Every government must find money to pay for their promises and pay for themselves. Tax revenue remains the obvious choice, but the bitter truth is that citizens generally don’t like paying taxes when the tax revenue is perceived to end up in corrupt activities. Because citizens dislike paying, politicians also dislike passing laws calling for new taxes or an increase in tax rate. The government must inevitably find ways to raise the revenue through taxation while escaping the wrath of the citizens, especially with taxes which easily produces political repercussions such as consumption taxes. 2020 Political campaigns and manifestoes are incomplete without at least one proposal for tax reforms. The obvious aim of these tax reforms is to ensure there is beneficial effects on economic growth.
2020 Tax Reforms
The Minister of Finance has given an indication that he will review all existing tax system in what can be described as fundamental restructuring of the existing tax system. The general expectation is that, any tax reform should be one that will produce the projected boost in economic growth. But what king of reform will really propel Ghana beyond aid? Tax rate-reduction, base-broadening reform or some more radical reforms of the tax system? At this point, there are uncertainties as to the directions for these changes.
But one thing is certain that, the reform is likely to take the following forms:
- Income based Tax reforms: This will involve building a reform based on Income, and moving the tax system further in the direction of broad-based, relatively low-rate tax, and on a comprehensive income, with primary focus on income of persons in Ghana rather than consumption based taxation. This may include finding ways to tax the income from the informal sector in a more efficient permanent way
- Consumption based tax reform: Another approach could be to introduce new consumption based taxation or increasing the rate on existing indirect tax.
It will be important to evaluate the strength and weaknesses of each approach and decide which one will survive the current political temperature as we go into election period.
Given the considerable level of uncertainty about the approach or direction of the tax reform, the business community remains unclear and will be waiting for government to announce the kind of reform it intends.
Pro-business Tax Policies
A quick look at the issues from business point of view will help to advance the prospect of the reforms and appreciate the general direction that the structure should take for any reform that will affect businesses. At the general level, any tax reform should focus on improving the climate for doing business, stimulate saving, investment, employment, wages and economic growth. Tax reforms that are less than helping businesses in adopting prudent business decisions will be opposed and can incur political repercussions. Loosely speaking, when businesses are proﬁtable and they reward their shareholders, they are more likely to want to expand by investing and hiring more people thereby creating jobs in the private sector, which expands opportunities, increases productivity.
Favourable and Pro-business Tax measures
Businesses will generally favour tax policies that focus on the following:
- A move from Taxation to Production
Production based taxation includes situations where businesses who are the main production units do not bear any indirect tax. Such production units are exempted or are granted tax credit when they pay any form of indirect tax. All over the world, businesses are not considered consumption units when they buy raw materials for production so any indirect taxes such as VAT is given back to businesses in the form of input VAT credit.
Businesses will prefer that, a new tax policy will treat the current 5% Getfund+ NHIL Levies in the same way as the normal VAT, and allow a credit for the input VAT. In the case of the 5% levy, in my view, it is not production- friendly tax policy. There is no deduction for the levy. A lot of businesses decries the introduction of the 5% levy because it drags productivity and not in line with the concept of moving from taxation to production. Those in the distribution chain are not affected by the levy since they apply the 3% flat VAT rate. This suggests that the 5% levy favours distributors who buy and sell. This 5% becomes non-deductible indirect tax which is additional cost. We need to look at the situation where businesses do not suffer taxes by buying input of raw materials. Businesses are therefore advocating for the abolishing of the non-deductibility of the levy currently in force and replacing it if possible, with a marginal increase in VAT from 12.5% to 13%. The levy should be completely integrated with existing VAT system.
- Encourages savings and investment:
Businesses will prefer that, tax policies should be geared towards encouraging investments in business ventures. Customs tariffs and rules should permit local manufacturers and industries to compete on a level playing ﬁeld in the marketplace. Such policies should raise the required amount of revenue for government without distorting a business decision to invest capital and hire new workers.
- Proper sharing of tax burden between the formal and informal sector
Businesses will prefer a proper balance in the tax burden among sectors of the economy, and especially between the informal sector and the formal sector. Over the years, successive governments have introduced several strategies in an attempt to tax the informal sector in an attempt to broaden the tax base but these have failed to bring the informal sector into the tax net to the required level. Any tax reform should ensure fairness in terms of sharing the tax burden among the citizenry. The GRA has over the years expressed difficulty in taxing the informal sector. Currently, the informal sector contributes 1% of the total tax revenue according to the GRA statistics in 2018 and because the informal sector do not get taxed, the overall tax burden is very unevenly distributed across the economy. These inequities under our current tax system are unfair to all those in the formal sector. When considering the general equilibrium effect of tax reforms, the business community are likely to be hostile when the tax policy is not adequately balanced in its implementation. There is the need to look at the laws on the taxation relating to the taxation of the following
- Registration and approval of religious and other charitable organisations for tax purposes
- Introducing tax/Levy on sanitation to deal with the sanitation problem. This levy can be collected by ECG or Ghana Water Company.
