Taxation is necessary if there is to be any form of government, but the necessity of tax does not make it a popular policy, because generally citizens dislike any government that calls for increased or new taxes. What trick can a government take to find money to pay for themselves and their services whiles escaping the wrath of the citizens especially when elections are just here and any increase in tax could produce political repercussions? This is a dilemma!
2020 has brought us a global pandemic, the steepest economic collapse since the Great Depression. Not only that, the year is one where there will be contentious presidential election, a complete shift to remote work and education, a total shutdown of airports and international transaction, closure of tourism activities etc. Can the GRA raise the needed revenue in this complex time?
The World has observed that, COVID-19 has triggered the deepest global recession in decades and the ultimate outcome is still uncertain. It is expected that the effect of the pandemic will result in a contraction across the vast majority of emerging market and developing economies, causing lasting damage to labor productivity and potential output. The baseline forecast envisions a 5.2% contraction in global GDP in 2020—the deepest global recession in decades and Per capita incomes in most emerging and developing economies will shrink.
In Ghana, there is no doubt covid-19 has taken a huge bite of government revenue and it still cast an uncertain shadow over how government can raise enough revenue to meets its expenditure, especially in this presidential and parliamentary elections. The revenue shortfall is likely to spillover to 2021 and beyond.
The rule of public finance is simple: When there is budget deficit and you want to reduce it, it is either you increase taxes and other revenue or by reducing spending. You can also do nothing and live with the deficit. Come what may, the Ministry of Finance will have to look for other means of bringing in revenue to support government activities.
Half year government revenue performance
A cursory look at the provisional government revenue as published by the Ministry of Finance on its website paints a GHS 7.54 Billion revenue shortfall against budget for January 2020 to June 2020. Whereas the government budgeted revenue stood at GHS 29.76 Billion, actual revenue and grants realized was GHS 22.2 Billion, resulting in a shortfall of 25.3%.
The steepest shortfall in government revenue and grants was recorded in March 2020 when the target was missed by 46.3%. The revenue target for January 2020 was however over-achieved by 23% but aside January performance, all other months were missed.
Tax revenue for 1st half year 2020
Taxation remains the main source of government revenue and the impact of the pandemic did not spear the various tax types. All the tax types have been negatively affected but the most severely hit are petroleum income tax, VAT and import duties. This is expected because the pandemic lead to a sharp decline in crude oil prices on the global market. With a budgeted tax revenue of GHS 1.4 billion expected from corporate tax on oil companies, GHS 0.48 billion was realized (a 65% shortfall behind target). The revenue target for VAT was also missed by over GHS 1 billion for the first half of the year. But it appears despite the challenges in generating revenue, the government continued to meet its target on tax refunds. The target for Personal Income tax was also overachieved, but this could be attributable to 2019 performance bonuses and other employee remunerations which were paid in Quarter 1 2020.
Expected tax measures after COVID-19
Even though restrictions have been eased, there is still uncertainties across the world on how economies will recover from the pandemic. Based on actual revenue target for the first half of 2020, government is unlikely to achieve its revenue target for 2020. The government’s “levelling” agenda to alleviate the impact of the pandemic which includes a reduction of the Communication Service Tax from 9% to 5%, the announcement of tax-free allowances for front-line workers, and other emergency covid-19 tax related measures will see government revenue larging behind target.
The government’s social intervention such as the free electricity and water and stimulus packages for small businesses means that, sooner or later the government must look for money to defray the debt.
Following the suspension of the Fiscal Responsibility Act, 2018 (Act 982) in December 2018 which to caped the annual fiscal deficit to no more than 5% of GDP, the government will have no choice but to take on more debt to close the revenue shortfall. Donor grants have fallen short because every country is now dealing with the pandemic.
The scale of the social interventions and a record budget deficit points to speculations on when the government will need to introduce new taxes to pay for the crisis. Whereas some tax experts are calling for tax breaks to enable businesses affected by Covid-19 to recover quickly, others are of the view that, government will not have the room to grant tax breaks because of the deficit and there appears to be no clear idea on how to get out of this hole created by the pandemic.
It is highly probable that, whichever government wins in the 2020 elections will have to deal with the deficit created by the pandemic.
Obviously, new taxes will need to be introduced to close the revenue shortfall. But one thing which is obvious is that, the GRA will have to do more in 2021. The fear is that, the GRA will likely be extremely hostile to Multinational Enterprises (MNES) as governments increase the tax burden on Multinational Enterprises (MNEs) to recoup tax revenues lost from trade and international transactions.
It is expected that, the tax dispute mechanism in Ghana will be more transparent with the passage of the Revenue Administration Bill which will provide a more rational and international best practice in the enforcement of the 30% pay-now-argue later in tax disputes.
It is also expected that tax administration will see a facelift, using technology to drive the administration of taxation in Ghana. It is also expected that the long-awaited tax exemption bill will be passed by parliament to regulate the grant of tax exemption in Ghana.
Finally, it is expected that, the informal section will have a simplified taxation regime and the contribution from the informal sector will record a significant growth. This will lead to a fair balance of the tax burn which is currently imbalanced toward the formal sector.
The writer is a Tax Consultant and a member of the Chartered Institute of Taxation -Ghana