A STUDY ON THE OBSTACLES TO TAXING THE INFORMAL SECTOR AND THEIR IMPACT ON REVENUE GENERATION IN GAROUA MUNICIPALITY, CAMEROON

CHAPTER ONE INTRODUCTION 1.1 Background of the Study Many developing countries around the world are currently grappling with a range of financial challenges. These challenges are closely linked to troubling global economic trends that have raised widespread concern in recent years. Nigeria presents a particularly unique case due to its overdependence on a single source of revenue—crude oil—which accounts for more than 90% of the nation’s income. This heavy reliance on oil leaves the country highly susceptible to both external and domestic economic fluctuations. As government spending continues to rise while internally generated revenue declines, and with the added pressures of foreign exchange shortages, a drop in global oil prices, soaring inflation, widespread poverty, and a lack of essential infrastructure, there is a pressing need to reconsider foundational fiscal strategies. One of the most viable strategies involves maximizing tax revenue through improved taxation systems. In Cameroon, the informal sector plays a vital role in contributing to employment generation, income distribution, and poverty reduction. However, effectively taxing this sector remains a longstanding challenge, especially in cities like Garoua. Garoua Municipal, located in the North Region of Cameroon, is known for its bustling informal economy, composed of small-scale businesses, street vendors, artisans, and service providers. Despite the sector’s economic significance, it largely operates outside the formal tax framework, resulting in substantial revenue losses and limiting the municipal government’s ability to raise funds (Ardic & Faria, 2018; Njangang & Nembot, 2017). The difficulty in taxing Garoua’s informal sector is rooted in several complex issues. These include a general lack of formal business registration, weak enforcement mechanisms, burdensome legal requirements, and socio-economic constraints that hinder compliance. Many informal businesses in Garoua Municipal are unregistered and operate without legal recognition, making it difficult for tax authorities to track and assess them (Adedokun et al., 2016). Furthermore, limited resources and ineffective enforcement strategies impair the authorities' ability to manage tax compliance efficiently (Njong & Tih, 2017). Additionally, the regulatory and administrative processes in place are often overly complicated, which discourages voluntary compliance and instead encourages evasion or avoidance (Osei-Assibey et al., 2019). Socio-economic factors such as poverty, limited access to education, and a lack of financial services also pose barriers to tax adherence for those working in the informal economy (Khan & Furuoka, 2019). These challenges have significant consequences for public revenue collection and the delivery of essential services in Garoua Municipal. The low level of tax revenue from the informal sector restricts the local government’s ability to invest in infrastructure, deliver public services, and implement poverty alleviation initiatives (Fambon, 2016). Furthermore, the inability to effectively tax this sector exacerbates inequality within the tax system and undermines the principles of fairness and tax justice. Considering the informal sector’s critical role in Garoua’s economy and the considerable difficulties involved in taxing it, there is a clear need for in-depth research. This study aims to explore the specific challenges faced by taxpayers in the informal sector and assess how these challenges impact revenue generation. The research is intended to offer practical recommendations to policymakers, tax administrators, and other stakeholders to enhance tax collection processes and strengthen the overall tax system within Garoua Municipal. 1.2 Statement of the Problem In Cameroon, as in many other developing countries, the informal sector contributes substantially to the national economy. Yet, taxing this sector effectively presents a serious hurdle to government revenue generation—particularly in areas like Garoua. While this sector plays a significant economic role, it often functions outside the reach of the formal tax system, resulting in lost income for the government and undermining efforts to fund infrastructure and public services (Ardic & Faria, 2018; Khan & Furuoka, 2019). In Garoua Municipal, the informal economy—comprising small-scale enterprises, street trading, and unregulated commercial activity—either escapes taxation entirely or is taxed at very minimal levels due to several persistent issues. These include a lack of business formalization, weak tax enforcement capabilities, intricate regulatory systems, and socio-economic challenges to compliance (Adedokun et al., 2016; Njangang & Nembot, 2017). Moreover, the lack of accurate data regarding the operations and income levels of informal businesses complicates the formulation of effective tax policies and enforcement strategies (Osei-Assibey et al., 2019). The research thus seeks to address the inefficient taxation of the informal sector in Garoua and the implications this has for revenue mobilization. Although informal enterprises form a critical part of the local economy, their tax contributions fall far short of their actual economic potential. This shortfall leads to significant fiscal constraints and impairs the ability of local authorities to meet public needs (Fambon, 2016; Njong & Tih, 2017). The goal of this research is to examine and evaluate the unique challenges hindering the effective taxation of the informal sector in Garoua Municipal. The study will also assess how these issues affect revenue collection and propose strategies for strengthening tax policies, enforcement, and compliance to improve overall tax revenue from this critical sector. 1.3 Objectives of the Study The main objective of this study is to investigate the challenges involved in taxing the informal sector and the implications these challenges have for revenue mobilization in Garoua Municipal, Cameroon. The specific objectives include: i. To evaluate the level of tax compliance among informal sector operators in Garoua Municipal. ii. To assess how effective current tax policies are in addressing informal sector taxation in Cameroon. iii. To explore how informal sector participants in Garoua perceive taxation. iv. To examine the effect of informal sector taxation on revenue generation in Garoua Municipal. 1.4 Research Questions The study will be guided by the following research questions: i. What is the level of tax compliance among informal sector operators in Garoua Municipal, Cameroon? ii. How effective are existing tax policies in regulating and taxing the informal sector in Cameroon? iii. What are the views and attitudes of informal sector participants towards taxation in Garoua Municipal? iv. What impact does taxing the informal sector have on revenue mobilization in Garoua Municipal, Cameroon? 1.5 Significance of the Study This study will be valuable to a variety of stakeholders: Policymakers: The findings can help guide the creation or revision of tax policies aimed at improving revenue collection from the informal sector. By identifying the main challenges faced by informal business operators, targeted strategies can be developed to boost tax compliance, reduce evasion, and broaden the local tax base. Academics and Researchers: The study will contribute to the academic understanding of informal sector taxation in sub-Saharan Africa. It will provide a foundation for future studies, comparative research, and theoretical exploration in public finance and taxation disciplines. 1.6 Scope of the Study This research focuses on identifying the challenges associated with taxing the informal sector and their implications for revenue mobilization in Garoua Municipal, Cameroon. Specifically, it will examine the degree of tax compliance, evaluate the effectiveness of tax policies, assess perceptions of informal sector operators, and investigate how informal sector taxation influences revenue generation in the municipality. 1.7 Limitations of the Study As with any academic undertaking, a few limitations were encountered during this research. Financial constraints limited the researcher’s ability to access extensive materials and resources, including online databases, printed literature, and logistics for data collection through surveys or interviews. This financial limitation also influenced the choice of a more modest sample size. Additionally, balancing the research with other academic responsibilities meant that the time allocated for the study was somewhat restricted. 1.8 Definition of Terms Informal Sector: Refers to business and economic activities that are not officially registered or regulated by government authorities. These include street vendors, home-based enterprises, and unregistered small businesses operating outside the formal economy. Taxation: The process by which the government collects financial contributions from individuals and businesses to fund public services and projects. Taxation can involve various forms such as income tax, sales tax, or property tax. Challenges: These are the various difficulties or obstacles that hinder effective taxation in the informal sector. They may include issues of compliance, poor enforcement, data gaps, complex administrative processes, and socio-economic barriers. Revenue Mobilization: Refers to the strategies and efforts used by governments to raise funds, particularly through taxation. In this context, it focuses on how local governments collect taxes from the informal sector to fund development initiatives and public service delivery in Garoua Municipal. REFERENCES Ardic, O. P., & Faria, W. J. (2018). 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