AN EXAMINATION OF TAXATION CHALLENGES IN THE INFORMAL SECTOR AND THEIR IMPLICATIONS FOR REVENUE COLLECTION IN GAROUA MUNICIPAL, CAMEROON

CHAPTER ONE INTRODUCTION 1.1 Background of the Study Many developing countries around the world are grappling with serious financial difficulties. This situation is largely tied to troubling economic indicators that have drawn global concern in recent years. Nigeria presents a particularly complex case. The country's economy relies heavily—over 90%—on revenue from crude oil exports. This has created a fragile economic foundation that depends extensively on both domestic and foreign loans. As a result, Nigeria's economy is highly susceptible to external shocks. The challenge is compounded by growing government spending needs, a decline in internally generated revenue, a shortage of foreign exchange, the global fall in oil prices, escalating inflation, widespread poverty, and a lack of basic infrastructure. These issues make it imperative for the country to revisit foundational economic strategies, including exploring alternative sources of internal revenue—especially through taxation. In neighboring Cameroon, the informal sector plays a crucial economic role by creating jobs, generating income, and helping reduce poverty. Despite its importance, taxing informal economic activities remains a major challenge—particularly in urban centers like Garoua. Located in the North Region of Cameroon, Garoua Municipal is characterized by a vibrant informal sector made up of small-scale entrepreneurs, street vendors, artisans, and service providers. While this sector contributes significantly to the local economy, it largely operates outside the formal tax system. This leads to substantial revenue losses and hinders the efforts of municipal authorities to raise the funds needed for development (Ardic & Faria, 2018; Njangang & Nembot, 2017). Several issues make it difficult to tax the informal sector in Garoua Municipal. These include limited formalization of businesses, weak enforcement capabilities, complicated tax laws, and socioeconomic barriers to compliance. Many informal businesses in Garoua lack legal recognition and registration, making it hard for tax officials to identify or monitor them (Adedokun et al., 2016). Inadequate resources and enforcement strategies further limit the ability of tax authorities to ensure compliance in the informal sector (Njong & Tih, 2017). Moreover, the complex legal and administrative frameworks discourage voluntary compliance and often drive businesses to avoid or evade taxes (Osei-Assibey et al., 2019). Social and economic challenges—such as poverty, low education levels, and limited access to financial services—also reduce the willingness and ability of informal operators to comply with tax obligations (Khan & Furuoka, 2019). These difficulties have serious consequences for revenue generation and public service delivery in Garoua Municipal. The failure to collect sufficient tax revenue from the informal sector limits the government’s ability to finance critical services, infrastructure, and poverty reduction programs (Fambon, 2016). Additionally, the under-taxation of this sector creates inequalities within the tax system and undermines the principles of fairness and justice. Given the informal sector’s significant role in the local economy and the complex challenges related to its taxation, there is a pressing need for a detailed investigation. This study seeks to explore the specific obstacles faced by informal sector taxpayers in Garoua and their implications for revenue generation. The goal is to provide insights and actionable recommendations for policymakers, tax authorities, and other stakeholders, ultimately contributing to improved tax administration and better revenue mobilization strategies. Thus, this research investigates the challenges associated with taxing the informal sector and their effects on revenue mobilization in Garoua Municipal, Cameroon. 1.2 Statement of the Problem In Cameroon, as in many other developing nations, the informal sector is a key driver of the national economy. However, this sector presents notable challenges when it comes to taxation, especially in urban centers such as Garoua. Despite its significant contribution to economic activities, the informal sector operates largely outside of the standard tax framework. This leads to revenue losses for the government and limits its ability to fund essential services and development projects (Ardic & Faria, 2018; Khan & Furuoka, 2019). The informal economy in Garoua Municipal consists mainly of small businesses, street trading, and unregulated commercial operations. These are often untaxed or under-taxed due to several factors, including lack of formal business registration, inadequate enforcement mechanisms, complex legal structures, and socio-economic barriers to compliance (Adedokun et al., 2016; Njangang & Nembot, 2017). Additionally, the absence of reliable data on the earnings and activities of the informal sector in Garoua makes tax planning and policy formulation even more challenging (Osei-Assibey et al., 2019). This research focuses on the inefficiency of tax collection from the informal sector in Garoua Municipal and how it affects overall revenue mobilization. Although the informal economy plays a major role in the region, the revenue it contributes is disproportionately low when compared to its actual economic impact. This revenue gap restricts budgetary capacity and hampers the local government's ability to provide services (Fambon, 2016; Njong & Tih, 2017). Therefore, this study seeks to analyze the unique challenges that hinder taxation in the informal sector in Garoua. It aims to understand how these challenges affect revenue collection and to propose strategies to enhance tax administration, promote compliance, and ultimately improve revenue generation. The study specifically investigates the challenges of taxing the informal sector and the implications for revenue mobilization in Garoua Municipal, Cameroon. 