Designing simplified tax regimes to work for women’s economic empowerment

What are simplified tax regimes?

Simplified tax regimes (STR) for business income are commonly introduced to raise revenue, reduce compliance costs, encourage the formalization of small businesses and self-employed entrepreneurs, and facilitate their transition to the regular tax regime. In sub-Saharan Africa, where most small businesses and self-employed are informal,¹ 65% of tax authorities use this regime as one of the key instruments to expand the tax net.² These regimes—sometimes referred to as presumptive, synthetic, or unified tax regimes or a turnover tax—often replace the need to pay corporate income tax (CIT), personal income tax (PIT), value-added tax (VAT), or excise taxes. They aim to simplify compliance by reducing reporting requirements and applying easier methods of tax assessment, typically by levying tax on turnover (gross sales) or indicators (such as number of seats and tables) instead of profits, as is the case with the PIT or CIT.

This brief focuses on the design and administration of these tax regimes in sub-Saharan Africa, with attention to how they may affect women and men differently. It discusses design features that could enhance the equity and efficiency of these regimes and reduce barriers to women’s economic empowerment. It also outlines a future research agenda to strengthen the evidence base. However, it does not cover other regions, such as Latin America or Eastern Europe, because the challenges associated with these regimes differ and are addressed in other publications.³

Why is this tax regime relevant for women’s economic empowerment?

In sub-Saharan Africa, the design and administration of simplified taxes are more important for women than the PIT or the CIT, as women are more likely to run small-scale or informal businesses than to be formal employees or owners of large firms. For instance, in sub-Saharan Africa, 60% of countries with a simplified business tax do not apply a minimum exemption threshold.⁴ This means that even the smallest subsistence-level microenterprises are subject to taxation, raising concerns about the onerous burden placed on vulnerable entrepreneurs, many of whom are women. Given the limited wage employment opportunities in the region—where only 16.5% of employed women and 27.4% of employed men are wage and salaried workers in 2023⁵—creating an enabling environment for entrepreneurship and private sector development is essential for self-employed individuals and entrepreneurs who rely on these businesses for their livelihoods. The design and administration of STRs therefore can play a critical role in supporting—or hindering—entrepreneurship development and women’s economic empowerment.

Many tax administrations in sub-Saharan Africa have also led mass registration campaigns to bring informal businesses onto the tax register, but these efforts have often resulted in registering low-income businesses or vulnerable own-account workers rather than higher-income businesses.⁶ These mass registration campaigns are likely to disproportionately affect women because they predominate in the lower end of the income distribution.⁷

These regimes raise little in tax revenue

In low- and middle-income countries, the simplified regimes cover a large percentage of taxpayers but do not contribute much to tax revenue.⁸ In Côte d’Ivoire, the simplified (or synthetic) tax regime raised 0.025% of GDP in 2021, compared to 1.5% of GDP from the CIT, even though a third of all businesses were microbusinesses.⁹ In Kenya, the turnover tax contributed even less, only 0.002% of GDP in 2023.¹⁰ Similarly, in Zambia, over 80% of taxpayers are registered under the turnover tax regime, yet these only account for 5% of total tax revenue.¹¹ In Tanzania, tax revenues did not improve even as the number of taxpayers increased.¹² Given that the simplified regimes generate limited tax revenue, some authors argue that revenue mobilization should not be emphasized as their primary objective¹³—even though governments continue to pursue them with the goal of raising revenue.

If these regimes do not generate significant revenue, the key question is whether they achieve other objectives—such as fostering firm growth and facilitating transitions to the regular tax regime through formalization. Empirical evidence suggests that tax registration by itself does not lead to benefits for most informal businesses.¹⁴ Those that do benefit tend to be larger and already share similar characteristics with formal enterprises, as seen in Benin.¹⁵ Similar findings are observed in Sri Lanka¹⁶ and Bolivia.¹⁷ If business owners perceive benefits from formalization—such as increased sales, improved access to financial services, or eligibility for government contracts—they may be more willing to comply with tax obligations, thereby increasing tax morale.¹⁸ These findings indicate that tax enforcement efforts may be more effective targeting larger informal businesses, rather than small, subsistence firms.¹⁹

