The informal economy is not only an issue of concern in Egypt, but in most developing countries. In Egypt, informal activities account for 37-68% of the country’s gross domestic product (GDP), and 48-70% of employment, according to estimates by the African Development Bank (AFDB).
The informal sector plays a significant role in production, distribution, wealth creation, and support for the country’s most vulnerable citizens. Only a fifth of people working in the informal sector do so by choice.
The informal economy is not taxed on income or revenue, and presents an opportunity for the National Treasury to broaden its tax base.
Aside from the practical challenges of taxing unrecorded economic activity, taxing the informal sector needs to adhere to an important social contract: that paying taxes leads to a more enabling business environment and a better country to live in.
Egypt’s informal economy has grown as a result of dysfunctions in the formal economy, which lacks the dynamism, flexibility, and resilience that can be found in the informal economy. Restrictively high costs and burdensome procedures for registering and operating in the formal economy have blocked many entrepreneurs and workers from entering the formal sector.
To tackle these issues, the legal and administrative procedures, and costs of starting and running a business need to be minimised and made more transparent, according to the AFDB recommendations.
Minister of Finance Amr El-Garhy announced on Wednesday that the government is being diligent in its efforts to absorb the informal economy into the official one.
That goes hand in hand with the Central Bank of Egypt’s initiative encouraging banks to fund small- and medium-sized enterprises (SMEs). This initiative also requires that banks reform the laws and regulations for SMEs, and allocate 20% of their loan portfolio to these projects.
Furthermore, the draft law for the value-added tax (VAT), that awaits parliament approval, aims to implement an integrated and simplified tax system for micro and small businesses, without burdening their owners with additional taxes.
Tax collection is a business case for not only the tax regulator, but also the trader and the economy. The government claims that all tax collection benefits the country and helps the state support the country’s businesses and its people.
Conversely, under current circumstances, that is not always the case. When a state spending system is plagued by inefficacy and corruption, where the state can offer little in return to the informal economy, tax submission will never be voluntary.