Taxing Informal and Hard-to-Tax Sectors: A Policy Guide

Taxing the informal sector remains a challenge in many developing countries. Typical challenges to taxing the informal and hard-to-tax sectors include issues related to data collection, compliance costs, governance weaknesses, and structural economic characteristics. Adding to the challenges, there is very little consensus on the definition and the size of the sectors.

The approach of this publication begins with the principle that the goal of a tax system should be to raise revenue while balancing the objectives of production efficiency and equity. Taking this perspective, this publication will examine what constitutes the informal and hard-to-tax sectors, and the gap between beliefs and evidence on their revenue potential.

Drawing on a study of 17 developing member countries of the Asian Development Bank and on detailed case studies from India, Pakistan, and Viet Nam, the authors explore issues such as institutional weaknesses and barriers to formalization. They explain how smart enforcement can help increase collection and crack down on evasion. Emphasizing the need to fine-tune interventions toward the agricultural sector, they examine how targeted policies can impact levels of informality, reduce the burden on small businesses, and boost revenue outcomes.

Contents

• Informal and Hard-to-Tax Sectors in Asia and the Pacific
• Challenges in Taxing the Informal and Hard-to-Tax Sectors
• Strategies to Tax the Informal and Hard-to-Tax Sectors
• Case Studies
• Conclusion
• Appendix