While intended to be simple, the design of these regimes can be complex

There is considerable variation across countries in the exemption thresholds, tax bases, and rates applied under STRs—some of which are complex, running counter to the intention of a simplified tax. For example,

• For taxes on business income in Côte d’Ivoire, there are: the regular regime, the simplified regime, the micro-enterprise regime, and the entrepreneur regime; each of these has its own thresholds, tax bases, and rates.²⁰ These differences add complexity and create opportunities for arbitrage and tax planning. There is also a discrete jump in tax liability between the entrepreneur and microenterprise regimes when a business exceeds the FCA50 million (approx. $87,000) threshold, resulting in a disincentive to report income above this level.²¹
• The presumptive tax in Ethiopia involves multiple rates by activity and turnover, comprising lump sum tax liabilities for 99 different business activities and 19 turnover bands (with a total of 1,881 activity-turnover bands).²² The difference in effective tax rates can have a diverse impact on women and men because of the prevailing employment patterns. The effective tax rates are high for food and beverage services, which is a sector predominated by women, and lower for construction.²³ In addition to the presumptive tax (which replaces the CIT), Ethiopian small businesses are subject to a turnover tax (which replaces the VAT) and charges a high rate of 10% on turnover for most services.²⁴ The existence of two taxes places a significant burden on small businesses.
• Countries like Uganda²⁵ and Tanzania²⁶ apply differentiated tax rates depending on whether businesses keep financial records, adding administrative complexity and a lack of clarity on how tax rates are determined in practice. Women-owned businesses may be more affected by the higher tax rate because they are less likely to maintain financial records. This administrative ambiguity gives tax officials considerable discretion in determining tax liabilities, leaving open opportunities for inconsistent enforcement and rent seeking.²⁷

The administration of this tax can unintentionally burden low-income taxpayers, disproportionately affecting women

The way this tax is administered can negatively impact vulnerable taxpayers. In Kenya, about 70% of low-earning businesses that should be exempt on paper are still paying the turnover tax.²⁸ This happens because while the turnover tax filing and payments are made monthly, the exemption threshold is assessed on annual revenues without opportunities to reconcile payments at the end of the year. This misalignment between filing and assessment and a lack of reconciliation procedures impose high costs for microbusinesses, which are predominantly owned by women.²⁹

There are also differences in the extent to which tax officials are directly involved in assessing business tax liabilities. For example, Rwanda’s mobile phone platform (M-declaration) enables small taxpayers to declare their turnover via mobile phones, with the system automatically calculating the taxes due.³⁰ In contrast, some countries have introduced block management systems, which entail significant involvement of tax officials in the assessment process.³¹ In Ethiopia, the government deploys revenue assessment teams every several years to estimate firms’ average daily revenue, which is then extrapolated to annual turnover using an assumed number of working days.³² A survey of taxpayers conducted following the tax assessment in Addis Ababa found considerable dissatisfaction, citing a lack of clarity, objectivity, and failing to account for seasonality.³³ In Zambia, a similar survey of taxpayers found that bargaining between tax collectors and taxpayers over how much tax to pay was widespread.³⁴ Administrative costs associated with door-to-door tax collection from small businesses can be expensive. For example, in the 2017 Addis Ababa presumptive tax assessment, 1,776 people took part in the revenue assessment committees, which entitled them to a daily fee of 150 Birr for 30 days on top of their regular benefits.³⁵

Considerations for improving the equity and efficiency of the simplified tax regimes

Given available evidence, several considerations or lessons can help ensure that STRs do not inhibit women’s economic empowerment or private sector development.

