An Examination of Constraints of Taxing the Informal Sector and the Impact on Revenue Mobilisation in Zambia

Abstract

Taxation is a fundamental tool for revenue generation, economy building and sustainability, reducing market externalities, regulating trade, stimulating representation and achieving tax justice as well as building state accountability and responsiveness. The informal sector in developing countries generally and Zambia particularly has been considered a hindrance to effective domestic revenue mobilisation, hence the rejuvenated focus to bring the sector into the tax baskets. Through a critical literature review, this study sought to identify the varying motivations tabled by the various stakeholders (policy-makers, scholars and tax administrators) in literature on the need to administer tax on this sector and to strengthen enforcement and to evaluate the plausibility of these motives critically. A total of 34 journal articles extracted from Goggle scholar, Research gate, Semantic Scholar and JSTOR formed the literature review. The factors were aggregated into five major groups: political interference, high cost of collection, lack of formality and limited potential for revenue. This study, therefore, conducted a profound evaluative analysis of literature on these factors, pinpointing any voids that future research could address and accordingly sought to contribute to the guidance offered to policy-makers on how to improve informal sector. The study shows that political interference with frequency of 12 at 35%, followed by limited revenue potential with frequency of 9 at 26%, high cost of collection with frequency of 8 at 24% and lack of formality at frequency of 5 at 15% in that order.