By Richmond Akwasi ATUAHENE (Dr)
The President elect campaign message on the abolishing the nuisance taxes like Covid 19, E’ levy and betting tax generate approximately GHC6.4 billion could result in significant revenue losses—approximately GHS 6.4 billion in 2025 based on the budgeted revenue but the sought tax exemptions and reliefs alone by outgoing government of US$350 million or GHC 5.6 billion to 42 companies operated under NPP government IDIF program.
The sought tax exemptions and reliefs of US$350 million was closer to IMF ECF disbursement of SDR 269.1 million or US$360 million. This analogy makes this country completely a joker and mockery.
What has been the 42 companies tax contributions to Ghana’s tax to GDP ratio. The World Bank has asserted that widespread tax exemptions and reliefs has been costing the country approximately 2%-3% to tax to GDP ratio.
The government could reduce revenue gap by reviewing the numerous tax exemptions and reliefs granted that is said to reduce the tax-to GDP ratio by 2%-3%. World Bank and IMF estimates show that value-added tax exemptions, on average, result in 2–3% reduction in the tax-to-GDP ratio. (World Bank Group,7/8/2024). The World Bank (2024).
The 8th Ghana Economic Update reveals that an overly generous regime of tax reliefs and exemptions was costing the government approximately 1.3% of its GDP annually in lost corporate income tax (CIT) revenue alone. The government must review the numerous tax exemptions and reliefs in order abolishing or reduce the nuisance taxes, which are making the citizenry poorer and poorer.
The government must fully capitalize on diversifying its tax revenue streams through the introduction of property taxes, environmental taxes and digital services like some of its peers like Kenyan and Rwanda and also review the taxes on high net wealth Individuals including politically expose persons (PEPs) in Ghana (HNWI) are individuals who have accumulated net worth to the level that places them at the very top of the wealth scale in a country and the incoming government must also ensure efficient tax administration which is crucial for effective revenue collection, because Ghana still faces challenges such as suboptimal compliance, obsolete technological infrastructure, and a lack of robust taxpayer education and support mechanisms.
The country’s tax laws had not been fully developed for some income streams, such as income generated from properties, equities, capital gains, alternative investments and setting up a High-Wealth Individual tax compliance.
Giving the low self-employment PIT (personal income tax) revenue collections in Ghana, it likely that many High Net Wealth Individuals (HNWI) in Ghana are not tax compliant with income tax —they do not file income tax returns, and therefore do not make the appropriate tax payments. This phenomenon leads to losses of a large amount of income tax revenue, and an unfair distribution of the tax burden.
Widening the tax net should not be a political talk, the government must work hard to improve the tax net to support fiscal space. While individuals residing in Ghana are mandated to pay tax on their income regardless of where it was earned or generated, the country’s economy is dominated by a large, difficult-to-tax informal sector.
Most businesses in the informal sector do not have formal structures and are not registered with the GRA for tax purposes. They do not file tax returns, so their incomes often fall outside the country’s tax net.
This places a burden on the small formal sector to pay taxes needed for government services and development. Successive governments have tried to tax the informal sector, introducing taxes specifically targeting informal-sector.
Another major challenge to tax administration is that majority of businesses in Ghana are informal. Formalizing informal firms could broaden the tax net and improve domestic revenue mobilization. Studies suggest that firms would only become formal when the benefits to doing so exceed the benefits of staying informal.
The Government could also design programs, which provide incentives to consumers, demanding receipts from firms with TIN numbers and verifiable receipt numbers. It could compel informal firms not only to register to formalize, but also comply with tax regulations in order to make customers patronize their services.
Exemptions reduce taxpayer’s “taxable income,” which is the amount of income on which the taxpayer pays taxes, hence lowering the amount of taxes he or she owes.
Tax exemptions are tax subsidies, preferences, and incentives that benefit a certain industry, activity, or group of people and represent government expenditure for those activities or groups, implemented through the tax system rather than direct grants, loans, or other types of government support.
In order to entice investment in Ghana, past governments give various tax exemptions, lowering tax revenue collection. The government must urgently review all tax exemptions and zero-rated items at the Ports.
Cutting down on non-essential exemptions, reviewing zero-rated items and concessions granted to mining companies, and amending existing tax concessions on imported items can potentially recover revenue loss from abolishing these two levies. The value of exempted and zero-rated imports decreased slightly from GHS 22.3 billion in 2022 to GHS 20.2 billion in 2023.
This represents a modest decline of 10.3%, reflecting some progress in reducing tax giveaways. World Bank and IMF estimates show that value-added tax exemptions, on average, result in 2–3% reduction in the tax-to-GDP ratio. (World Bank,7/08.2024). Reviewing and rationalizing these exemptions can help the government recover substantial revenue.
If the government undertakes a thorough review of direct port exemptions, revisits zero-rated imports, and reconsiders items taxed at 5% due to special concessions, such as imports within the mining sector, there is a substantial potential to generate enough revenue to offset the revenue loss from abolishing the E-Levy and COVID-19 Levy, and still ensure fiscal stability and alleviate the tax burden on citizens.
Ghana’s tax exemptions from VAT, PIT, and import duties offer fiscal relief but create complexity and distortions. The Tax Exemptions Act, 2022, provides clear criteria and guidelines, but other legislation introduces further tax incentives that deviate from the notional tax benchmark.
In 2021, the fiscal cost of VAT exemptions was estimated at 1.9 percent of GDP, or more than 72 percent of actual VAT revenue, with the largest source of forgone revenue being the VAT exemption on the supply of dwellings and land. Personal income tax (PIT) PIT exemptions cost an estimated 1.4 percent of GDP in 2021, about 62 percent of PIT revenues, with significant impacts from exemptions for cocoa farmers and pension contributions. Import duty exemptions in 2022 cost an estimated 0.2 percent of GDP, about 21 percent of actual revenues, with the most expensive being those granted by parliament to specific taxpayers.
