Enhancing Ghana’s domestic revenue mobilisation — Key to resetting agenda under IMF ECF programme
The government must enhance the domestic mobilization to address chronic revenue underperformance which has been the core of Ghana’s fiscal fragility.
Fiscal indiscipline, primarily low revenue mobilization, underpinned by poor revenue policy, wide spread of tax exemptions and administration, were key causes of Ghana’s macroeconomic crisis.
Chronic structural weaknesses, including frequent changes in tax policy, a narrow tax base, a reliance on indirect and trade taxes, and a high tax burden on labor rather than on capital income, resulted in an inefficient and inequitable tax system.
Ghana’s tax-to-GDP ratio averaged 13.8 % for the 2017–23 period, well below most other lower-middle-income countries (16.9 % in 2023) and the rest of Sub- Saharan Africa (18.4 %in 2023).
Ghana’s overall tax-to-GDP ratio has increased steadily from around 8% in 2000 to approximately 13.8% today.
Despite this, Ghana’s tax take remains below the government’s target of 18–20% of GDP by 2027 (Ministry of Finance, 2023. Ghana is one of the developing countries with a budget deficit over the years. Ghana’s fiscal problems are rooted in structurally weak domestic revenue mobilization.
Tax revenue in Ghana is well below Sub-Saharan African peers but also starkly lower than countries with the same level of income.
This highlights systemic inefficiencies within Ghana’s tax policy and compliance.
The low levels of tax revenue not only affect efforts towards macroeconomic stability but also undermine the capacity of the country to generate sufficient resources to support long-term growth and poverty reduction (World Bank,2024).
Enhancing Ghana's revenue mobilization through reduction in the widespread tax exemptions and reliefs as well as critically diversifying the revenue streams are therefore imperative in the current economic context of the country’s debt overhang, high inflation, persistent currency depreciation and low economic growth.
Ghana’s tax-to-GDP ratio has been low compared to peers, with non-oil revenues stagnating in recent years.
Tax policy design suffers from widespread tax expenditures (estimated around 4 percent of GDP), especially in VAT, and underexploited taxes (property tax, excises).
Weaknesses in revenue administration continue to be reflected in limited compliance and recoveries (IMF, country report/ 23/168/2023).
Causes of the low tax to GDP ratio
There are myriad of causes to the country’s tax to GDP ratio including wide spread taxes exemptions and waivers, poorly administered property rates, weaknesses in the revenue administration, pervasive corruption in tax administration system, failure on the part of Ghana Revenue Authority to deal adequately with high net wealth.
Individuals including politically expose persons (PEPs) in Ghana (HNWI) and PEPs are individuals who have accumulated net worth, inadequate logistics are making tax collection difficult and big underground economy.
First, GIZ supported the Academia/ CSOs/ Private Sector (2015- 2020) observed that Ghana's tax system included many exemptions and incentives to achieve social and economic goals, but some of these exemptions are unsustainable and provide opportunities for abuse.
Wide range of tax exemptions and waivers are one of the reasons why Ghana's tax-to-GDP ratio has remained low over the years. Ghana's government ran a deficit of 8.3% of GDP in 2022, and spending on debt repayment and employee compensation exceeded 122% of tax revenues. Other factors that may contribute to Ghana's low tax-to-GDP ratio include:
Lack of political will and Biased and nepotistic legal and institutional environments. Ghana's tax-to-GDP ratio was 13.8% in 2022, which is below the government's target of 18-20% by 2027.
Exemptions generally reduce the tax burden of taxpayers.
Exemptions reduce taxpayer’s “taxable income,” which is the amount of income on which the taxpayer pays taxes, hence lowering the amount of taxes he or she owes.
Tax exemptions are tax subsidies, preferences, and incentives that benefit a certain industry, activity, or group of people and represent government expenditure for those activities or groups, implemented through the tax system rather than direct grants, loans, or other types of government support.
The World Bank has asserted that widespread tax exemptions and reliefs has been costing the country approximately 2%-3% to tax to GDP ratio.
The government could reduce revenue gap by reviewing the numerous tax exemptions and reliefs granted that is said to reduce the tax-to GDP ratio by 2%-3%.
