White Paper:
Pathways to Formalization, A Tax Compliance Strategy for MSME’s
As companies work to reduce barriers to access and participation, as well as remove systems of exclusions from their operational practices, they should look at how educational and formalization training solutions for local businesses can be a part of their comprehensive growth, impact, and environmental and social governance (ESG) strategies. She Grows It™ (SGI) has explored how Ghanaian-owned businesses can be a significant component to increasing tax revenue and growing Ghana Beyond Aid.
Here is a summary of the opportunities and challenges to consider:
BUSINESS PROVIDES A SIGNIFICANT PATH TO ADDRESSING TAX COMPLIANCE.
In the Ghanaian business ecosystem, roughly nine out of ten businesses are MSMEs, which presents 60% of the labor force and contributes 22% to the Gross Domestic Product (GDP). However, employment in Ghana is predominantly informal as more than 80% of the employed are working in the informal sector. Over half of the employed (55.9 %) are own-account workers (self-employed), 20% are employed in family enterprises, and 17.6% are wage employees. Yet, studies from the World Bank, IFC, and Ghanaian academics show that MSMEs could provide more revenue through formalized business practices.
To tap into the full profit potential of businesses, actions can be taken to keep more businesses operational as formal entities and avoid regression to informal practices by improving the management of existing businesses, increasing access to technological resources, and using more business practices that increase the transparency of transactions and encourage the cycle of investment. However, there is no clear national policy and support for MSMEs; often seen as ad hoc, irregular, and uncoordinated.
MSME BUSINESS OWNERS ARE AN UNTAPPED OPPORTUNITY TO INCREASE ECONOMIC GROWTH
To tap into the economic potential of Ghanaian business, the greatest opportunity lies in MSMEs. MSMEs collectively own the largest portion – 90% - of all businesses. The majority of owners own micro, smaller, boutique, magazine-style businesses and employ between 6 and 100 people. Micro and small businesses also employ between 85% - 90% of the labor force in the least developed parts of Ghana. This makes the MSMEs sector the most important sector in the Ghanaian economy for policymakers, development practitioners, and community leaders to continue to initiate, develop, and direct pragmatic strategies to improve the sector.
More importantly, their values align with the needs of Ghana’s business environment and investment climate. MSME business owners care about the health of their family and community, and they care about seeing their business regenerate economic returns today as well as for future generations.
Yet, few are taking action to do so. Nearly 2 out of 3 micro and small owners have a household income of $26,000 (GHS 102,000), which increases to $1,022,000 (GHS 4,037,000) for medium-sized firms. Ghana needs economic diversification and efforts from the government to increase industry share of GDP by both making Ghanaian manufactured goods competitive in the domestic and international markets, as well as maximizing the use of local raw materials in the industry. Business owners also struggle to find information and trusted resources to help them achieve these stated goals and objectives required for the business and industry growth that equates to local sector ownership. Removing these barriers can help empower business owners to access more financing options for their enterprises.
FINANCIAL MARKETS CAN EMPOWER MSME BUSINESS OWNERS TO ACT
Markets, specifically formalized markets are an effective mechanism to help combat cost barriers for business owners. Increased access to financial and technical markets provides business owners with an avenue to bring in income from their business to cover the cost of needed management activities and drive economic stimulus to rural areas. They offer business owners a voluntary option for action, complementing government tools and leveraging private-sector investment, to help achieve scale across the country.
However, the reality is that the current business formalization system presents challenges for the majority of MSME owners, and therefore limits their ability to participate in the formal economy. More than 90% of all registered companies in Ghana are MSMEs, accounting for over 70% of the country’s GDP, but only a very small portion of these businesses are ready for investment. Less than 5% of businesses operating in the business ecosystem in Ghana are formal enterprises, which is mostly due to the current business ecosystem’s complexity, cost of formalization, and business owners’ limited access to and engagement from the financial sector and the information communication technology sector. It is also due to a lack of appropriate educational resources.
THE PATHWAYS TO FORMALIZATION PROGRAM BRINGS TOGETHER MSME BUSINESS OWNERS, POLICYMAKERS, AND AGENCY TO ADDRESS TAX MOBILIZATION
The Pathways to Formalization Strategy is a new program, created by She Grows It (SGI) the Ghana Inclusive Development Research Network (GIDRN), and Fluid Finance Technologies to increase educational opportunities, financial access, and technological resources to MSME business owners, empowering them to be able to help address Ghana’s tax mobilization challenges.
The Pathways to Formalization Program connects MSME owners with trusted information, professionals, and relevant programming that helps them implement ESG-positive business management practices, which can help bring economic stimulus to rural communities. Learn more about policy initiatives like the Ghana Beyond Aid dedicated to helping programs like this for business owners.
For companies seeking to reduce ESG risks or address diversity, equity, and inclusion (DEI) in human resources and organizational policies, the Pathways to Formalization Program provides a verified procurement list of local businesses in respective industries that can be mentored and sourced for projects, programs, and sub-contracts. In addition, it provides companies an avenue to support MSME owners through economic stimulus, makes a positive impact on the growth of local industry and sector, and supports the formal growing regenerative private economy of Ghana.
LEARN MORE ABOUT THE PATHWAYS TO FORMALIZATION PROGRAM AND HOW YOU MIGHT PARTNER WITH SGI, GIDRN, & Fluid.
SIGN UP TO RECEIVE INFORMATION ON PATHWAYS FOR FORMALIZATION
Interested in receiving research like the above or other updates related to business, industry, and sector growth strategies?