By Richmond Akwasi ATUAHENE (Dr)
The free zone regime provides companies with a 10-year holiday for corporate income tax, VAT, customs duties, excise taxes, levies, and fees on imports. The 10-year CIT holiday is provided to free zone enterprises and developers.
The Income Tax Act (ITA) stipulates a post-holiday CIT rate of 15 percent for taxable income from exports of a free zone enterprise; and a post-holiday CIT rate of 1 percent for taxable income from exports of a free zone developer.
Further, dividends paid out of exempt profits of free-zone enterprises are exempt from shareholder-level taxation (no withholding tax) (MoF, 2022, Tax Expenditure Report).
Tenth, World Bank (2020) observed that other taxes have also seen a decline in their contribution to overall revenues, partly due to exemptions. The World Bank estimates that such VAT exemptions cost Ghana 1.85 percent of GDP per year, and their value is equivalent to about 72 percent of all VAT revenue collected. Importantly, numerous levies are added to the VAT base rate in Ghana—i.e., the national health insurance levy (2.5 percent), the Ghana education trust fund levy (2.5 percent), and the COVID-19 health recovery levy (1percent)—effectively raising the consumption tax on certain items well above the statutory rate.
The VAT’s share of Ghana’s total tax revenues dropped from 34 percent in 2015 to 17 percent in 2021, contrasting with global trends. This decline is partly attributed to a reduction in the standard VAT rate in 2018, which was reversed in 2023. Although the VAT rate is now in line with regional peers, additional levies and exemptions on certain items, such as agricultural products and utilities, complicate the revenue picture.
Excise duties contribute about 1.8 percent of GDP, below the 2.1 percent average across low-income countries and at the lower end of the SSA region. More than 90 percent of Ghana’s excise tax revenues are derived from petroleum products, through the energy fund and road fund levies.
The absence of a robust track-and-trace system and factory-gate flow meters likely contributes to non-compliance. The government must widen the tax net to improve the 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 operators. These include the vehicle income tax on public transport operators, the tax stamp for collecting income tax from small traders, and the flat rate scheme for expanding the reach of the VAT (Prichard & Bentum, 2009).
Eleventh, Agyei (1984) observed that one of the many problems facing tax administrations in the developing countries has been tax evasion. Tax evasion is rampant due to lack of appropriate monitoring strategies in tracking tax revenues from tax officials and taxpayers.
Tax evasion has been a major challenge in Ghana, and it can have a negative impact on the country’s economic growth and development. Some factors that contribute to tax evasion in Ghana include: weak tax administration, underground economy, high tax burden and unemployment.
The estimated tax evasion due to the presence of the “underground economy” is, on average, about 6.28% of GDP. According to Akoto (2020) most tax evaders in Ghana are within the underground economy. The Ghana Revenue Authority (GRA) has consistently missed its tax revenue targets as a result of operation of underground economy.
This has been due to a lack of effective monitoring strategies and low detection. Many tax evaders in Ghana are part of the underground economy. Mobile money activities have contributed to the growth of the underground economy, which has made it more difficult to collect taxes.
The high tax burden in Ghana has contributed to the problem of tax evasion and Unemployment is another factor that has contributed to the worsening of the tax evasion problem. Tax evasion affects various sectors of an economy and heaps adverse effect on an economy as a whole.
Evasion of taxes tempers on the accuracy of microeconomic statistics thus leading to the misallocation of resources needed to stimulate the growth of an economy. The main determinants of tax evasion include tax burden, income level, source of income, tax audits, tax rates, penalties, gender, marital status, public service, tax system, tax mentality and tax morale as the factors augmenting the evasion of taxes worldwide. Tax rates have been widely recognized as the most primary determinant of tax evasion.
Penalties for tax evasion widely accepted as a deterrence force to encourage taxpayers’ compliance. Income level fluctuations have had an impact on taxpayers evading behaviors. Demographic Factors (Gender, Age, Race and Education) effect on tax evasion cannot be underestimated.
Lastly, Ghana’s legal definition of employee for tax purposes is not fully aligned with international best practice. For example, corporate directors are not considered employees for payroll tax purposes; instead, fees and/or allowances paid to directors are subject to a non-final withholding tax of 20 percent.
Moreover, fees paid to lecturers, invigilators, examiners, and part-time teachers, as well as endorsement fees, attract a final withholding tax rate of 10 percent. This contrasts with international best practice, whereby corporate directors are employees for tax purposes, and fees that add to overall income do not benefit from special treatment.
4.0. Conclusion
The Government of Ghana has made domestic revenue mobilization a crucial part
of its medium-term development strategy, with the goal of tax revenues reaching
18–20% of GDP by 2027. Improving domestic revenue mobilization in the country
is seen as an important means of funding social programs and public goods, as
well as of improving the country’s fiscal position. Overall, despite some gradual increases over the past two decades, Ghana’s tax-to-GDP ratio, which stood at 13.8% in 2022, remains slightly below the average of countries of a comparable income level, though it is middling among other countries in sub-Saharan Africa.
Ghana’s fiscal performance has been very poor in recent years. Weak domestic revenue mobilization has become the root cause of fiscal imbalances in the country and the biggest single threat to the achievement of the government’s development objectives. Ghana’s domestic revenue/GDP ratio remains far below the levels of its sub-Saharan African comparators, and revenue gap has increased significantly in the past years.
