The ability to raise revenues from taxes – fiscal capacity – is a crucial aspect for the functioning of any economy. Being able to tax citizens, and collect revenues efficiently, is the backbone of state formation and survival because greater fiscal capacity implies greater access of the state to resources needed to deliver public goods and services.
In developed countries, tax revenues represent over 40 percent of gross domestic product (GDP), while developing ones are only able to collect between 10 percent and 20 percent. In Ghana, tax-to-GDP ratio in 2017 was 14.1 percent – lower than the African average of 17.2 percent.
This low rate is the consequence of many problems. The large size of the informal economy, where non-compliance with tax obligations in the Micro Small Medium Enterprises (MSMEs) sector is common, being one.
According to a new study, ‘A research into Ghana’s tax regime, the need for reforms in the taxation of Micro, Small and Medium-sized Enterprises (MSMEs) in Ghana to enhance Compliance’, there are several reasons for MSMEs not complying with their tax obligations – fundamental among which is the high cost of compliance.
Conducted by Private Enterprise Federation (PEF) with funding from OSIWA, it said: “Especially where the tax administration system is not simple enough to allow individual businesses to meet their tax obligation without the additional cost of hiring a consultant to enable them meet their compliance requirement. The alternative is for the business not to incur additional cost by refusing to pay so as to reduce the costs associated with compliance”.
It also noted that MSMEs lack understanding of their obligations under the tax laws and related administrative provisions – another reason for their non-compliance.
“It is therefore not surprising that MSMEs contribute only about 4 percent of Ghana’s domestic tax revenue, even though they make-up about 92 percent of registered companies. This ultimately results in the Ghana Revenue Authority (GRA) not meeting its annual revenue targets,” it further reads.
This low compliance rate has devastating consequences on development. It means that government is not able to invest in public goods such as health, infrastructure and education. Even the Sustainable Development Goals which aim, among other things, to build effective, accountable and inclusive institutions at all levels, have set mobilising revenues as a goal on its own.
Prevailing tax regime
The current tax system categorises taxpayers into three (3): small taxpayers (with annual turnover below GH₵90,000); medium taxpayers (with annual turnover between GH₵90,000 and GH₵5,000,000); and large taxpayers (with annual turnover above GH₵5,000,000).
All MSME taxpayers are subject to the same Company Income Tax rate of 25% of chargeable income with relevant rebates depending on activity and/or location of the entity. Further, all MSME taxpayers are subject to withholding tax on their services, works and goods as well as company income tax just like the large entities. The tax laws also impose on MSMEs the same compliance obligations – including tax calculation, payment and filing – as the large entities.
Currently, there are no implemented legal provisions in Ghana which create a differentiated taxation system for MSMEs.
Overall, in the current tax laws and administrative provisions, but for minimal exceptions, all taxpayers have to comply with the same Company Income Tax and/or Value Added Tax and/or Customs and Excise Tax obligations however complex or costly, without consideration of their peculiar characteristics, size of business, or taxpayer categorisation.
An attempt to remedy this imbalance is provisioned in the second schedule to the Income Tax Act, 2015 (Act 896) as amended – Modified taxation and the presumptive tax system. However, these provisions are not succinct and have remained un-implemented to date.
The complexities and cost of compliance in the current tax administration system also serves as a demotivation to the MSME taxpayer population, the report said, adding: “There is therefore a need to reduce the tax compliance burden of MSMEs in order to bring a greater percentage of them into the tax net for continuous monitoring. This would enhance revenue collection and the general tax compliance culture of these MSMEs”.
Lessons from other countries
Whereas countries including South Africa, Cameroon, Democratic Republic of Congo (DRC), Sierra Leone, Liberia and Nigeria have a lot in common with Ghana in terms of topography and income distribution, the study revealed that they all have clear definitions for MSMEs in their tax laws – unlike Ghana.
Countries with differentiated tax systems for MSMEs have made those systems optional, such that the SMEs can elect to be a part of the differentiated system which is based on their special needs.
It also noteworthy that most developing countries have minimum company income tax applicable to large resident companies to shore-up government’s revenue generation efforts.
Again, a good number of these countries have a two-tier tax system and others have multi-tiered tax systems with graduated Company Income Tax rates; in addition, each country determines the tax system based on their country-specific circumstances.
Way forward for Ghana
Among other things, the report wants the country to realistically re-define which entities are classified as Micro, Small, Medium or large taxpayers for purposes of taxation and related obligations. The current turnover threshold of GH₵90,000 for small taxpayers for income tax purposes is too low and further conflicts with the GH₵200,000 turnover threshold for VAT registration that forms the basis of segregation for the various groups of taxpayers (i.e. STO, MTO and LTO).
Even though Ghana’s presumptive tax/modified cash accounting provisions are yet to be fully operational, it is recommended that it be streamlined to include entities as well, and not implemented only for individuals. It may also be adopted as an option for Micro or Small taxpayers;
Furthermore, it is important that tax rates for the MSMEs be reduced in addition to massive tax education by the GRA for taxpayers in the country. Such education efforts, the report added, will enable taxpayers to understand the tax laws which affect them as well as know their tax obligations under the law.
“If Ghana is to maintain the three-taxpayer categorisation – STO, MTO and LTO – then the tax system implemented, especially at the SME (small and medium taxpayers) level, should be very simple to understand and have very little, if any at all, costs to compliance,” it recommended.