Tax regime, its challenges and practical solutions (Part:1)

Tax regime, its challenges and practical solutions (Part:1)

The current management of the Bank of Ghana (BoG) has largely excelled in its mandate to improve Ghana’s macroeconomic gains, especially relating to the monetary and financial environment, since 2017. Hence, I am always interested in what the top three at the central bank have to say about the economy. In the recent times, the Governor and First Deputy Governor of the Bank of Ghana have been discussing the fiscal issues, especially taxation, in different presentations:

Dr. Maxwell Opoku-Afari, the First Deputy Governor of the Bank of Ghana delivered a public lecture organized by the University of Ghana Business School (UGBS) on the topic “Re-thinking Development Financing: Macroeconomic management when the love is gone” in September at the Great Hall, University of Ghana. He began with historical narratives on the evolution of Ghana’s economy in general, and in connection with development aid over the years. In a clear, down-to-earth yet rigorous style, the First Deputy Governor makes a solid case that the days when Ghana was the “poster child” of development aid and grants are over (upon achieving a Lower Middle-Income status). Hence, he aptly prescribes that Ghana should enhance domestic resource mobilization efforts to support development. He made a strong case for an improved tax regime in Ghana.

Dr. Ernest Yedu Addison, according to reports by Business & Financial Times of the Monetary Policy Committee (MPC) meetings in September, reveals that the cause of high lending rates could be attributed to domestic borrowing by the government. I could not agree more. I played with this idea in August 2019 while I interned at the national oil company. Data, as of May 2021 from BoG, reveals the banking sector (BoG and commercial banks combined) holds almost 50% of total domestic debts. Commercial banks hold GHS 51.8 billion which is the largest portion of the domestic debts, followed by debts holdings by non-bank institutions (including SSNIT and insurance companies), the central bank, and non-residents in that order. This leads to crowding out of funds for private investments hence inflating costs of borrowing, even with a falling policy rate from 2016. The persistence of the status quo could cause a mild credit squeeze in the future.

Dr. Addison appropriately advocates that affordable lending will depend on fiscal consolidation. In his own words, he stresses that “we should expect that as the budget consolidates, we will be able to see a reallocation of the resources which are released in financing the budget to the private sector.”

What is fiscal consolidation?

Fiscal consolidation is simply taking strong and decisive policies intending to reduce government deficits and debt accumulation. A major step to achieve fiscal consolidation is to ensure that economic managers increase levels of tax revenue collected, based on sound principles of taxation and tax policies.

I think the central bank, in a subtle manner, is trying to communicate to the fiscal authorities of Ghana to work hard and improve fortunes, at their side of the divide, to consolidate the gains from the efforts of the Bank of Ghana to achieve a prosperous and buoyant economy for all. Therefore, the onus lies on the Ministry and Finance and Economic Planning, and by extension the Ghana Revenue Authority but, frankly, uneasy lies the head that wears the crown of a tax man.

With this background, I will discuss the challenges in the tax regime in Ghana and hands-on solutions that can be pursued to improve government revenue. Of course, within the past year, the revenue authority has pursued significant digitization of revenue collection systems which is commendable.

The fiscal of any country is crucial to the health of its economy as well as its development prospects. A country’s ability to raise adequate revenue for its spending is as important as that of households and firms. Ghana, like other developing countries, has experienced chronic fiscal challenges over the years. Ghana’s rising public expenditures co-occur with persistent weak revenue performance (IFS, 2017).

The role of taxation cannot be underestimated in the economic development of developing countries like Ghana. Tax revenue is used to finance social programs and the provision of infrastructure to enhance economic growth. Taxation can also be used to stabilize economic outcomes such as unemployment, the balance of payment problems, and inflation; allocate resources and ensure redistribution of income in an economy. Nonetheless, a significant number of developing countries, like Ghana, fail to mobilize adequate tax revenue to finance their spending.

The tax performance in Ghana is not satisfactory. The prior conclusion can be reached based on two issues. First, evidence shows that the tax-to-GDP ratio of Ghana is one of the lowest among its compeers; either lower-middle-income countries or its Sub-Saharan Africa (SSA) peers. As of 2019, Ghana’s tax-to-GDP ratio stood at 13% compared to an average of 18% for Sub-Saharan Africa. Moreover, compared to rising public expenditures, domestic revenue is low. This has led to the accumulation of public debt resulting in a downward and unsustainable path in Ghana’s public finance.

Brief Review of Ghana’s Tax Reforms

Poor revenue mobilization in Ghana demands appropriate policies and measures to improve tax performance. Ghana has embarked on several tax reforms to improve revenue generation (Osei & Quartey, 2005). However, the impact has not been significant. Major tax reforms in Ghana began in the 1980s to restore the tax base, widen the tax net as well as reduce evasion by making Internal Revenue Service (IRS) and Customs Excise and Preventive Services (CEPS) independent and efficient; and ensuring an efficient and equitable tax system. Other major tax reforms included the introduction of VAT in 1998 and the establishment of the GRA in 2009 by successive governments. This paper examines various determinants that influence tax performance in Ghana, as a developing country. It further discusses measures that can be implemented to solve such challenges.

