Designing a Tax System for Micro and Small Businesses: Guide for Practitioners

This toolkit examines the reasons behind micro and small businesses (MSE) not complying with the tax system and recommends options to make the tax systems MSE-friendly. The toolkit states that:

• Characteristics and tax compliance attitude of micro and small businesses (MSEs) vary significantly. A large number of MSEs register with the tax authority;
• High costs, difficult formalization procedures and the expectation of gaining comparative advantage from non-compliance, drive many small businesses into operating in the informal economy;
• Operating in the informal economy negatively impacts the compliance part of the business community and also affects the growth potential of informal businesses;
• Reforms to foster private sector development and to support innovation and growth need to address and eliminate obstacles for small business formalization;
• Cumbersome tax system in most countries is one of the main reasons that MSEs operate in the informal economy.

The toolkit provides a number of options to reform the tax system and facilitate small business compliance. It discusses:

• Impact of the tax system on small business development;
• Options for facilitating small business tax compliance;
• Guidelines for the design of a small business tax regime.

The toolkit concludes by highlighting the importance of private sector involvement in the reform process.