Bawumia’s tax proposals require careful analysis — Expert

The proposed tax amnesty for defaulting businesses and individuals in the country as proposed by Vice President, Dr Mahamudu Bawumia, has come under scrutiny.

A tax expert has explained that, the proposed tax amnesty may have a mixed effect on the country’s tax system if implemented and, therefore, called for a careful assessment of the options to ascertain its impact before it is actioned.

Explaining his point, Tax Partner at PwC Ghana, Abeku Gyan-Quansah, in an interview with the Graphic Business to react to the proposal by the flag bearer of the ruling New Patriotic Party (NPP), indicated that on one hand, granting tax amnesty may encourage people who have gone outside the tax net because they owe, including interests and penalties, to come into the system and start afresh.

On the other hand, he said, the proposal may have no effect if taxpayers who owe still decide to stay outside the system because they perceive the amnesty as a grand ploy to rope them in and be made to pay more taxes. 

The third scenario, according to him, was that others may choose not to comply with the payment of their taxes now and instead, wait for the proposed tax amnesty to kick in so they can also start afresh, a development which may have a negative impact on end-year tax revenues to the state.

Ghana’s tax collection

Ghana has a major challenge with domestic tax revenue mobilisation, with tax to GDP ratio hovering around 14 per cent, compared to an average of between 18 and 20 per cent in Sub Sahara Africa.

This is because many Ghanaians are still outside the tax net, with estimates suggesting that revenues amounting to 13 per cent of GDP are not collected because people are outside the tax net.

Dr Bawumia, in his vision statement presented to the nation about three weeks ago, clearly admitted that the current tax regime had failed the country due to its cumbersome nature.

He said when voted to lead the country as President, he would introduce a very simple, citizen and business-friendly flat tax regime.

“A flat tax of a percentage of income for individuals and SMEs (which constitute 98 per cent of all businesses in Ghana) with appropriate exemption thresholds set to protect the poor. With the new tax regime, the tax return should be able to be completed in minutes.

“To start the new tax system on a clean slate, my government will provide a tax amnesty (i.e. a complete exemption from the payment of taxes for a specified period and the waiving of interest and penalties) up to a certain year to individuals and businesses for failures to file taxes in previous years so that everyone will start afresh,” Dr Bawumia stated.

Increasing tax base

Mr Gyan-Quansah said such a move may have mixed reactions because the introduction of tax amnesty would likely increase the tax base of the country and lead to more taxes.

“There are some people who will never come into the tax system because they know when they come, and their previous activities are assessed, they will be taxed and made to pay penalties. 

“So what the Vice President is saying is that he will grant tax amnesty to individuals who have not complied to get the confidence to come into the tax net and start afresh, without being made to pay for the old taxes or any penalty,” he said.

“In addition to waiving the principal taxes, he will also waive the interest and penalties. But the question is if he does this, will people really come into the tax net so that going forward they will pay taxes as required?” he asked.

“Or somebody will say, I will never come because this is just a ploy to get me into the system and, going forward, I will be made to pay more taxes; or some others, having heard this, will decide not to comply with the system but wait to see whether the Vice President, should he win the upcoming elections, will waive their taxes and interest,” he noted.

He said he expected that the proposed tax amnesty would convince people who may be afraid of penalties and interest and not come into the tax system to do so now.

“I expect that this will lead to an increase in the number of compliant taxpayers,” he said.

Flat rate regime

Commenting on the introduction of a flat rate system, Mr Gyan-Quansah said although this would make the tax system more simplified, it raises concerns about progressiveness in the tax system.

He noted that currently, when an individual earns a salary, it is subjected to tax bands of between 0 to 35 per cent, which indicates that the more you earn, the more you pay.

He said replacing this system with a flat rate would mean that those who earn more and those who earn less would be subjected to the same tax rate, raising questions of equity.

“Currently, taxes on salaries are subjected to a progressive tax rate of 0 per cent, five per cent, 17.5 per cent, 25 per cent, 30 per cent and 35 per cent. However, the Vice President is proposing that instead of these numerous bands, he will replace all with one tax band.

“So the Vice President intends to trade additional progressivity with simplicity in the regime and he said he will do this for both individuals and businesses,” he stated.

He said currently, the zero per cent band applies to just individuals, which means that if a company makes a profit of GH¢400, it would still be subjected to tax while an individual who makes an income of GH¢400 is not subjected to tax.

“So what the Vice President is saying is that he will make sure that even if you are a company, there is a certain limit to which you will not pay taxes,” he explained.

Duty for spare parts

Dr Bawumia, in his vision statement, also noted that duties for spare parts will attract a flat rate per container (20 or 40 feet).

Reacting to this, Mr Gyan-Quansah said that currently duties are slapped on the items in the container in line with the ECOWAS Common External Tariff of which Ghana is a signatory.

“When a business imports goods, the taxes are slapped based on the items and different items in a container would each attract a different tax depending on how it is classified in our customs regime. 

“But what the Vice President is saying is that going forward, he will do away with the system where you have to open the container to look at the various items in the container; instead there is going to be a flat rate per container instead of the items,” he explained.

He said although this would make things more simplified, it could be complicated in its own way and may also go against the current ECOWAS protocols.