Mid–year review of the 2020 budget – Tax effects on the Ghanaian economy
On July 23, 2020, the Finance Minister presented the mid–year review of the 2020 budget to Parliament and primarily, it sought to help cushion individuals and businesses against the COVID–19 pandemic.
The major interventions included the reduction of the rate for the communications tax from 9 to 5 per cent, payment of utility bills for an additional three months, the introduction of the National Unemployment Insurance Scheme to provide temporary income for laid–off workers, the establishment of a guarantee scheme to enable businesses to borrow from banks at more affordable rates and a GHȼ 600 million support for micro, small and medium enterprises.
Ghana has always had deficit budgets and with the COVID–19 pandemic, the deficit has been increased further.
The revenues that were expected to be collected prior to the pandemic were expected to fall short by GHȼ 13.63 billion whereas expenditures are expected to increase by GHȼ 11.66 billion. The overall fiscal deficit increased from GHȼ 18.9 billion which is 4.7 per cent of Gross Domestic Product) to GHȼ 30.2 billion which is 7.8 per cent of the revised Gross Domestic Product.
Gross Domestic Product (GDP)
It is the monetary value of all finished goods and services made within a country during a specific period and it is used to estimate the size of an economy and its growth rate.
According to official data from the World Bank, Ghana’s GDP in 2019 was worth USD 66.98 billion and for 2020, the revised GDP is GHȼ 387.18 billion.
Tax Effects
1. The provision of free water and electricity will lead to a reduction in the cost of operating businesses and also lead to an increase in the amount which an individual can spend. The effects are two;
a. The reduction in the cost of operations will result in an increase in the net profit of businesses which will enable them to pay more corporate taxes while they also expand their businesses to help solve the unemployment problem in Ghana.
b. For an individual, the increase in the spending amount can enable him/ her to increase the level of savings or increase his/ her consumption. When savings increase, the overall effect is increased in investment since the two are co–related.
2. As businesses expand, they may employ more persons which will lead to an increase in the employee taxes payable.
3. The setting up of a National Unemployment Insurance Scheme to provide temporary income for laid–off workers will help to stabilise the purchasing power of these workers and, therefore, help to keep the GDP at a certain sustainable level instead of a complete drop when the workers are laid-off without any income to support them.
4. The payment of lower interest on loans that businesses can access will reduce their cost of operation and lead to increase in their level of profit. Invariably, it will lead to a reduction of corporate taxes regarding finance cost which the tax law puts a cap on and that will lead to a boost in businesses resulting in an increase in Ghana’s GDP.
5. The reduction in the communications service tax from 9 to 5% will enable individuals and institutions to reduce their cost of operation which can lead to an expansion of their businesses.
The following measures can be taken to ensure that businesses can thrive in Ghana which will lead to an expansion of the economy and subsequent growth and development.
i. The individual tax rates must be reviewed to make individuals pay lower taxes, especially when COVID–19 has led to some workers being laid off. The threshold for exempt income must be increased so that the disposable incomes of workers will increase. This will lead to increased savings and investment. The 30 per cent terminal rate with regard to the individual tax rates is high and affects employees and sole proprietors. In the case of sole proprietors, it makes them pay too much tax as compared to limited liability companies and this makes it unfair.
ii. Tax exemptions that are given to persons must be looked at again. A careful analysis has to be made to determine the benefit of the business of the person to the country before they are granted.
iii. Duties on imported equipment must be removed to enable the manufacturing sector to develop thereby increasing output and eventually leading to an increase in GDP. In addition, raw materials that cannot be produced locally and are imported must not attract any duties.
iv. Corporate taxes must be reduced from the current 25 to 22 per cent whereas those in the hospitality industry whose tax rate is currently 22 per cent must be reduced to 20 per cent. This will lead to an expansion in this sector which will eventually lead to an increase in Ghana’s GDP.
v. Government must support those in the tourism industry by giving them credit and granting them tax incentives.
vi. With the COVID– 19 pandemic, most businesses are using the Internet to transact businesses and Ghana Revenue Authority is not well equipped to monitor these transactions and assess them accordingly. The result is that the country loses tax revenue which is needed to support our deficit budget.
vii. Workers that may be laid off have to be given the requisite training to enable them to establish their own businesses or fit into other areas that their services may be needed.
To conclude, my expectations are that, government will adopt my recommendations because they will help to stabilise the economy and eventually lead to sustained growth of the Ghanaian economy. This will help our GDP to increase and place us on the highest level regarding the country’s status as middle – income country.
The writer is a Tax Consultant
eriboat@hotmail.co.uk