Proposed taxes will hurt economy — Experts

Emmanuel Bruce Business News Feb - 06 - 2024 , 06:00

Two economists have advised the government to reconsider the introduction of the 15 per cent VAT on electricity and the emissions levy, arguing that such a move will do more harm to the economy than good.

They said with businesses and individuals yet to recover from the economic challenges in 2022 and 2023, the introduction of these new taxes would further worsen their plight.

The Ministry of Finance, in a letter dated December 12, 2023, directed the Electricity Company of Ghana (ECG) and the Northern Electricity Distribution Company (NEDCo) to implement the 15 per cent VAT on electricity for residential customers.

Portions of the letter asked the two power distributors to start "implementation of VAT for residential customers of electricity above the maximum consumption of level specified for block charges for lifeline units in line with section 35 and 37 and first schedule of VAT Act, 2013 (Act 870) effective 1st January, 2024."

The minister explained in the letter that the measure was part of the government's medium-term revenue strategy and the International Monetary Fund (IMF) supported post COVID-19 programme for economic growth.

Meanwhile, move has been resisted by sections of the Ghanaian public, with organised labour serving notice to the government to embark on public protest after a one-week ultimatum to withdraw the tax.

While the public was yet to come to terms with the introduction of this new tax, the government last week announced the implementation of the Emissions Levy Act, 2023 (Act 1112), which imposes a levy on carbon dioxide equivalent emissions on internal combustion engine vehicles.

Already, the Ghana Private Road Transport Union (GPRTU) has suggested a potential fare increase in response to the implementation of the levy.

It will be recalled that the GPRTU earlier in January had to suspend their proposed 20 per cent fare hike, following intervention by the Transport Ministry for further engagement.

The GPRTU has, however, served notice that the proposed 20 per cent hike did not even take into account the emissions levy, adding that the cost would be passed on to passengers. Analysts predict that the increases in transport fares will further increase especially the food component of the Consumer Price Index (CPI), while the non-food component of the CPI is also likely to inch up if the VAT on electricity kicks in.

Last Monday, the Monetary Policy Committee reduced its policy rate by one basis point to 29%, anchoring its decision on the dwindling inflation rate and the general positive economic outlook.

For many economic watchers, these two taxes have the potential to derail the monetary outlook for the year with a projected end year inflation at 15%. Consumer price index has come down from the highs of 54% in January 2023 to 23.2% at end of December 2023.

Analysts say the flip side of the government’s inability to see through these new taxes also has the potential to affect the country’s full access to the GH¢3 billion IMF bailout The IMF has so far disbursed a total of US$1.5 billion to support the budget. Government would have to re-engage with the IMF as the next review meeting comes close to renegotiate and to show how it intends to bridge the financing gap in the unlikely event that the government aborts the implementation of the new taxes on the back of anticipated public protests.

Hurting the economy

In an interview with the Graphic Business, Senior Researcher at the Institute of Fiscal Studies (IFS), Dr Said Boakye, said the introduction of those new taxes would do more harm to the economy than good.

He said what the government was doing was taking money from citizens and private businesses into the coffers of the public which is counter-productive.

“Private individuals and businesses are more efficient spenders and impact on the economy better than the government, particularly in Ghana where there are so many inefficiencies in public spending so if you keep on introducing new taxes, you are destroying the economy,” he explained.

He said businesses and households were yet to recover from the turmoil of 2022 and the post DDEP losses and the least the government could do to support was to hold on with the introduction of new taxes.

“We understand that the government is cash strapped and the gap between revenue and expenditure has to close but we do not have to focus on taxation all the time,” he stated.

Focus on extractive sector

Dr Boakye said instead of the incessant taxes, the government should rather focus on how to generate more from the extractive sector.

Under the IMF programme, a key component of the medium-term revenue strategy is to adopt a new fiscal regime for the extractive industries.

Dr Boakye said despite the numerous calls for something to be done in the extractive sector, the government has still not put in place measures to raise more revenue from the sector.

“We should be able to generate enough revenue from the extractive sector. It is sad you give about 90% of the value of resources you produce to foreign investors leaving us with only 10%.”

“Why can’t we learn even from Botswana, Nigeria and the rest who are able to get up to more than 50% from their resources?

He said the solution to getting the best out of the country’s resources is to partner with the investors and be actively involved in the process.

“All over the world, countries are using their natural resources to develop, if we don’t want to do that, it is up to us,” he said.

Another key component of the revenue strategy is the removal of VAT exemptions (which are estimated at close to 2 per cent of GDP), and phasing out tax holidays and exemptions.

Dr Boakye said the government has not shown much interest in this regard because the ones who are supposed to monitor and make the changes are the ones benefitting from the exemptions.

IMF programme too focused on revenue

Also speaking in an interview with the Graphic Business, Economist and Lecturer at the Academic City University, Eugene Bawelle, said the surge in new taxes was because Ghana’s programme with the IMF was too reliant on revenue mobilisation.

He said little or nothing was being done on the expenditure side.

“The programme is focused on revenue growth than expenditure rationalisation hence the renewed interest in ramping up taxes by the government.”

“The government is equally in a fix because most of these deliverables have to be implemented in the early stages of the programme,” he noted.

He said taxes were, however, not the way to go as it would further reduce the disposable incomes of the already burdened Ghanaian, with businesses also suffering increased cost of doing business and consequently pass these costs to the consumer.

“The current downward trend of inflation is likely to suffer,” he stated.

Suspension of VAT

As of press time (yesterday), government had served notice to suspend the VAT on electricity, calling for further consultations.

However, some experts are still of the opinion that a re-introduction of the VAT on electricity at a later time would still not be ideal for the economy.

The suspension of the tax comes on the back of similar protest in 1995, when the introduction of the VAT for the first time caused a public uproar. Government had to withdraw the tax.

However, it was reintroduced after public consultations and engagements.