…despite making up 92% of registered companies
- PEF proposes tiered tax framework
New research has revealed that Micro, Small and Medium Enterprises (MSMEs) in the country contribute a paltry 4 percent to domestic tax revenue despite making up about 92 percent of registered businesses, often due to complexities in the tax administration system.
This essentially means that, of the about GH¢30 billion mobilised in 2019 as domestic revenue, just about GH¢1.2 billion came from MSMEs, even though nine of out every ten registered business falls within this category of business.
According to the research, which was undertaken by the Private Enterprise Federation and sponsored by the Open Society Initiative for West Africa (OSIWA) Project, the tax administration system implemented for MSMEs makes it difficult for these businesses to comply as there is no discrimination in terms of requirement expected of them and that of big businesses. For example, all MSME taxpayers are subject to the same Company Income Tax rate of 25 percent, Value Added Tax, Customs and Excise Tax obligations just as is required of larger businesses.
The research also found out that tax education is poor among MSMEs as many of the businesses say they do not understand what is expected of them by the tax laws and related administrative provisions. These MSMEs say the tax system is so complex that it requires hiring a tax consultant, as the big corporations do, but they cannot afford the additional cost of hiring such professionals.
For these reasons, PEF is proposing a multi-tiered and optional tax system for MSMES. These include subjecting small businesses (those with turnover below GH¢90,000) to a lump sum final income tax, and will not be required to pay any further income tax until they move into higher income levels.
Again, it recommends that entities that qualify for presumptive tax should not be subject to withholding tax as this will ensure that these small businesses have access to all their funds for operating their businesses instead of resorting to bank borrowing which comes at extra cost and limit their ability to grow and create jobs and wealth.
Commenting on the findings, CEO of the Private Enterprise Federation, Nana Osei Bonsu, said it will be a win-win situation for both small businesses and government if the tax administration system is reformed as it will increase the tax base for revenue collection.
“Tax compliance is very difficult. The language of the tax laws is not easy for businesses to understand and be able to meet their obligations. And then, the tax rates are high, so once we lower the tax rate, more businesses will be willing to comply. Once we lower the language, more businesses will appreciate what is required of them and comply.
Once we have voluntary compliance, then, the cost of tax administration also goes down for the government. And when you lower the tax laws, lower the tax rates, and more businesses now pay taxes to government, it becomes a win-win situation for all,” he told B&FT during the launch of the findings in Accra.
Revenue shortfall has become a constant feature of the country’s economy primarily because of its informal structure which creates room for many entities to avoid paying taxes. Revenue mobilisation in the first half of this year fell short of target by 26 percent, resulting mainly from shortfalls in oil revenue, customs receipts and non-oil Non-Tax revenues. Total Revenue and Grants for the period amounted to GH¢22 billion compared with a programmed target of GH¢29.7 billion.
The World Bank recently made a similar call for the tax base to be broadened in order to accrue more domestic revenue for government.
“Broadening the tax base can build up fiscal space by raising government revenues. The insertion of digital tools into public administration may help expand the set of taxpayers, reduce costs, and improve tax performance. Governments can better identify taxpayers by issuing digital IDs. They can also establish online platforms for e-filing and e-payments of taxes and import duties. Digital technologies help strengthen tax administration by lowering transaction costs and allowing innovation in tax policy. Digital tax administration may reduce tax evasion and fraud,” the bank said in its Africa’s Pulse report (October 2020).