20% TAX 2023. FEASIBLE?
The ability to collect taxes is central to the running of any country, as governments all over the world solely depend on taxes as a major source of revenue to finance its social services such as health, education, and critical infrastructure. With the COVID-19 pandemic placing the global economy in an extra ordinary times, leading to major economic downturns and a global economic recession, the need to recover and build back strongly has been more than necessary. For economies to, however, recover from this downturn, there is the need for the government to lead the way by making some major investments into the economy, something which could only be done if the government is able to mobilise enough revenue. Domestic Revenue Mobilization is therefore becoming the topmost priority for most developing countries, especially in Sub Saharan Africa. The need to mobilise additional revenue is now the first priority on the agenda of African governments and Ghana is no exception.
To deliver on its mandate, the government requires resources, necessitating the need to impose compulsory levy (tax) on citizens– tax policy. Currently, most economies across the globe rely on the imposition of taxes to augment their revenues to finance their expenditures. In this regard, most advanced or developed economies are doing so well in mobilizing tax revenues. Data on the Organization for Co-operation and Economic Development (OECD) countries show that their average tax-to-GDP ratio was 33.8% in 2019.
The data show that Denmark is the most efficient in terms of tax revenue mobilization among these countries with a tax-to-GDP ratio of 46.3%. In sharp contrast, their counterparts in Less Developed Countries (LCDs) which are confronted with several challenges, have this as the crux of the matter. Revenue mobilization continue to be a major challenge to most LDCs, especially those in Sub-Saharan African countries. Most of these countries have their tax-to-GDP ratio way below the World Bank’s ideal threshold of 15 percent for developing economies
The OECD report on tax revenues on African countries show that the average tax-to-GDP ratio for 30 African countries was 16.5 percent in 2018. This compares to the OECD average of 34.3 percent and the Latin American and Caribbean (LAC) average of 23.1 percent for the same year. As observed, the situation in Ghana is not entirely different from those of the other African countries. Domestic resource mobilization has been a major problem facing Ghana over the years, with its tax-to-GDP ratio falling below most of its peers.
Per the OECD report, Ghana ranked 20th among 30 African countries with a tax-to-GDP ratio of 14.1% in 2018. Ghana’s performance is not surprising as the country consistently misses its revenue targets set by the government. For instance, in the first half of 2021, government missed its revenue target by GH¢4,058 million, representing 12.5 percent of the target for the period. In other words, the government was able to achieve 87.5 percent of its revenue targets of GH¢32,362 million between January and June 2021.
This further casts doubt on whether the revised revenue target of GH¢72,477 million for 2021 will be achievable. Just as one will expect, the anemic domestic revenue growth continues to exert immense pressure on the government, leaving it with no option than to borrow. This has been compounded by the outbreak of COVID-19 which has overstretched government’s finances, leaving little or no fiscal space to undertake developmental projects. It has, therefore, become very critical for the government to improve its domestic resource mobilization to enable it address its expenditure issues, thus, the need for a comprehensive assessment of the country’s revenue mobilization drive.
Assessment of revenue mobilization
Commenting on the current revenue mobilization situation in the country, Mr. Theophilus Tawiah, a Tax Expert and Managing Partner at WTS Nobisfields, commended the government’s efforts so far but stated that more needs to be done. “If you look at the statistics that we have, it shows that consistently we have improved in our revenue collection. Even though we are doing very well, more needs to be done to enable us have a sustainable, reliable source of fiscal revenue to support the government’s agenda that we have in this country”.
To further buttress his point, the Tax Expert provided details on government’s revenues collected over the past five years which clearly showed the consistency and improvement with revenue mobilization. He pointed out that in 2015, government collected GH¢ 22.19 billion as revenues. In 2016, the country’s revenues rose significantly to GH¢27.0 billion, a year-on-year growth of 21.7% over the previous year’s receipts. In 2017, total revenues collected by the GRA was GH¢32.3 billion which increased to GH¢39.0 billion in 2018 and further rose to GH¢43.10 billion in 2019. In 2020, despite the COVID-19, the government managed to raise GH¢53.39 billion as revenues through the GRA.
The trend over the past five years shows 19.24% average annual increase in revenue collection. Meanwhile, as part of efforts to help mobilize enough resources to meet its expenditures, the government imposed new taxes and also made amendments to some existing ones. The new taxes include the COVID-19 Health Levy, the National Health Insurance Levy and the Sanitation and Pollution Levy (SPL), and the Energy Sector Levies Act (ESLA). There was also the introduction of the financial sector clean-up levy of 5% on profit-before-tax of banks in addition to increments in Road Tolls.