- Tax/Levy on street hawking
- Full implementation of Property taxation. This is overdue.
- A review of the Vehicle Income Tax system and a review of the tax stamp in general
- Vehicle transfer tax on the sale of vehicles. This can replace the luxury vehicle tax
- Enforcement of tax laws on small and medium size businesses
The additional revenue generated from these sources can argument the existing revenues from taxation. This calls for adequate resources to enable the GRA undertake these activities.
- Growth and Fair competition
Businesses will embrace tax reforms that promotes rather than hinders the competitiveness of businesses. Any tax reform should encourage economic dynamism and growth in a more efficient way. Business opportunities, rather than tax planning, should be the driving force behind business and investment decisions. The reform should completely do away with selective preferences of tax exemptions. Selective tax exemptions is reported to have cost Ghana GHS393 million in 2010 (representing 0.6% of GDP) and in 2018, the figure stood at GHS 4.66 billion (representing 1.6% pf GDP). The current economic conditions, combined with indirect tax is bias to local manufacturing. It is cheaper to import finished goods than to produce them in Ghana. This must change and this budget statement is the right opportunity to rebalance the exemption policies.
- Simplification of Tax administration and Tax Laws
The current tax laws are very complex to understand and comply with, especially for small businesses who do not have the resources to employ tax consultants. The tax reform should incorporate administrative rules that make it easier for taxpayers to administratively comply with the law. Anytime tax reforms leads to complications in compliance, it has a high tendency of non-compliance which will eventually lead to tax evasion. The GRA embarks on campaigns to educate taxpayers to honour their tax obligations but most often, such educations does not yield the needed results. We can make tax education a compulsory subject in second cycle and tertiary institution to ensure Ghanaians understand the need to pay taxes. The GRA should also implement the modified taxation system of taxing the informal sector contained in the Income Tax Act. Making tax laws simple makes compliance easier and more readily understood by more Ghanaians. A simpler tax system will result in full tax compliance.
- Adequate time for implementation
Businesses may not be excited about tax reforms if the reform present complexities and no adequate time to enable businesses implement those policies. There is no doubt complexities are inherent in most tax reforms. Mostly, what appears in a tax reform proposal to be simple and straight forward inevitability tends to be complicated to implement in practice. Some of the laws do not make provisions for “grandfather” mechanism to deal with transitional issues. A tax policy will have good intentions but end up increasing the administrative burden of taxpayers. Because of the likelihood of any comprehensive tax reforms to be complicated, transitional rules should be made in the tax laws. The reform should include broad and strong transition rules that provide fair and equitable treatment for taxpayers who have committed substantial resources based on current law.
Getting the Right Balance and the way forward
So the question is, are all tax reforms that are good for business also good for the Nation? The Economists in Ghana normally say that high taxes are bad for economic growth. But in an economy like Ghana where large commercial transactions do not take place in the formal sector, how can the government raise the needed revenue without increasing taxes?
Generally, not all tax reforms that are good for business may be good for the growth of the economy given the narrow interest of owners of capital who constitute just a small segment of the economy. There is the need to have the right balance between tax reforms that are good for businesses and those that leads to economic growth. This calls for critical evaluation of every tax policy, backed by research data. The Ministry of Finance should be interested in engaging industry. This is critical for efficient tax systems.
When tax reforms fail to succeed, tax revenues could decline, leading to laggard economic growth. Thus tax reforms being good for business is not the exclusive criterion by which tax reform or economic policy in general, should be evaluated. Sometimes the link between business prosperity and national development is blurred. An extreme example that exposes the disconnection between what is good for business and what is good for the nation is the reduction in benchmark values at the port for customs duties. The reduction in the port values were intended to reduce customs duties, increase the volume of import and reduce the prices of goods generally. But at the general level, volume did not increase as expected and the GRA announced that, revenue at the ports were hurt, though this policy from government to businesses would raise current proﬁtability of businesses. Local manufacturers and the Association of Ghana Industries complained of unfair competition.
It is my expectation that, any tax reform will be backed by well research data whiles still achieving a tax friendly environment for businesses to thrive.
Let us use this budget period to change situations to accelerate the growth of this country.
The writer is a Tax Consultant and a member of the Chartered Institute of Taxation[Ghana]