World Bank and IMF estimates show that value-added tax exemptions, on average, result in 2–3% reduction in the tax-to-GDP ratio. (World Bank Group,7/8/2024).
The World Bank (2024) The 8th Ghana Economic Update reveals that an overly generous regime of tax reliefs and exemptions was costing the government approximately 1.3% of its GDP annually in lost corporate income tax (CIT) revenue alone.
The government must review the numerous tax exemptions and reliefs in order abolishing or reduce the nuisance taxes which are making the citizenry poorer and poorer
Second, according to World Bank Economic Update (2024) posited that there is empirical evidence that Ghana’s tax policy architecture also lags the more effective systems employed by its peers.
Countries such as South Africa and Kenya have adopted more progressive tax regimes with higher levies on upper-income echelons and political elites thereby harnessing a larger share of economic wealth.
Conversely, Ghana’s tax structure has been less progressive over the years, with lower rates and substantial exemptions that dilute the tax base.
For instance, Rwanda and Senegal have instituted comprehensive value-added tax (VAT) systems with minimal exemptions, resulting in augmented VAT collections.
Ghana’s VAT framework, while structurally similar, is beleaguered by pervasive evasion and extensive exemptions that compromise its yield (World Bank, 2023).
Third, UK Chamber of Commerce, (2019) noted that there was pervasive corruption in Ghana tax administration that accounted for the low tax GDP ratio of 13.8%.
In Ghana, Customs Division of the GRA has consistently been cited as one of the most corrupt institutions (UK Chamber of Commerce, 2019).
Corruption drastically reduces tax revenues, forcing governments to find other avenues for financing including borrowing.
Future fiscal flexibility is reduced, because servicing of debt has to be given priority over other expenditures.
This creates a vicious circle endangering fiscal sustainability.
The politicizing the Ghana Revenue Authority had made it ineffective and inefficient. Political leadership sustains and often creates and protects corruption.
Corrupt political leadership makes the spread of corruption at lower levels relatively easy.
The main drivers of tax corruption are low pay, lack of professional ethics, legal loopholes, conflicts of interest, get-rich-quick ambitions, and bureaucratic red tape.
Fourth, according to Mohammed (2020) the politicization of property taxes by the two leading parties NPP and NDC had contributed to poor property tax in Ghana.
The two major political parties the New Patriotic Party and National Democratic Party are in keen competition for voters’ hearts and are therefore not keen on collecting local taxes in general and particular property taxes in particular because the people view taxes as unnecessary impositions which increases cost of living as well as are the beneficiaries or owners of the numerous properties developed over the past three decades.
Mohammed (2020) further observed that property rating in Ghana is governed by the Local Government Act 1993 (Act 462), which upholds this ‘replacement cost’ approach to levying properties (Commonwealth Local Government Forum 2018).
Fifth, IMF (2017) observed that the failure on the part of Ghana Revenue Authority to adequately deal with high net wealth Individuals including politically expose persons (PEPs) in Ghana (HNWI) and PEPs are individuals who have accumulated net worth to the level that places them at the very top of the wealth scale in a country are not prepared to the relevant taxes accounted for low tax to GDP ratio (IMF, 2017).
Net worth or wealth is defined as the value of financial assets plus real assets (land and buildings), owned by individuals and their immediate families, less their debts.
The definition of wealth includes personal wealth and wealth held in trusts, and in legal entities effectively controlled by the individuals and their families.
Sixth, IFS (2017) has observed that Ghana mining sector has not contributed adequately to tax to GDP ratio like Botswana: The mining sector in Ghana has a dominant potential to contribute to national resource mobilisation.
However, the sector’s contribution to government revenue has not grown at the same pace as the overall GDP growth, and the overall impact of the sector to national development, despite the mineral commodity boom, is not very visible.
This is because the incentives accorded mining companies have greatly limited the share of government revenue from the sector and constrained the opportunities for government to mobilize adequate resources to fund social and development programs.
The framework of the current mining legislation in the country, which generally seeks to encourage foreign investment, is not necessarily compatible with the maximization of revenue and attainment of social and economic development.
Seventh, 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.