Speaking on this, Mr. Tawiah stated that despite the negative impacts of the pandemic on households and businesses, the government also needs to raise revenues to fast-track the recovery process. For the 1% COVID-19 levy, he explained that since it’s an indirect tax which is borne by everyone, it will definitely raise revenues to augment government’s support. “These taxes will go a long way to augment the tax revenue target for this country. So, I think that we are doing very well; more could be done to help augment the process. So, my general view is that, we are doing very well in terms of revenue, the tax net needs to be widened to bring a lot of people into the tax bracket”.
However, he quickly indicated that at this stage it’s not clear how these taxes are performing. Meanwhile, the Finance Minister in the Mid-year Budget Review indicated that the taxes introduced in May have so far yielded a total of GH¢249.7 million compared to the target of GH¢358.1 million. This is approximately 70 percent pass mark for these taxes. Little as it may be, it’s definitely going to help the government to address some of its needs. Nonetheless, what is yet to be assessed is the impact of these taxes on businesses and households that are still struggling to get out of the woods.
The Ghana.GOV platform – the game changer?
Aside the introduction of the taxes, the government continues to explore avenues to widen the tax net. One of such initiatives is the Ghana.GOV platform launched earlier this year. This platform seeks to minimize the need to engage in physical money interactions and reduce the need for interminable visits to various offices to process and pay for services. The platform also enables the relevant government bodies to have a single view over all internally generated funds within the country. Commenting on the introduction of the Ghana.Gov., the Tax Analyst averred it “is a very laudable idea. It is part of an effort to digitize how we pay taxes in this country, so for a start, it’s a very good idea”. “It will make tax payers to be able to file their tax returns on time without walking to a GRA office. It will also ensure that we can make payment of taxes without having human intervention.
Also, it’s likely to ensure that there is no much interface between the taxpayer and the revenue authorities and if all things go well, it’s likely to increase the revenue of the state because everything is going through the online platform system. Administratively, it is very good; very efficient for taxpayers to use”. However, Mr. Tawiah raised some concerns about the platform of which one is the inability of the system to not synchronize with other government agencies.
For instance, he noted that when one visits the SSNIT and GIPC on the platform, one will not be able to access it even though that functionality exists because it has not been activated. Secondly, he noted that at the moment, the system doesn’t cover all the 23 banks in the country as only selected banks have been adopted to operate on the platform. “So, my recommendation is that, it should be extended to cover all banks licensed by the Bank of Ghana, and also special deposit taking institutions like the microfinance, savings and loans and the rural banks. Because when you go to the rural community, most of the banks there are the rural banks.
So, the coverage should be widened in terms of the banks that are allowed to accept payment on behalf of the GRA.” Further raising concerns on the Ghana.Gov, Mr. Tawiah averred that payment through the bank is currently the only mode established on the platform. As such, he recommended that the other modes that are placed on the platform but still remain inactive should be activated. According to him, those functionalities need to be activated so that tax payers can pay through the other means such as MoMo or other similar means of payment.
Another concern the tax consultant raised was that the Ghana.Gov is not synchronized with the GRA portal, so even though you might have paid the money through the platform, it will not reflect on the GRA portal that you have made your payment. As such, that synchronization needs to be addressed, he added. “It’s a starting point. So, we need to put in all these measures so that it works efficiently. The final thing I will say is that the security system in relation to the platform needs to be tightened so that it doesn’t give miscreants access to be able to generate invoices and appear as if they have paid taxes. So, that security aspect needs to be covered as well”.
Need to Improve Revenue Mobilization at the Local Level
Just like the central government, revenue mobilization by MMDAs is also nothing to write home about. In Ghana, Assemblies rely on three main sources of revenues: Internally Generated Funds (IGFs), central government transfers, and Donor Funds. However, evidence reveals that locally generated revenues which include property rates, ground rent, fees and licenses, commercial undertakings, and service charges, have been low in most of the Assemblies. As such, the government’s resolve to rope in more revenues should also focus on ensuring efficiency at the local government levels. “At the moment, they are not doing well in terms of revenue collection.
Because properties remain unnumbered, properties are scattered; it’s quite difficult”, said Mr. Tawiah who expressed worry about the revenue situation of the MMDAs. According to Mr. Tawiah, there is the need for a reliable data on all properties that are registered at the local level. To him, once we have the data and houses numbered, revenue mobilization at the local level will pick up.
To this end, he lauded the government’s digital address initiative saying, “that’s a good starting point”. He further noted that the property rates that are being charged currently are very low and should be re-looked at properly. He explained that the rates to be paid should be based on the value of the property in question. “So, all in all, if we want to increase the revenue collection at the local level, we need to have the right data. We need to make sure that we have information on everyone”.
