Tax incentives, investors’ behaviour and fiscal deficit

Tax incentives

Ghana, like many other developing countries, has been suffering from fiscal deficits – and it appears is quite doubtful if the 5% cap of the Fiscal Authority bill can ever be achieved if passed into law.

The World Bank and many economists have expressed their concerns over the growing fiscal deficit of Ghana. Their concerns can be observed through the  macro ratios of the country. The budget deficits to GDP have been on the increase year after year. It has increased from 6.79% in 2016 to 12.1% in 2021, which is almost double the 2016 level. It is therefore not surprising that the Debt–GDP ratio has increased from 55.94% in 2016 to about 81.8% in 2021, partly to finance the fiscal gap. The ratio of tax exemption to tax revenue has also not been spared.

While the deficit–GDP ratio continues to grow each year, the ratio of tax exemption to tax revenue also continues to grow. According to the Institute of Economic Affairs [IEA], the country loses more than GH¢5bn annually through tax exemptions alone.  This finding should be worrying, especially when the fiscal deficit continues to increase on an annual basis.  The cumulative effect of this is that the currency depreciates and pushes inflation high. It therefore comes as no surprise that inflation has also been reported to hit 23% and is at its highest level recorded in the country since 2004.

We need to appreciate the efforts of government to at least widen the tax net by introducing the E-levy. However, the efforts fall short of expectation as soft areas in management of the deficit are left untouched. One area is tax exemptions. Unlike introducing a new tax like the E-levy to widen the tax net in order to improve tax revenue, control of tax exemption requires no additional efforts to improve tax revenue.

Tax incentives

Tax incentives like tax holidays and tax on Custom capital goods are tax exemptions given as incentives to enterprises for promoting growth of businesses. They serve as a temporary tax reduction or elimination for businesses to let them save cash to finance their activities. In Ghana, businesses that qualify for tax holidays enjoy the incentive for between five (5) and ten (10) years, depending on the sector and/or location.

Tax exempt Industrial plant, machinery or equipment and parts thereof are exempted from Customs import duty under the HS Codes chapter 82, 84, 85 and 98.  Among others, the purpose is to promote economic activities and stimulate investment and economic growth. By stimulating investment and economic growth, it is expected that tax revenue will increase to more than cover the short-term tax forfeited through the incentives.

Investors’ behaviour

Investors are always looking for opportunities to maximise returns over their investment. They adopt all sort of unethical business behaviour at the least opportunity, whether legal or otherwise, in their attempts to achieve their aim of taking investment initiatives. The question that begs an answer is whether the expected increase in tax revenue in the long-run is maximised from the incentives or not.

In the present form of applying the incentives, nothing guarantees that the investment or the entity will continue to be in business after end of the tax holiday. Given the unpredictability of human nature, it is doubtful if full benefits of the tax incentives (tax holidays & exemptions on capital goods) can ever be realised. In light of this, it is important that the dysfunctional behaviour of investors is controlled or checked so that they don’t take advantage of tax avoidance to abuse the objective(s) of the incentives.

Deferred Tax Recovery

To deal with dysfunctional behaviour of investors, the deferred tax recovery concept is introduced by this author. Deferred tax as recognised by tax law and ISA -12 arises as a result of temporary difference between tax base and carrying amount. The author defines deferred tax recovery as a temporary cash movement due to timing differences between tax holiday and future tax periods. Apart from the temporary differences in timing of tax adjustment and temporary cash management, both deferred tax and deferred tax recovery arise from past transactions and eventually end up as book adjustments.

Application of Deferred Tax Recovery

By the concept of deferred tax recovery, the tax payer pays the tax throughout the tax holidays including the relevant import duty on depreciable assets. This immediately improves tax revenue and reduces the fiscal deficit gap. The deferred tax recovery starts in the year immediately after end of the tax holiday. This will be done on a yearly basis by adjusting the tax previously paid during the tax holiday against corporate tax to be paid after the tax holiday.

For example, if a tax holiday is for 5 years and ‘X’ amount of tax is paid in year-one of the tax holiday, the same ‘X’ amount of tax paid will be recovered against corporate tax in the 6th year.  Similarly, if ‘Y’ amount of tax is paid in year-two during the tax holiday, the same amount of ‘Y’ will be the deferred tax to be recovered against the 7th year tax of the tax payer.

Thus, the tax payer only suffers a temporary cash disadvantage [not cash loss] due to the timing difference between the start of operation [beginning of the tax holiday] and the period to begin paying tax [end of the tax holiday] and recovers it after end of the tax holiday. If the business ceases to exist after the 5-year tax holiday, the tax payer recovers no deferred tax. Under such circumstances, government or the state loses nothing because tax has already been temporarily prepaid during the tax holiday period


The benefit of introducing the concept of deferred tax recovery is that it will improve fiscal space, reduce budget deficit, reduce external borrowings, improve external debt servicing, improve balance of payment position, improve exchange rates and control inflation. In effect, deferred tax recovery can be used as a tax tool to check unpredictable business behaviour, reduce the fiscal gap and improve macro-economic stability.

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