Is financial inclusion facilitating tax evasion?

Although my discussions with small entrepreneurs in rural areas in India clearly showed to me that financing alternatives are really scarce, and that we do have impact by supporting financial intermediaries that focus on SMEs, a recent exchange with a Microfinance Fund Manager highlighted a relevant attention point to some adverse effects. “We might in fact be encouraging tax evasion” he claimed. “How so?” I asked. “Some people are unbanked by choice to avoid taxes, and we are offering them incentives to stay so”.
In fact, a large chunk of small businesses do not have formal existence, registration, invoices etc. Not surprisingly, they are ruled out by mainstream banking, to the benefit of smaller institutions that developed the tools and the proximity to serve those small businesses, “including” them into the financial system, and helping them develop and grow. But how much of these businesses want to stay small and “informal” just to avoid taxes? If they had no alternatives, would they register and pay taxes instead?
Similar patterns are now happening with “Affordable Housing”, where ”unbanked” client with no formal revenue or formal registered business can now get a mortgage. Excellent news for the development of new and decent housing complexes for low income people. But loans of more than USD 10,000, even if they are initially designed for the vulnerable and the “graduating” microfinance client, can also end up attracting other types of clients. Some of them are  in a very satisfactory financial situation, ready to pay some additional basis points to stay away from mainstream housing banks and tax requirements . In a way, they are in fact given alternatives to confirm their shadow status…This is just one of the many points to watch are engaging in financial inclusion: eagerness for growth and impact, has to go along cautious assessment of unexpected effects and abuses.

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