There have been many calls for the speedy passage of the Exemptions Bill in Ghana. Those making these calls include Civil Society Organisations, tax consultants and academics. All these stakeholders believe that the existing exemptions regime contains gaps where tax revenues are lost.
The Exemptions Bill was first introduced in 2019. Parliament invited comments from the public but was unable to pass it before the life of the 7th Parliament ended. Government took on board some comments submitted to parliament and reintroduced the bill in 2021.
According to government’s own data, GH¢1.7bn was lost to tax exemptions in 2020, see the Memorandum to the Exemptions Bill, 2021. This is not even the total amount as this amount excluded some exemptions. There was an urgent need to rationalise the current exemptions regime, the memorandum adds. Government says there are abuses of the exemptions and sometimes, exemptions are granted on the blind side of the Minister of Finance.
This Bill will therefore streamline the exemptions process and remove obsolete exemptions in laws. From the memorandum, about GH¢500m will be saved in 2022 after passage of the bill.
This article submits that the Exemptions Bill, 2021, may not achieve the results the stakeholders expect. Majority of the tax exemptions are from public or government-sponsored projects that are being funded by government. There is little evidence that persons who are not entitled to tax exemptions are enjoying illegal exemptions. Even if that were the case, there are existing laws that specifically address that problem, and it is not a new law that will cure it.
Article 174 of the 1992 Constitution of Ghana provides that only Parliament of Ghana can approve waiver of taxes. Parliament can also allow the person authorised to waive the tax from seeking parliament’s approval. The tax laws provide that exemptions that do not follow the constitutional prescriptions are invalid. Section 7(5) of the Income Tax Act, 2015 (Act 896) makes it clear that no law or agreement can exempt income tax unless the legal framework for exemptions is followed. Value Added Tax, 2013 (Act 870) and Excise Duty Act, 2014 (Act 878) do not allow exemptions outside the ones listed in them.
Principally, Section 63 of the Revenue Administration Act, 2016 (Act 915) requires the Commissioner-General of the Ghana Revenue Authority (GRA) to ignore any tax exemption that is not sanctioned by a law. This same provision also disables Ministries, Departments and Agencies (MDAs) from negotiating or concluding contracts that include tax waivers without the consent of the Minister of Finance. So where are the loopholes? If the GRA is following the law, it will mean every current tax exemption is backed by a law, or at least, a parliamentary resolution. Section 64 of Act 915 requires the GRA to provide detailed quarterly reports on exemptions granted and utilised.
Parliamentary waivers accounted for almost all the GH¢1.7bn exemptions in 2020. In the first quarter of 2022 alone, the total requests for tax exemptions submitted by the Minister of Finance was GH¢693m (using exchange rates of 29 April 2022). See the details in the table below. About half of the requests relate to government projects. The private sector projects are exemptions under the government’s flagship 1D1F programme. Parliament has already designed rules to assist itself in approving the tax exemptions to companies under this programme.
|Paa Grant Interchange and other roads||Public||54m|
|Sekondi and Takoradi roads||Public||54m|
|Tema – Akosombo Junction (63.6 KM)||Public||225m|
|Rural & Peri-Urban Nano-Filtration Water Project||Public||8m|
|Assembly Plant for Tractors, Backhoe Loaders, and fabrication of agriculture implements in Ghana||Public||13m|
|Imports for 1D1F (Sunda Ghana Limited)||Private||169m|
|Imports for 1D1F (Korban Company Limited)||Private||9m|
|Imports for 1D1F (Sunda Ghana Investment Limited)||Private||163m|
Author’s compilation from official reports of Parliament of Ghana
The first thing this bill does is to repeal any provision in any law that contains tax exemptions. The traditional tax laws, i.e., Income Tax Act, 2015 (Act 896), Value Added Tax, 2013 (Act 870), Customs Act, 2015 (Act 891) and Excise Duty Act, 2014 (Act 878) will continue to contain normal exemptions. The bill moves some tax exemptions in the Free Zone Act to itself.
Free Zone Enterprises (FZE) will continue to enjoy exemptions on import and customs duties. The bill requires strict compliance with the Free Zone laws to enjoy the waivers. The dividend tax exemption that a FZE currently enjoys under the Free Zone Act, 1995 (Act 504) will end with the passage of this bill. The dividend exemption was meant to attract investors. Its removal without any consultation may dent government’s reputation when it comes to assurances and guarantees to investors.
The most refreshing feature of the bill is to clarify the exemption process. MDAs, private businesses, charities, and international funds have rules to guide their exemption applications. There are timelines for processes to be followed. The bill repeats existing laws regarding the involvement of the Minister of Finance and formalises current practices of obtaining cabinet approval and submission of requests to parliament. Another repetition is the report to the Minister of Finance on the exemptions granted and utilised, although this time, the report will be on an annual basis.
There should be no problem with government exempting taxes on importation of goods or equipment for construction of hospitals, roads or any other public infrastructure. It is government that is ultimately responsible for footing these expenditures or at any rate, benefits from donors providing these structures. Without the exemption, government would be very inefficient in managing its cash flow since these are capital-intensive projects.
It would have used tax revenue already collected, to pay GRA for these taxes and end up reporting fresh tax revenue when GRA pays into the Consolidated Fund. That will be like moving money from the left pocket to the right. Exemptions on public projects only need scrutiny to ensure the items exempted are not diverted elsewhere and are used solely for the projects. What needs serious attention is the exemptions provided to the private sector.
Private sector exemptions only make economic sense if government will reap benefits from the current exemptions. The concept of exempting a private business from import duties and taxes, company income tax and other levies is to enable them to have enough funds to invest now. The hope is that in the future, their investments will generate higher than normal profit that government can tax. They will also employ people and government will collect more employment taxes.
For those businesses that principally export, Ghana will earn foreign exchange. However, there is little evidence to suggest that private tax exemptions have achieved quicker results. These benefits will only crystallise if Ghana can reap them quicker than a normal business that has no exemption. Otherwise, government would just be providing a private shareholder with tax waivers, thereby discriminating against businesses in the same industry without the tax waivers.
Detailed research on the performance of private sector tax exemptions is required to measure how quickly the expected tax benefits are provided after the waivers are granted. New rules may need to be added such that private businesses which benefit from tax exemptions will not end up paying out all their profits as dividend until a certain tax threshold or investment level is met.
Stakeholders have complained about the volume of tax exemptions that are granted today. These exemptions are always seen as lost tax revenue. This may not be accurate, especially when majority of the exemptions approved by parliament relate to government-sponsored projects. There is no point requiring government to pay these taxes by taking money out of the Consolidated Fund and then reporting these same monies as fresh tax revenue. Concerns about excessive tax waivers require exclusion of waivers for government-sponsored projects.
Government needs to move past accounting for the total taxes waived for private businesses as proposed in the bill, to tracing the actualisation of the expected benefits. This will inform any future tax waiver application, especially when government can tell the success rate of such a decision.
There is no confusion as to whether a person has a tax waiver or not. The laws are clear as to what a valid waiver requires. Complaints about illegitimate waivers reflect a failure at GRA. Current laws forbid the GRA from enforcing any tax exemption that is not sanctioned by law. Every tax exemption that is not contained in a law or agreement that has been approved by parliament must be ignored by the GRA. Are the current rules not being enforced? If so, what reason do we have to believe the additional rules in the Exemptions Bill will succeed?