The Government of Ghana must make domestic revenue mobilization a crucial part of its medium-term development strategy, with the goal of tax revenues reaching 18–20% of GDP by 2027 will urgently reviewing tax exemptions and reliefs.
Ghana Revenue Authority must adopt new methodology of taxing of the high net- worth individuals, politically expose persons and their cronies, introduce a new equitable and transparent property taxes in the cities and urban areas,.
The Government must intensify its digitalization agenda which has the potential to propel the formalization of the Ghanaian economy and widen the tax net and also re-equip, re-tool and modernize the Ghana Tax Authority to function effectively and efficiently. Improving domestic revenue mobilization in the country is seen as an important means of funding social programs and public goods, as well as of improving the country’s fiscal position.
Overall, despite some gradual increases over the past two decades, Ghana’s tax-to-GDP ratio, which stood at 13.8% in 2022, remains slightly below the average of countries of a comparable income level, though it is middling among other countries in sub-Saharan Africa. Despite these challenges, Ghana has made some progress in improving its tax administration and tax policies, albeit with varying degrees of success.
The Ghana Revenue Authority (GRA) has implemented various initiatives aimed at enhancing tax collection and compliance including the adaptation of digital solutions such as the Integrated Tax Application and Preparation System (Itaps) and the Total Revenue Integrated Processing System (TRIPS) aimed at streamlining tax filing and payment processes, reduce administrative bottlenecks, and minimize human interactions that often lead to corruption.
Ghana has also made efforts to improve its tax policy framework by amending its Value-Added Tax (VAT) laws to reduce exemptions and improve compliance. The introduction of the Excise Tax Stamp policy, which mandates the affixing of tax stamps on specified excisable goods, is another step toward curbing tax evasion and enhancing revenue collection.
Further, the enforcement of Transfer Pricing Regulations is a strategic move to counteract profit shifting and ensure equitable tax contributions from multinational entities (IMF, 2023). Finally, the government has developed a Medium-Term Revenue Strategy (MTRS) focused on tax policy and revenue. The first step in improving corporate tax revenue is an establishment of taxpayer databases. Infrastructure is critical for making other interventions possible and effective.
Since economy payment systems are important for easily accessing information about taxpayers, encouraging and compelling digital payments could help improve revenue mobilization. Deterrents and other messages to boost taxpayer morale, if appropriately designed, could also be effective in encouraging tax filing and compliance.
The introduction of minimum tax schemes and tax – deductible laws can be promulgated to reduce substantial corporate tax evasion and increase domestic revenue mobilization. Fully refundable withholding taxes, especially for online transactions, could be introduced to secure revenues Given the country’s history of tax underperformance, the proposed short-to-medium-term policy recommendations will need to be accompanied by additional measures to: (i) ensure that tax policies are not reversed, (ii) rebuild and expand the tax base, and (iii) increase progressivity and ensure fair burden-sharing across various income groups.
5.0. Specific Policy Recommendations.
Specific policy recommendations are underlisted in the scope of this report. This research paper paves the way for specific recommendations for reform which can meet policy objectives in an efficient, equitable and sustainable manner to justify the removal of the nuisance taxes as well as reaching the tax to GDP ratio of18–20% by 2027 under the IMF ECF program.
IMF country report (23/168/2023) recommended potential measures to sustainably generate significant revenue while addressing efficiency and equity concerns: (i) removing VAT exemptions (which are estimated at close to 2 percent of GDP), (ii) reforming the CIT by phasing out tax holidays and exemptions and strengthening safeguards against profit shifting, (iii) reducing customs exemptions, (iv) increasing progressivity in personal income taxes, (v) automatically adjusting fuel levies by exchange rate movement or inflation, and (vi) adopting the new fiscal regime for the extractive industries but the study had made specific policy recommendations to address the low tax to GDP ratio in the country.
First, as recommended by the IMF (2017), the first and foremost step towards implementing a High Net Wealth Individuals Compliance Program (HNWICP) is for a tax administration to make an assessment of its readiness to proceed and create feasible and sustainable programs.
Strengthen tax administration capacity to deal with complexities related to large and high net worth individuals with high revenue potential. The complexities and political factors necessitate tactfulness at the planning stage, in order to embark on reforms and programs to appropriately tax, monitor, and enforce compliance on tax filing and payment of tax liabilities.
One key recommendation is that Ghana Revenue Authority must adopt the Uganda Tax Authority methodology of handling the high net- worth individuals, politically expose persons and their cronies.
The Uganda Revenue Authority (URA) set up a High Net Wealth Individual (HNWI) unit in September 2015 to focus on mobilizing tax revenues from High Net Wealth Individuals and PEPs The unit developed their programs in two phases.
During the first phrase, the unit identified and categorized HNWIs, and analyzed legal and administrative strengths and weakness of the URA. The unit identified the following sectors as the top priorities: real estate, financial and insurance services, professional and technical services (lawyers and doctors), manufacturing, construction, and public (policy makers).
The Unit paid special attentions to those who had 1) land transactions of large amounts, 2) high value commercial forests, 3) rental income, 4) income from imports and exports, 5) expensive cars, 6) large loans and bank transactions, and 7) CEOs and business owners.