Moreover, the introduction of excises on plastics, sugar-sweetened beverages, environmentally detrimental goods, and motor fuels, among others, could generate significant revenue, while helping mitigate the negative externalities of such products on public health and the environment.
Second, according to World Bank Economic Update (2024) posited that there is empirical evidence that Ghana’s tax policy architecture also lags the more effective systems employed by its peers. Countries such as South Africa and Kenya have adopted more progressive tax regimes with higher levies on upper-income echelons and political elites thereby harnessing a larger share of economic wealth. Conversely, Ghana’s tax structure has been less progressive over the years, with lower rates and substantial exemptions that dilute the tax base. For instance,
Rwanda and Senegal have instituted comprehensive value-added tax (VAT) systems with minimal exemptions, resulting in augmented VAT collections. Ghana’s VAT framework, while structurally similar, is beleaguered by pervasive evasion and extensive exemptions that compromise its yield (World Bank, 2023).
Third, UK Chamber of Commerce, 2019) noted that there was pervasive corruption in Ghana Tax Administration that accounted for the low tax GDP ratio of 13.8%. In Ghana, Customs Division of the GRA has consistently been cited as one of the most corrupt institutions (UK Chamber of Commerce, 2019). Corruption drastically reduces tax revenues, forcing governments to find other avenues for financing government expenditure, including borrowing.
Future fiscal flexibility is reduced, because servicing of debt has to be given priority over other expenditures. This creates a vicious circle endangering fiscal sustainability. The politicizing the Ghana Revenue Authority had made it ineffective and inefficient.
Political leadership sustains and often creates and protects corruption. Corrupt political leadership makes the spread of corruption at lower levels relatively easy. The main drivers of tax corruption are low pay, lack of professional ethics, legal loopholes, conflicts of interest, get-rich-quick ambitions, and bureaucratic red tape.
The less satisfied tax officers are with their pay scales or with the fairness of career development and financial incentive schemes, the more inclined they are to engage in corrupt behavior. If their wages are comparable to the wages for a similar job in the private sector, they may not take the risk of engaging in corruption.
A variety of factors contributes to corruption in tax administration. These include the complexity of tax laws and procedures, the monopoly power and degree of discretion of tax officials, lack of adequate monitoring and supervision, the commitment of political leadership, and the overall environment in the public sector.
The complexity of tax laws and procedures increases the magnitude of corruption in the tax system. Tax evasion is more likely to occur in a highly corrupt environment. Lack of requisite information makes taxpayers unaware of their rights and more exposed to discretionary treatment and exploitation. Because of asymmetrical information, it is difficult to monitor officers and hold them accountable for their actions.
The absence of supervision and accountability gives workers an opportunity to refrain from performing public duties. Absence of measures designed to maintain the integrity of staff—such as the promotion and enforcement of ethical standards, merit-based recruitment and promotion procedures, and regular staff rotation schemes to prevent the creation of lucrative networks—increases the likelihood of staff indulging in corrupt practices.
In some developing countries, such as Ghana, the extreme unwillingness of taxpayers to comply with the law—and hence their readiness to bribe tax collectors in order to reduce their tax liability—are important causes of corruption. The level of corruption in tax administration generally parallels that in the administrative environment as a whole.
The underdeveloped economic systems like Ghana offer fewer opportunities for corruption than socialist systems. The greater the administrative controls over the economy, the greater the problems of monitoring and accountability, because a greater share of economic planning decisions depend on bureaucrats
Fourth, according to Mohammed (2020) the politicization of property taxes by the two leading parties NPP and NDC had contributed to poor property tax in Ghana. The two major political parties the New Patriotic Party and National Democratic Party are in keen competition for voters’ hearts and are therefore not keen on collecting local taxes in general and particular property taxes in particular because the people view taxes as unnecessary impositions which increases cost of living as well as are the beneficiaries or owners of the numerous properties developed over the past three decades.
Mohammed (2020) further observed that property rating in Ghana is governed by the Local Government Act 1993 (Act 462), which upholds this ‘replacement cost’ approach to levying properties (Commonwealth Local Government Forum 2018).
The approach calculates the rate impost as “the amount it would cost to provide buildings, structures and other developments as if they were new on an undeveloped land or site at the time the premises are being valued” (Section 96(10)[a]). Local authorities in Ghana are legally empowered to collect rate revenue due to them fully and promptly. This empowered position has not, however, translated into improved local tax performance.
The reasons offered in the existing literature for sub-optimal property rate performance in Ghana include: 1) outdated or non-existent property registers and valuation rolls 2) manual, not automated, rate implementation systems 3) limited administrative capacity and equipment 4) a narrow tax base caused by extensive legal exemptions and 5) inadequately described taxable properties in the fiscal registers.
World Bank data (2020;2023) also noted that Ghana has not failed to fully capitalize on diversifying its tax revenue streams through the introduction of property taxes thus accounting for low tax to GDP ratio unlike some of its peers. For example, Rwanda and Uganda have implemented successful property tax regimes which have contributed to their higher tax-to-GDP ratios.
Property rate performance as a percentage of Gross Domestic Product (GDP) is far lower in emerging economies (0.69%) and the global South (0.6%) than in the USA (4.0%), OECD (2.0–3.0%) and developed countries generally (2.2%) (Norregaard 2013). Further, when we look across Africa we find an average yield of only 0.38% (African Property Tax Initiative, 2017; McCluskey and Franzsen 2017). This is regrettable, as property rates are the most promising sources of income to accelerate the socio-economic transformation of cities in Africa (Moore et al. 2018).
