Mobilising Taxes for Development: The Case of Tax Expenditures
Prudent fiscal policy is critical for the development of economies around the globe and the government uses
its expenditures and revenues to manage the fiscal space. The government’s ability to implement its development agenda is largely dependent on the mobilization of revenue and prudent use of its resources. Thus, tax policy and administration are imperative to economic growth and development, especially emerging and developing economies.
Currently, Ghana’s tax policies are aimed at enhancing and promoting increased economic activities in the private sector, mostly through tax exemptions and cuts for firms operating in the sector. Given the quantum of these exemptions and cuts, it is prudent to analyze the effectiveness of the policy these current or scheduled tax exemptions and cuts and ascertains whether the policies have achieved their stated objectives as well as the value of revenue lost.
The effectiveness or otherwise of tax policies can be evaluated in using four approaches – an assessment of the effect tax policies on macroeconomic variables such as: economic growth and growth in incomes; an evaluation of the incidence of tax; how changes in the marginal tax rates impact on behavior of taxpayers; and an evaluation of tax exemptions and tax cuts. An assessment of the impact of tax policies on the macroeconomy does not seem to be critical for the Ghana Revenue Authority (GRA) and the Ministry of Finance (MOF) currently, given the present peculiar situation that the country finds itself (inability to mobilize enough revenue to meet its developmental agenda as well as reckless spending of government).
Tax incidence analysis is complex and requires the application of microsimulation modeling, with its relevance realized when the marginal tax rate is rightly determined and the majority of the citizens honor their tax obligations. However, currently, the situation in Ghana does not allow the implementation of such assessment. Further, in the absence of a good tax-paying culture as an assessment technique based on the changing marginal rates is extremely difficult and Ghana is bedeviled with such a challenge. The reliability or validity of the analysis would also be significantly limited. In a gist, the approach of evaluating current or scheduled tax exemptions and cuts by government is a more effective approach.
The Ghanaian economy over the past 3 decades have experienced rapid economic growth, however, it is faced with major macroeconomic challenges. Chiefly among these challenges among others are the large debt overhang and associated rising interest payments resulting from massive government borrowing; expenditure overruns and accumulated arrears caused by fiscal indiscipline; revenue underperformance caused by leakages, loopholes and tax exemptions; and declining credit to the private sector, high cost of borrowing and the lack of reliable power supply to support private sector growth.
The high debt overhang and rising interest payments have left the government with limited fiscal space to implement its developmental agenda. All these have hindered the government’s efforts at mobilizing revenues over the years, as declining commodity prices reduces revenue of the amount of taxes these companies pay, as well as acute power supply and high cost of borrowing which have slowed growth in business activities. The situation is made worse on high tax exemptions regime, revenue mobilization leakages, low compliance, and poor taxpayer information.
Subsequently, the government of Ghana’s tax policies prior to 2016 sort to address the challenges of revenue shortfalls by enhancing revenue mobilization. The Ghanaian tax authorities have aimed at tax modernization programs, and these, for instance, have enabled the GRA to recover unpaid taxes, plug leakages and loopholes in the tax administration, conducted a comprehensive tax audit of the entire system and broaden the tax net.
The GRA has further strengthened the reconciliation process for the various taxes such as taxes on import and export duties as well as value-added tax and improvement in payroll tax auditing system. With respect to the tax modernization programs, a number of tax policy and administration initiatives have been implemented designed to enhance efficiency and effectiveness in tax administration and better promote good governance.
To mention, but a few, some of the tax policies include Permits and Exemptions; Introduction of Sliding Scale Excise Duty; Implementation of the Tax Identification Number (TIN) system; Removal of import VAT on specific raw materials; Review of Tax Laws on ECOWAS Common External Tariff (CET); Introduction of the National Single Window at the port of entry; Amendment of the National Health Insurance Scheme.