1.3 Objectives of the Study The overall objective of this research is to examine the challenges involved in taxing the informal sector and how these affect revenue mobilization in Garoua Municipal, Cameroon. The specific objectives are to: i. Evaluate the level of tax compliance among informal sector operators in Garoua Municipal. ii. Assess the effectiveness of tax policies as they relate to the informal sector in Cameroon. iii. Explore the perceptions of informal sector participants regarding taxation in Garoua Municipal. iv. Investigate how taxation of the informal sector impacts revenue mobilization in Garoua Municipal, Cameroon. 1.4 Research Questions To guide the study, the following research questions have been posed: i. What is the level of tax compliance in the informal sector in Garoua Municipal, Cameroon? ii. How effective are current tax policies in addressing the informal sector in Cameroon? iii. What are the views of informal sector operators on taxation in Garoua Municipal? iv. What is the impact of taxing the informal sector on revenue mobilization in Garoua Municipal, Cameroon? 1.5 Significance of the Study The outcomes of this study will be beneficial to various stakeholders: Policymakers: The findings will provide useful information for shaping or revising tax policies to better capture revenue from the informal sector in Garoua and similar regions. By understanding the specific barriers faced by informal taxpayers, authorities can design targeted interventions to increase compliance, curb tax evasion, and expand the tax base. Academic Community: The study will contribute to the academic literature on informal sector taxation, particularly in the context of sub-Saharan Africa. Researchers and scholars can use these findings to conduct further studies, make comparisons across regions, or develop new theories, thus enhancing academic understanding of public finance and tax policy. 1.6 Scope of the Study This study is focused on identifying and analyzing the challenges associated with taxing the informal sector and understanding their implications for revenue mobilization in Garoua Municipal, Cameroon. Specifically, it covers the degree of tax compliance among informal operators, the effectiveness of tax policies, informal sector operators’ attitudes toward taxation, and the overall impact of informal sector taxation on revenue generation in the municipality. 1.7 Limitations of the Study As with any research endeavor, a few constraints were encountered during the study. Limited financial resources affected the researcher’s ability to access extensive literature, collect data, and conduct interviews or distribute questionnaires. Consequently, the sample size had to be reasonably moderate. Additionally, the researcher had to balance this study with other academic commitments, which reduced the amount of time available for conducting thorough research. 1.8 Definition of Terms Informal Sector: This refers to economic activities that are not officially registered or regulated by government authorities. These activities typically fall outside formal legal structures and are not subjected to standard taxation. Examples include street vending, small-scale trading, and unregistered businesses. Taxation: Taxation is the process through which government collects money from individuals, businesses, and other entities to fund public services and infrastructure. It includes various types of taxes, such as income, consumption, and property taxes, and is enforced through legal and administrative systems. Challenges: Challenges in this context refer to the range of difficulties or obstacles faced in trying to impose taxes on informal sector activities in Garoua Municipal. These include poor compliance, enforcement problems, complex regulations, lack of data, and socio-economic factors that hinder tax collection. Revenue Mobilization: This involves the efforts made by governments to generate income from various sources—including taxes—to finance public services. In this study, it specifically refers to collecting tax revenue from the informal sector in Garoua Municipal for use in public infrastructure and service delivery. REFERENCES Ardic, O. P., & Faria, W. J. (2018). Taxing the informal sector: Challenges, possibilities, and policy options. World Development, 105, 273-282. Adedokun, O. J., Olayungbo, D. O., & Nwaubani, I. O. (2016). The impact of informal sector on the revenue generation in Nigeria. International Journal of Humanities and Social Science, 6(4), 229-235. Fambon, S. (2016). The importance of the informal sector in developing countries. Journal of International Business and Economics, 4(2), 101-109. Khan, H. A., & Furuoka, F. (2019). Taxation of informal sector in Pakistan: Challenges and opportunities. Journal of Islamic Business and Management, 9(2), 243-261. Njangang, H. N., & Nembot, L. N. (2017). Determinants of tax revenue in Cameroon: Long-run and short-run analysis. Journal of Policy Modeling, 39(6), 1035-1050. 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