Government’s Ambitious drive to mobilize Tax-to-GDP ratio of 20 percent by 2023
Despite being assessed as having the potential to revitalize the economy, many have expressed worry about how the government will raise its share of the GH¢100 billion Ghana CARES “Obaatan Pa” Program. Finance Minister, Ken Ofori-Atta, earlier indicated that this Program will require the government to raise GH¢30 billion over the next three years. As such, he noted this will, thus, necessitate the government to achieve a Tax-to-GDP ratio of 20 percent by 2023 to raise these funds.
Assessing the scenario, the Law Lecturer at UPSA/Partner at WTS Nobisfield observed that the target looks quite ambitious considering government’s revenue growth over the years. “The target will be quite difficult to achieve. Because at present, tax revenue to GDP in most African countries sit at 17.2% of GDP. Ghana, according to the OECD and ATAF is making 14.1% tax revenue to GDP as of 2020. So, in the next three years, if you want to achieve 20%, it means that you need to put in a lot of measures to achieve that. And I think that because of the COVID, because of other things, it may look quite unrealistic. But there are other things that can be done to ensure that at least we increase it from 14.1% to something like 18.1% or 18.5%”
Need for a comprehensive data on taxpayers
To meet the current target of 20% tax-to-GDP ratio demands, government must go the extra mile in its revenue mobilization strategies. To this end, Mr. Tawiah believes the starting point is to have a reliable and up-to-date data of all eligible tax payers in the country. According to him, continuous measures must be put in place to ensure that persons who are not registered or companies that are not paying taxes, are brought into the tax net. Also, widening the tax net to cover the informal sector is another key area government must consciously explore to aid its revenue mobilization. This must form part of government’s efforts to formalize the informal sector economy in the country.
However, Mr. Tawiah questions what constitutes the informal sector. “We have had that conversation for a while. But, it looks as though we ourselves don’t know what is informal sector; we need to define what informal sector is from the Ghana point of view.” Mr. Tawiah further emphasized that the country should be clear on what constitutes the informal sector. That definition, according to him, will point out whether we are basing the informal sector on the revenue size or on the size of the business or sector. Once that has been sorted out, the next step will be to develop an appropriate tax system for taxing the sector, he stated. He also admonished Ghana to understudy other countries that have such small taxpayers’ corporate regime. This system, according to him, covers those who are not paying tax at the regular rate of 25%.
However, the ACCA classifies businesses earning 1.5 million Pounds as SMEs but it’s still not clear whether that definition applies in Ghana presently, he averred. “Is that the definition of SME in Ghana? We don’t have that information. So, once you want to have small corporate tax system for SMEs, we must define what a tax unit is. Those persons who are within that bracket– is it individual, is it companies, is it partnerships, is it based on revenue? Once we are able to define what a tax unit is, then the next thing to do is to look at a proper design of the tax system for the small corporate tax regime.” Furthermore, Mr. Tawiah stated that Ghana needs to also provide clear administrative procedures to deal with the administration of tax.
He also proposed a new rate for taxing the sector. “I will recommend that we should tax the SMEs at 10% which is higher than the presumptive tax, which is 3%. So, that will likely bring government revenue of about 7% for those who qualify for the small tax payer’s regime.” Moreover, he recommended a revision of the country’s tax law enforcement mechanism. He averred that the country has good tax laws but the enforcement of those laws have always been a challenge. Therefore, he urged the revenue administration body to use certain anti-avoidance measures such as the general anti-avoidance rules or special anti-avoidance rules in the tax laws of the country to counteract avoidance and tax evasion.
He, likewise, stressed on the need for public education. “We must also educate the public because a lot of people do not understand their tax obligations. So, we must educate the public; the tax payers, the taxing community in a language that they understand to pay taxes. The education can be done with maybe the NCCE or Chartered Institute of Taxation, Ghana. We can have a program with them to break the taxes into a language that everyone can understand, so that they can understand the tax that we have in this country.” Additionally, Mr. Tawiah believes that the country must have a conversation on how to tax multinational companies that do not have offices in the country and as such do not pay taxes.
He cited Google as an example of one of the Multinationals that has an office here in Ghana and accordingly honoring its tax obligations to the state. According to him, the debate is still lingering as to whether the existing laws can tax digital services in the country or new laws should be formulated. “Some countries have taxation of digital services, like the UK and other places. There is a conversation about global minimum tax which has come up recently to tax multinationals at 15%, where value is being created. We have to have a conversation around it and see how best we can tax those multinationals who are not having presence here.”
Integration of data bases
Consequent to improving revenue mobilization in the country, the government has initiated the integration of some of its databases especially the NIA and GRA. This has led to the registration of about 14 million taxpayers in the books of the GRA. The Vice President, Dr. Mahamudu Bawumia during the launch of the Revenue Assurance and Compliance Enforcement (RACE) initiative further stated that government has addressed the issue of the narrow tax base by replacing the TIN with the Ghanacard.
