For as much as many have articulated various points concerning the advantages or disadvantages of the E-levy, the ongoing town hall meetings and the excitable discussions on the airwaves coupled with the continued impasse in Parliament and society at large call for a deeper discussion on the levy. The economic challenges facing the country are no longer a secret.
The E-levy has been touted in some quarters as the antidote to the poison of the International Monetary Fund (IMF) and to get the country out of the quagmire it finds itself in. Whether that is an accurate description or not, this author leaves it to the economists to discuss.
The purpose of this article is to highlight the flaws in the e-levy’s design and propose an alternative tax design that should be acceptable to both sides of the divide and help broaden the tax base.
The notion that everyone must pay tax (I believe whenever this statement is used, it is in respect of direct taxes) is erroneous. Not everyone makes an income or makes an acceptable level of it to be considered as taxable income. Currently, under the Income Tax Act 2015, the first GH¢4,380 of all employees’ annual salaries is excluded from the income tax base.
Hence, although an income has been made, that income is not taxed at all. Some persons do not make an income because they are not engaged in a business, are not in employment, or have any investments. The message is that not everyone is legally required to pay direct taxes. For tax purposes, the question is not about quantity but quality of the tax base.
Further, from a tax policy perspective, the ideal tax should not only raise more revenue than the cost of administering the tax, but should also not have a distortionary effect on the economy and have a broad base. Hence, the various tax types including VAT, NHIL, CIT, PIT, Import and Export duties are used complementarily by government to raise the desired revenues.
The fact that one tax type delivers more revenue than another does not discount the utility of other taxes. Therefore, to achieve equity and fairness (which any government should use as a self-check in the imposition of taxes), a tax should not be designed to obtain the highest possible revenues within the shortest possible time.
The principles underpinning direct taxation are fairly settled and consistently applied universally. Direct taxes are applied on income from an identifiable source – i.e., business, employment or investment. Savings (used here to mean household incomes not spent on consumption goods and services and capital goods) are specifically excluded from the ambit of direct taxation. Herein is the challenge of the E-levy’s current design.
The levy seeks to tax mobile money transfers done on the same service provider and between service providers, transfers from mobile money accounts to bank accounts and vice versa and bank transfers originating from a bank account belonging to an individual. With respect to mobile money transfers, there is no distinction between mobile transfers used to pay for goods and services and those transfers used to perform private charity. Private charity because money is transferred by individuals to provide an income to individuals who cannot find work or are unable to financially support themselves either because of age, station or malady.
In ideal circumstances, this charity – also called social welfare – would be performed by government using tax receipts. Much has been said on the debilitating effect a tax on bank transfers belonging to an individual will have on the financial inclusion agenda of the Bank of Ghana and the drive toward a cashless economy. The levy’s current design lends itself to unintended outcomes. A levy that is imposed on a particular means of money transfer leaving other means – i.e. cash payments and direct use of payment cards – will cause people to use these other means to achieve the same result, whether commerce or charity.
Since its phenomenal growth, mobile money has become ubiquitous social phenomenon. But beyond the name of the transferor, the source of funds, purpose of the transfer are either unrequired or generically provided. Today, it is unknown the number of persons who use mobile money for commercial activity, i.e. receiving payment for goods and services (Merchants). This is notwithstanding the fact that various mobile money providers have available merchant facilities for use by their customers.
Government, through regulation, should obligate all persons who use the mobile money platform for receiving payment for goods and services to be registered with the mobile money provider as a Merchant. Upon registration, the Merchant should be given a number that is identifiable by customers and the Ghana Revenue Authority (GRA). By this singular act, persons using the platform for commercial purposes will be distinguished from non-commercial users and can be specifically targetted for taxation of their business activity.
Additionally, registration should be made subject to an annual renewal on the presentation of a tax clearance certificate. Non-compliance with this regulation should bring heavy fines for both those who use mobile money for commercial purposes and the mobile money providers. A defence based on ignorance of the customers’ commercial status should not suffice, as the volume and frequency of transfers should be prima facie proof of the platform’s commercial use.
Having identified those who use the platform for commercial activity, a direct tax using presumptive taxation can be applied to the person’s turnover. Presumptive taxation is a simplified way of distributing the tax burden to a population or income that has remained largely untaxed. It is cheaper with respect to compliance and administrative burden. The current presumptive tax rate of 3% imposed on the turnover of a qualifying business as provided in the Income Tax Act, 2015 is a good starting point.
The author recognises that certain paragraphs in the Second Schedule will have to be amended to cater for a broader base. With a presumptive tax charged, an obligation to withhold can be imposed on the income, with the withholder being the mobile money provider. The withholding tax should not be a final tax but a tax on account. If successfully carried out, two results will be accomplished: Merchants will be compelled to register with the Ghana Revenue Authority (GRA) and file a tax return if they are desirous of recovering any excess tax paid during the year; or the GRA may recover underpaid taxes that have not been satisfied during the year with the withholding taxes.
The implications for the Merchant’s cash flow is not lost on the author. This can be fixed if a comprehensive tax system affecting registration, book-keeping, tax forms and refunds is created specifically for small businesses. The author is also aware of the likelihood of a tax cascade, wherein Merchants may imbed the withholding tax component into the price of their goods and services. The market will correct itself concerning those supplies.
In addition, or as an alternative to the direct tax, the E-levy can be designed as an indirect tax to be imposed on the fee charged by the mobile money providers for the transfer of funds, the service fee – and not on the total value of the transfer as it is currently designed. Like the archetype VAT, a threshold based on the value being transferred may be established. To deal with the challenge of those mobile money providers who do not charge a fee for their service, a fee can be imputed using the principles of consideration enunciated under the Value Added Tax, 2013 (VATA).
Mobile Money Providers who do not impose a service fee on their services do not do so for altruistic purposes. Just as social media is not free but paid for by the personal data of its users, so also there is an inherent consideration paid by subscribers who use ‘free’ mobile money services; customer attraction, loyalty and retention. Hence, there is indeed a consideration, albeit in kind, and a fair market value can be ascertained.
To conclude, citizens must recognise that calls for development must be supported by an equal contribution to that development. It is not sustainable that in a country of 30.8 million, approximately 2,364,348 persons bear the direct tax burden. Equally, government can no longer demand taxes from its population without accountability and responsibility in spending. Broadening the tax burden cannot be solved in haste. Like investment, sustainable returns take time. Government must take its time to get this right. Let’s not say tomorrow we will be bold, tomorrow we will make that decision. Let’s take inspiration from tomorrow’s courage and act today.
Ivy is a Tax Consultant & Lawyer. Email- [email protected]