Since 2016 the government has shifted from the pursuance of a tight tax regime to a more flexible tax policy regime in which the tax system aims at encouraging and enhancing growth in the private sector economic activities in order to promote rapid economic growth. Government by these policies sort to reduce some types of taxes and abolish others it labeled “nuisance” and these tax reliefs were to improve the welfare of ordinary consumers.
These policies saw the abolishing of some taxes including one percent Special Import Levy imposed on imported raw materials and machinery; 17.5 percent VAT/NHIL on Financial Services; 17.5 percent VAT/NHIL on domestic airline tickets; Excise duty on Petroleum; Import duty on specified vehicle spare parts etc. Other taxes were also reduced and these include Special Petroleum Tax reduced from 17.5 percent to 15 percent; Energy sector levy rates for National Electrification and Public Lighting also reduced from 5 percent to 2 percent and 5 percent to 3 percent respectively; Exemption from tax, gains from realization of securities listed on the Ghana Stock Exchange for a period of 5 years and Replacement of the17.5 percent standard rate with a 3 percent flat VAT/NHIL rate for supplies by retailers and wholesalers.
The government has also in 2018 introduced a comprehensive tax exemption system based on a paperless system for implementing guidelines for granting and monitoring tax exemptions. Also, the government has launched the Excise Tax Stamp policy, which involves sticking of a specially designed digital stamp with security features on specified excisable goods whether locally manufactured or imported to indicate that taxes and duties have been paid or will be paid on them.
In several developing countries, policies to attract Foreign Direct Investment have largely centered on tax exemptions and cuts. These exemptions and cuts have been used as effective tools in the conduct of fiscal policy as well as the pursuance of various social goals and promote economic growth. These strategies have been beneficial to the economies (though questionable), however, exemptions have varying costs resulting from lost in tax revenue; referred to as tax expenditures.
The propensity for the tax authority to overlook the effect of tax expenditure on their economies is relatively high, as it is not viewed as part of actual government expenditures but rather forgone revenues. Assessment of tax expenditure is critical and there is the need for a comprehensive cost-benefit analysis of such tax policies to apprise government policies. In several cases, these incentives have been used as a political tool rather than an economic tool to drive economic growth and development, especially in developing economies.
All the major tax types in Ghana have some form of tax incentive built into it in the form of tax holidays, exemptions and reliefs, with income tax incentives being most prominent. These incentives are granted in the form of lower tax rates and in some cases complete exemptions and this is dependent on the sector in which the organization operates and its location. Various reasons are assigned for income tax incentives, ranging from stemming the flow of rural-urban migration; improving spatial distribution of industries; and promote investment or redirect investment into prioritized sectors of government.
Exemptions and reliefs from VAT are provided for certain kinds of supplies and to mitigate regressive effect of the tax on some type of taxpayers and under some circumstances a fulfillment of international agreements. Tax authorities provide exemptions and reliefs from customs duties for importers of intermediate inputs.
The major challenge with these exemptions and reliefs in Ghana is the fact that until 2011 there was the absence of a comprehensive effort to estimate the countries tax expenditure. It’s not until 2011 when OECD through its Tax & Development Program that the first estimate of tax expenditure study was undertaken in Ghana, and estimated revenue loss through tax incentives at 6.13% of GDP. However, the Ministry of Finance and GRA employed the same methodology as OECD and estimated that tax expenditure from 2008 – 2011 averaged 1.9% of GDP and increased to an average of 2.6% from 2011 – 2015. This discrepancy was attributed to data challenges and limitations.
Oppong and James (2016) have pointed out that data aggregation in the estimation of VAT expenditure by the GRA and the Ministry of Finance resulted in the underestimation of the tax expenditure. Using firm-level data for direct and custom tax expenditures and VAT tax expenditures from the supply and use tables in 2013 estimates an overall tax expenditure of 5.2% of GDP for 2013. Their results further indicated tax expenditures on VAT constitute 4.2% of the overall tax expenditures. In brief tax, expenditure is high in Ghana and has been on the rise since 2008 and it is imperative Ghana starts changing the narrative if the country is to mobilize enough revenue so as realize the Ghana Beyond Aid agenda.