This, according to him, has increased the percentage of the adult population with a TIN from 4% in 2016 to 86% in 2021. This notwithstanding, he highlighted the major challenge is how to convert this 86% into actual tax payers. Interrogating these assertions, Mr. Tawiah questioned “the make-up of the 14 million [people]. Because as it stands now, the cut off point for registering for the Ghana card is 15 years. But in this country, it is unlikely that a 15-year person will be doing business”. “I think it will be difficult to say that because we have 14 million people who have registered, it means that we are widening the tax net.
We have to look at the make-up of it.” Further considering the government’s agenda of widening the tax net, the Tax Expert admonished government agencies to be structured to become revenue centers instead of call centers. He argues that these Agencies and Ministries can raise some considerable revenues for the state through their services. “For example, when you go to the Ministry of Foreign Affairs, they provide passport services at a charge. Other ministries must take a clue from that and become revenue centers other than call centers. It’s not a tax; it’s services that we are procuring.
Exploring other Tax Avenues
Expatiating more on how government can improve its tax revenues, the Tax analyst noted that there are still certain areas that remain untaxed that needs to be explored especially at this time. This, he averred, is because the effects of the pandemic on economies have awaken the need for innovation in resource mobilization. “There are certain areas that remain non-taxed which we need to look at. One of the ways to increase revenue is the introduction of wealth tax, which is taxing accumulated wealth.
If you look at our tax system, we tax on transfer tax which is company tax, we tax on estate duty, we tax on capital gains, we tax on investment income, but we don’t tax on accumulated wealth. We tax on expenditure, as in VAT but there is a base that remains untaxed; this is accumulated wealth. Once you have accumulated wealth, it gives what we call taxable capacity. It gives you certain benefits as a person”. Mr. Tawiah further explained that there are hosts of countries which currently place taxes on the wealth accumulated by an individual.
According to him, South Africa is currently considering the introduction of a wealth tax. Also, he cited countries like Columbia, Spain, and Switzerland as countries that are already administering the wealth tax. “So we can explore taxing accumulated wealth because there are certain people, they don’t have business income, they don’t have employment income, they don’t have investment income, but they have an accumulated wealth and they are not paying taxes on them”. Moreover, he advised we must assess the performance of existing taxes to know whether they are yielding the right revenues. “We can look at capital gains tax; is it yielding the right taxes for us?
We can look at stamp duty; is it yielding the right taxes for us? Estate duty has been 3% for a long while, we want to look at whether we should increase the estate duty. So, we must have a conversation on that line. Once we do that, it’s going to give us sustainable wealth to augment the existing taxes that we are getting”. Furthermore, the Tax Expert emphasized the need for Environmental taxes. According to him, the government should consider taxing carbon emissions emanating as a result of the pollution of the environment as well as the use of rubber and plastics.
Such taxes will not only rope in revenues, they will also protect the environment by reducing the impact of climate on the economy in the long run, he intimated. Besides, the tax consultant advised the government to consider renegotiating some of the tax treaties established with other countries. This, he indicated, is because some aspects of these treaties do not favor the country at the moment. Moreover, the International Monetary Fund (IMF) has called for policies to prioritize tax levers that improve fairness and burden sharing. However, in the interim, government can employ measures such as rationalizing VAT and import duty exemptions, replacing statutory CIT tax holidays with cost-based incentives, and redesigning alcohol and tobacco excise rates.
Stakeholders’ wake up call
Underpinning the ensuing conversation is the need for a collaborative effort by all stakeholders, especially voluntary compliance by taxpayers. As such, corporate bodies and individuals must complement government’s current efforts to improve revenue mobilization. “The unfortunate reality is that our progress in domestic revenue mobilization could be better than what we have now.
The reasons: the commitment to paying taxes is low; some tax laws are complex and do not encourage compliance; there is also a school of thought that those who must enforce compliance are not without blame. Our challenges are in enforcement and compliance”- H.E. Dr. Mahamudu Bawumia, Vice President of the Republic of Ghana The above quote from the Vice President summarizes the current state of the country’s domestic revenue mobilization challenges.
It shows that the whole tax system needs improvement and restructuring, where necessary, if revenue is to improve beyond the current 14.1% of the country’s GDP. Above all, whilst digitization will play a key role, investment in infrastructure especially at the local level remains fundamental. Taxing the informal sector, which will depend on collecting reliable data on eligible taxpayers, should be the major concern going forward. Without a proper structure to enhance the tax system, raising the Tax-to-GDP ratio to 20% by 2023 will only amount to building castles in the air.