Formalisation of informal sector as a revenue generation strategy: the case of furniture manufacturers in Glen View, 2009-2016.

Abstract

The thrust of this study was to explore formalisation of the informal sector as a strategy for creation of fiscal space in Zimbabwe, with particular reference to furniture manufacturers in Glen View, Harare. The research was motivated by the fact that the informal sector has become an important segment of many economies and is estimated to represent more than 95% of all global entities. In Zimbabwe, there are about 1.2 million SMEs, employing around 4.5 million people in small-scale manufacturing, trade and services, and contributing about 40% to GDP. However, the SMEs are contributing less in terms of tax revenue and lack of formalisation could have been one of the causes. Therefore, this study sought to assess formalisation of the informal sector as a strategy for revenue generation in Zimbabwe, with reference to furniture manufacturers in Glen View. There were five specific objectives, the first one being to establish the amount of revenue contributed by the informal furniture makers in Glen View between the years 2009 and 2016. The second objective was to assess the possible types of formal businesses that furniture makers in Glen View can establish. The third objective was to examine the potential impact of formalisation of informal businesses on revenue collection. The fourth objective was to interrogate the barriers to the formalisation of informal furniture manufacturers in Glen View. The last objective was to propose options for spearheading the formalisation of informal furniture manufacturers in Glen View. This study was a survey of furniture manufacturers in Glen View. The researcher collected data from a sample of furniture manufacturers in Glen View, Ministry of SME officials, ZIMRA tax officers, and SMEDCO officials. The researcher used questionnaires and interviews as research instruments. The study found out that the furniture manufacturers in Glen View were not paying taxes and Council rates. The Glen View Furniture Complex was being used for individual benefit by ‘space barons’ and the government was not benefiting anything. The research showed that the furniture manufacturers could formalise through the establishment of sole proprietorships, partnerships, and cooperatives. It was pointed out that formalisation of SMEs benefits the national economy, improves revenue collection, and is beneficial to the SMEs. Nevertheless, there were barriers to formalisation of SMEs, which include high costs of tax compliance and too much paperwork to formalise. A number of options were proposed to spearhead formalisation and they included reducing administrative barriers through online registration, encouraging voluntary tax compliance, provision of incentives and facilities to the SMEs, and the need for the SMEs to adopt acceptable accounting practices. The study came up with some recommendations, which could spearhead the formalisation of SMEs and widen the tax revenue base. The first recommendation was that there was a need for the eradication of corruption, ‘space barons’, respecting of the law. The second recommendation was that there was a need to promote voluntary tax compliance and to coordinate tax collection. The third recommendation was that there was a need to simplify the registration procedures and to provide information on the path to be followed during formalisation. Finally, it was recommended that it was essential to provide incentives to the SMEs, which included construction of workshops for registered SMEs, assisting in marketing, and preferential treatment to the registered firms.