Challenges of current tax regime

The issue of tax exemptions and tax reliefs is a problem that plagues the tax performance of a developing country such as Ghana. Tax exemptions refer to the reduction or removal of a tax obligation for various categories of taxpayers and taxable activities by authorities. In Ghana, a wide range of such reliefs are granted to achieve socio-economic goals such as the promotion of investment and employment in certain industries and lessen the tax burden on some economic sectors and income groups (IFS, 2019).

The effect of such actions fosters the erosion of the tax base and stifles revenue generation. The President (of Ghana) admitted to this in the State of the Nation Address in February 2019 when he said: “Mr. Speaker, revenue mobilization poses the biggest challenge in the management of our economy, with the tax exemption policy, in particular, proving to be an Achilles heel”. Evidence shows that total tax exemptions have spiked from GHS 2.06 billion to GHS 2.26 billion through to GHS 2.57 billion from 2015 to 2016 to 2017 respectively (IFS, 2019).

The matter of the underground economy plays a vital role in domestic revenue mobilization in Ghana. The underground (shadow) economy spans economic transactions that are not regulated by the legal framework of the state and cannot be measured by government statistics. Economic transactions that operate outside government control are very difficult to be taxed.

Tax authorities face problems in identifying taxpayers in informal sector activities such as mobile and/or night traders, self-employed and unregistered businesses. It is a challenge to bring an ever-expanding informal sector into the tax net. This obliterates significant portions of the tax base in the economy.

In the shadow economy, many transactions are also held in cash making it difficult to tax goods and services. It is also difficult to tax the incomes of the self-employees and employees of the informal sector. The use of presumptive taxation for hard-to-tax does not help to mobilize adequate revenue.

A canker that continues to plague the tax system in Ghana and other developing countries is the challenge with tax administration and management. Egyin (2011) states that, for example, tax leakages are worsened by under-resourced administrators, failure of legal enforcement systems for tax collection, and paltry penalties for non-payment.

Lack of adequate resources, both human and physical, such as quality of tax officials, office buildings and equipment, vehicles, and appropriate communication media add up to major constraints in tax administration in Ghana. These challenges stifle the efficiency and effectiveness of the tax management in Ghana culminating in inadequate tax collections in Ghana.

Akin to weak tax administrative structures in Ghana is the issue of corruption. Stiglitz (2010) reprimands experts in developed countries for their inability to identify corruption as a major challenge facing developing countries concerning taxation. According to him, standard textbook writing on tax policy stresses efficiency, tax evasion issues but rarely corruption. Issues relating to corruption can be attributed to both taxpayers and tax officials.

The recent expose, by Kwetey Nartey of Joy News, which reveals that tax officials forge tax records for businesses bidding contracts for a sum of GHS 1,500 is clear evidence.  Corruption among taxpayers concerns matters of noncompliance and evasion practices such as failure to file returns, misreporting allowable deductions on income, under-reporting tax, and failure to pay legally due taxes.

Hence, it can be inferred that corruption in a tax system can be ascribed to the inability of tax authorities to objectively observe incomes. Tax officials are also be complicit in matters of corruption. They may collect bribes from powerful firms and individuals so that tax deductibles are understated. They may also embezzle tax receipts denying much-needed revenue to get into the national coffers.

In the same way, a high illiteracy rate can hinder the development of a whole country, tax illiteracy among citizens can adversely affect the revenue mobilization of a country. If citizens have no or little knowledge about their tax obligations and processes, tax laws, and tax system in general, then the tax performance of a country is substantially weakened. Armah-Attoh & Mohammed (2013), in reporting an Afrobarometer Survey on taxation in Ghana, observes that a majority of citizens know their obligation to pay taxes such as property tax, license fees, and VAT.

However, only about half know about their obligation to pay income tax either as employees or self-employed. More so, the majority of Ghanaians, i.e., 68%, declare that they find it difficult to know the taxes they are required to pay (Armah-Attoh & Mohammed, 2013). Such status quo does not augur well for tax performance in Ghana.

Lack of political will to tax is a challenge to low tax performance in Ghana and other SSA countries. Politics dominates economics regarding issues of governance in many SSA jurisdictions. Elected governments have a social contract with citizens to improve their living standards.

This requires mobilizing adequate revenue to spend on policies and projects. Yet, citizens oppose political regimes which introduce new taxes and broaden the tax base. A tentative trade-off exists between closing the fiscal gap and unpopularity among electorates – a dilemma to incumbent governments.

Such a phenomenon suppresses the will of the state to pursue necessary tax reforms. In Ghana, the Kume Preko demonstrations in 1995 over the introduction of VAT is a clear case. More recently, the agitation over, and subsequent scrapping of the luxury vehicle tax in Ghana, in 2019, also give credence to this argument.

The writer is an immediate past National Service Person (NSP) at the Department of Finance, University of Ghana Business School, and also a former student of the Department of Economics, University of Ghana. His email address is [email protected].




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