As the nation grapples with mounting fiscal deficits, calls by key stakeholders for expedited passage of the Tax Exemption bill into law have intensified.
Fiscal judiciousness has been thrown into disarray following the ongoing pandemic – its adverse effect on economic activities, as well as the cost of multiple stimulus packages aimed at shoring-up various industries – as well as the traditional over-expenditure associated with a general election year.
At a recent lecture, the Bank of Ghana Governor, Dr. Philip Addision, confirmed that the nation has exceeded three key fiscal indicators for a Market Access Country.
The three include the much publicised Debt-to-GDP ratio, which exceeded the prudent and sustainable 70 percent mark at 70.1 percent at the end of the third quarter of the year, and is expected to rise due to election-related expenses as well as government interventions like payments made to depositors of defunct financial institutions.
Closely related is gross government financing needs – the sum of budget deficits and funds required to roll-over debt that matures dung the course of the year – which currently stands at 11.8 percent of GDP; 1.8 percentage points over the 10 percent threshold. The other is non-resident holdings to GDP ratio, which is at 59.9 percent.
While the above should be cause for concern in any economy, it is particularly worrying for an emerging economy in the current unpredictable economic climate. This is however exacerbated by leakages in the nation’s revenue collection – the worst culprit appearing to be the numerous and oft-times poorly regulated tax exemption regime.
Tax incentives and exemptions are scarcely novel, and have been used as a means to attain certain economic goals including but not limited to driving Foreign Direct and Private Investment; boosting industry by reducing cost of production through carry-forward of losses, import duty exemptions; honouring diplomatic pacts and privileges; providing improved conditions for aid-funded projects governed by international treaties and agreements; promoting international competitiveness of non‐traditional exports; reducing regressive effect of VAT, with the primary goal of sustainable job creation.
These can serve their true purposes if managed well. But recent literature on the efficacy of the nation’s tax exemption implementation makes sorry reading. For instance, a report published by the Institute for Fiscal Studies (IFS) suggests that while in 2016 the Ministry of Finance intensified its oversight in an effort to limit the use of special permits which exempt imports from Customs duties and VAT, total exemptions stood at GH¢2.26billion as at end 2016 – representing a close to 10% increase from the previous year’s exemptions of GH¢2.06billion. In 2017 total tax exemptions amounted to GH¢2.57billion, representing nearly half (47%) of the total import duty collected for that year.
An earlier paper containing an analysis of Ghana’s tax incentive regime between 2008 and 2013 – presented by the Assistant Commissioner in charge of Legal Affairs and International Taxation Agreements at the Ghana Revenue Authority, Eric Mensah, to the United Nations Department of Economic and Social Affairs – revealed that Total tax expenditure accruing to the state from incentives represents 24.54 percent of the Total revenue collected for the period. Also, the tax expenditure – as a function of exemptions – to GDP rose to as high as 5.31 percent for the period.
It is against this backdrop that the president in his ‘State of the Nation’ address before Parliament in February 2019 said: “…If we continue at this rate, in less than sixteen years half of Ghana’s revenue base will be given away as tax exemptions. Mr. Speaker, this is not sustainable, and we intend to do something about it to reverse the trend by introducing suitable measures that may disrupt the easy and comfortable arrangements many have become accustomed to, but which we have to take to ensure that we have the firmest of foundations for the economic take-off that has escaped us for so long”.
These sentiments culminated in submission of the Exemptions bill to Parliament by the Minster Responsible for Finance, in the first quarter of 2019. The bill is geared toward consolidating and streamlining the applicable exemptions in different laws and improving transparency by “regulate(ing) the application of tax exemptions and other exemptions, and to provide for related matters”.
With less than a quarter to the second anniversary of the bill’s submission for consideration and passage into law, and with the expiration of tenure for the 7th Parliament – before whom the bill was presented – in less than a fortnight, the document has gathered the proverbial dust as nothing concrete has been done by the August House to pass the bill; much to the chagrin of many stakeholders.
Tax consultant and coordinator at tax advocacy group, the Tax Justice Coalition, Bernard Anaba believes that the treatment of the Exemption bill, 2019, is a cause for concern and indicative of a deeply-rooted malaise in the nation’s willingness to enhance revenue receipts.
According to him, while a black swan event like the ongoing pandemic might have altered the direction of House business, lessons from the pandemic ought to have intensified a national desire for self-sustenance – and this should have been expressed in moves such as passage of the bill.
In an interaction with the media, he suggested that the process might have been derailed by parties with interests in maintaining the status quo. He said: “Despite the purpose of tax exemptions to incentivise certain types of investors, firms and taxpayers, the accumulation in tax expenditure really does create distortions in the economy and allows some vested interests to fester – especially when beneficiaries will do whatever in their power to ensure that they enjoy such benefits, regardless of whether it has any impact on the economy and society”.
He laboured to highlight the potential gains or losses that would accrue to the nation, depending not only on the speed of passage but also effective application – noting that Ghana has matured to a point where it can afford to negotiate better terms of engagement with parties operating within its borders.