities often operate outside the formal legal framework and are not subject to government oversight or taxation. Examples include street vending, small-scale trading, domestic work, and unregistered businesses.

Taxation: Taxation is the process by which governments collect revenue from individuals, businesses, or other entities to fund public expenditures and services. Taxes can be levied on income, consumption, property, and various transactions, and they are typically enforced through legal regulations and administrative mechanisms.

Challenges: Challenges refer to obstacles, difficulties, or problems encountered in the process of taxing the informal sector in Garoua Municipal. These challenges may include but are not limited to compliance issues, enforcement constraints, administrative inefficiencies, lack of data, and socio-economic barriers to tax collection.

Revenue Mobilization: Revenue mobilization encompasses the efforts made by governments to collect funds from various sources, including taxes, fees, and other revenue-generating mechanisms. In the context of this study, revenue mobilization specifically pertains to the collection of tax revenues from the informal sector in Garoua Municipal to finance public services and infrastructure projects.

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