1. Simplify the tax regime: The lack of simplicity in some of these regimes runs counter to the original aim of simplifying procedures and reducing compliance costs. To simplify the system, it is recommended to limit differentiated tax rates to one or two sectors³⁶ and reduce the number of simplified regimes, thereby minimizing opportunities for arbitrage.
2. Avoid ambiguous features that are subject to interpretation by tax officials: This includes clearly defining the boundaries of business activities subject to different rates and avoiding features like rate differentiation based on record-keeping status.
3. Set minimum exemption thresholds to avoid taxing subsistence firms: To ensure that the poorest individuals are exempt from paying this tax, minimum thresholds should be introduced and periodically adjusted for inflation over time so that subsistence firms around the poverty line, which tend to be women-led, do not creep into the tax net.³⁷ Administrative efficiency and revenue mobilization can be achieved by targeting higher-income informal businesses than microbusinesses or subsistence firms.
4. Coordinate with the regular tax system, such as the VAT, PIT, and CIT: Setting the threshold for the simplified tax too high can be distortionary by encouraging taxpayers to migrate to this tax in order to pay a lower tax. The VAT registration threshold often aligns with the threshold for the simplified business tax because firms capable of complying with VAT requirements are generally also considered able to comply with the CIT.³⁸ The tax rates for the simplified tax cannot be set too high, as this could disincentivize formalization, but setting them too low could inadvertently discourage transition to the regular tax regime.³⁹
5. Clarify the eligibility criteria: The simplified regime should clearly define the eligibility of taxpayers, the taxes covered, and the activities that are excluded. It is common practice to exclude liberal professionals (e.g., accountants, doctors, and lawyers) because they are considered capable of filing with the regular tax regime.⁴⁰
6. Conduct taxpayer education and simplify the filing and assessment process: Raising taxpayer awareness of minimum exemption thresholds and allowing for tax reconciliations would ensure that low-income earners who are meant to be exempt do not end up paying this tax.⁴¹ For example, Rwanda has seen improvements in taxpayer knowledge and compliance as a result of the revenue authority’s efforts in delivering targeted taxpayer education programs.⁴² Registration, filing, and assessment processes should be simple, streamlined, and not overly burdensome in order to minimize compliance costs.
7. Digitization of tax systems can remove key barriers to tax compliance for women but could also bring new challenges: Digital tax systems can ease constraints related to mobility and time—factors that tend to disproportionately affect women due to childcare responsibilities and restrictive social norms.⁴³ Additionally, reducing direct interactions with tax officers can be particularly beneficial for women, who may be more vulnerable to gender-based harassment and corruption.⁴⁴ However, digitalization could also inhibit women’s access to the tax system due to prevailing gender digital and literacy gaps and women’s limited knowledge of the tax systems. For women to fully benefit, digital technologies should be accessible to women, appropriate, user-friendly, and low-cost.⁴⁵ In some cases, tailoring taxpayer services to the differential needs of women and men may be warranted to facilitate tax compliance.⁴⁶ For example, Uganda has appointed women in border posts of the Uganda Revenue Authority to serve female cross-border taxpayers.⁴⁷ Similarly, one-stop-shop taxpayer services, such as the case in Khyber Pakhtunkhwa, Pakistan, could reduce compliance costs.⁴⁸
   

Existing evidence suggests that simplified tax systems are not achieving their objective of raising revenue. Moreover, in sub-Saharan Africa, there is limited evidence on whether these regimes have reduced compliance costs or supported the transition of businesses into the regular tax regime. Despite these concerns, data-driven assessments of the effectiveness of the STRs have only recently begun.

Revenue administrations can partner with researchers to evaluate the performance of the simplified regimes and to assess taxpayer behavior, such as whether businesses are growing or whether there is evidence of tax planning. The availability of sex-disaggregated tax administrative and survey data is especially valuable for identifying whether women and men behave differently, whether their businesses grow at different rates, or whether they face distinct constraints in tax compliance. There is also evidence that small businesses and self-employed individuals in this region bear a disproportionate burden from local taxes and fees.⁴⁹ This highlights the need to better understand the tax compliance costs borne by this taxpayer segment and how these costs can be reduced. Evaluating STRs through the lens of the cost of doing business and adhering to the principles of equity, efficiency, and ease of administration is essential to create an enabling environment for entrepreneurship, private sector development, and women’s economic empowerment.