By Richmond Akwasi ATUAHENE (Dr)
Ghana’s tax collection is low compared with other lower middle-income countries. Wide spread tax exemptions and waivers, corruption, failure to diversify revenue streams and non-compliance of tax payments had been major issues in Ghana, as the government has been suffering from a widening fiscal deficit and a rising debt burden over the years.
Ghana’s Tax policy design suffers from widespread tax expenditures (estimated around 4 percent of GDP), especially in VAT, and underexploited taxes (property tax, excises).
Weaknesses in revenue administration continue to be reflected in limited compliance and recoveries (IMF, country report/ 23/168/2023). Learning from experiences in other countries like Kenya, Rwanda, Uganda and South Africa could help the country to improve on the low tax to GDP ratio of 13.8% in 2022 to 18%-20% under the IMF ECF program by 2027.
This report proposes potential interventions that could help to improve tax to GDP ratio through downward revision widespread tax exemptions and concessions, diversifying revenue streams like comprehensive and equitable property rates, dealing adequately with high net wealth Individuals including politically expose persons (PEPs), through the resourcing of GRA with the appropriate technology and equipment as well as trained human capital and also deal severely with corrupt officials both in the public and private sectors like countries like Singapore and China to serve major deterrent.
The majority of businesses in Ghana are informal. Most firms are not registered with the Ghana Revenue authority (GRA). About 67.9 percent of sole proprietorship firms and 66 percent partnership firms operate in the informal sector in 2013— not registered with Ghana Revenue Authority.
Potential revenues from formalizing unregistered sole proprietorship and partnership establishments and enforcing tax compliance from these establishments would have amounted to 11.8 percent of GDP and 0.2 percent of GDP, respectively. Formalizing informal firms could broaden the tax net and dramatically improve domestic revenue mobilization.
With the implementation of the above specific recommendations would go a long way to boost tax revenue collection in Ghana from its current tax-to- GDP ratio of 13.8 percent to 18%- 20% under IMF ECF Program by 2027.
Chronic revenue underperformance is at the core of Ghana’s fiscal fragility. Fiscal indiscipline, primarily low revenue mobilization, underpinned by poor revenue policy, wide spread of tax exemptions and administration, were key causes of Ghana’s macroeconomic crisis.
Chronic structural weaknesses, including frequent changes in tax policy, a narrow tax base, a reliance on indirect and trade taxes, and a high tax burden on labor rather than on capital income, resulted in an inefficient and inequitable tax system.
The essence of the government tax policy is to have a clear direction on what the government wants to achieve regarding taxation. Tax policy is the choice by a government as to what taxes to levy, in what amounts, and on whom (OECD, 2013).
According to tax experts, tax strategy has to do with procedures, methods, guidelines, or administrative measures to achieve the tax policy. Thus, tax policy and strategy are interlinked. Tax policy is an objective, and the strategy is the means to achieve the objective.
Taxation in Ghana plays a critical role in financing public expenditures and supporting economic development. The major tax policies that Ghana has adopted since independence includes (a) Taxation of income (b) Consumption tax (c) Capital gain tax and (d) Excise Tax.
These policies have been evaluated together with the tax types namely, Corporate Income Tax, Value Added Tax (consumption tax), Excise duty, PAYE, CST, Duties (import duties), and their incentives and reliefs.
Governments in emerging nations are faced with an increasing desire for government services as well as public budget shortfalls. The country’s tax system is predominately composed of indirect taxes, such as the valued added tax, excise duties and import levies, which together contribute significantly to government revenue (Acheampong et al, 2021).
Large and persistent fiscal deficits are usually the result of a rising gap between government income and expenditures. Ghana is one of the developing countries with a budget deficit over the years. Ghana’s fiscal problems are rooted in structurally weak domestic revenue mobilization.
Tax revenue in Ghana is well below Sub-Saharan African peers but also starkly lower than countries with the same level of income. This highlights systemic inefficiencies within Ghana’s tax policy and compliance.
The low levels of tax revenue not only affect efforts towards macroeconomic stability but also undermine the capacity of the country to generate sufficient resources to support long-term growth and poverty reduction (World Bank,2024).
Enhancing Ghana’s revenue mobilization through reduction in the widespread tax exemptions and reliefs as well as critically diversifying the revenue streams are therefore imperative in the current economic context of the country’s debt overhang, high inflation, persistent currency depreciation and low economic growth.
Ghana’s tax-to-GDP ratio has been low compared to peers, with non-oil revenues stagnating in recent years. Tax policy design suffers from widespread tax expenditures (estimated around 4 percent of GDP), especially in VAT, and underexploited taxes (property tax, excises).
Weaknesses in revenue administration continue to be reflected in limited compliance and recoveries (IMF, country report/ 23/168/2023). Revenue administration includes the collection and management of domestic revenues, such as taxes, custom duties, revenues obtained from state-owned firms and others (Morgner and Chêne 2014; Jenkins 2018).
Having a well-functioning tax administration is crucial to promote business activities, investment and economic growth as well. Ghana’s fiscal sustainability challenges have persisted over the past decade.
This has manifested itself through weak revenues, expenditure overruns, and significant energy sector fiscal risks. Reforms around strengthening revenue mobilization, controlling expenditures (particularly the public sector wage bill), and prudent debt management have not had the intended results.
Taxation is the key to promoting sustainable growth and poverty reduction. It provides developing countries with a stable and predictable fiscal environment to promote growth and to finance their social and infrastructural needs.
Efficient and effective tax policy and administration are key to domestic resource mobilization and successful socio-economic reforms for every country. Tax policies and laws create the potential for raising revenues, but the magnitude of tax revenues obtained by the fiscus depends, partly, on the tax administration’s efficiency.
Consequently, tax administrations’ efficiency levels have become a key area of interest to policymakers worldwide. Various factors also kindled this interest, including tight government budgets, globalization, increasing interdependence between countries, effects of the global financial crisis, illicit financial flows), and Base Erosion and Profit Shifting (BEPS) practices that undermine country tax bases.
The economy of Ghana is highly dependent on tax revenue as a source of government expenditure for developmental purposes. Reforms in tax policy, revenue administration, and public financial management, including steps to address weaknesses in SOEs, are critical to addressing fiscal vulnerabilities.
pCorruption risks in tax administration has arisen as a result of overly complex tax codes, lack of autonomy on the part of revenue authorities, weak sanctioning regimes, a lack of meritocratic recruitment, poor professional ethics standards and high discretion in the collection of taxes – a problem exacerbated where such collection is based on frequent in-person interaction. Revenue mobilization has been historically below expenditures.
Revenue mobilization has been historically below expenditures. Ghana’s tax-to-GDP ratio averaged 13.8 percent for the 2017–23 period, well below most other lower-middle-income countries (16.9 percent in 2023) and the rest of Sub- Saharan Africa (18.4 percent in 2023).
Ghana’s overall tax-to-GDP ratio has increased steadily from around 8% in 2000 to approximately 13.8% today. Despite this, Ghana’s tax take remains below the government’s target of 18–20% of GDP by 2027 (Ministry of Finance, 2023). This level of tax revenue mobilization is lower than estimates that were available for Ghana just a few years ago.
The reason for this is the rebasing of Ghana’s GDP series, which led to a substantial upwards revision of nominal GDP in 2018 and highlights a key challenge when making international comparisons across developing economies.
Prichard, Cobham and Goodall (2014) argue that the infrequent and irregular rebasing of GDP series in developing countries often leads to the overestimation of tax-to-GDP ratios and presents a major challenge in comparing tax revenue ratios across countries.
With the urgent need to boost tax revenue collection in Ghana from the current average tax-to- GDP ratio of 13.8 percent to 20 percent under IMF ECF Program, the Ghana Revenue Authority (GRA) must embark on several reform and initiatives to reduce non-compliance with tax obligations for various tax types.
These include improve effectiveness of taxpayer services and improving the business environment, albeit with slower progress in the reformation agenda since 2014 (Keen et al., 2019).
Despite several reforms being made by the Ministry of Finance and the GRA to improve the tax collection to the comparable levels of Ghana’s peers within Sub-Saharan Region of 20 percent, a lot can still be learned from interventions used by other countries to speed-up the progress.
