What to do about the hurting tax regime : IMANI provides some answers
Ghana’s tax regime has experienced some reforms in recent times, particularly between 2013 and 2016. These changes are diverse in nature – from upward adjustments in tax rates to the consolidation of tax laws.
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Evidently, not all of these changes have been welcomed by private sector players, who come first in bearing the brunt of the tax reforms. Indeed, this is quite obvious in the recent demonstrations we have seen regarding the government’s 2016 tax initiatives.
The government expects higher revenue inflows in 2016 based on the consolidation of revenue collection efforts, introduction of new taxes and increment of existing ones.
Business indicators to watch
The 2016 tax initiatives as noted earlier will visibly affect all the productive sectors of the economy, particularly manufacturing, whose performance was the most disappointing in 2015 with a two per cent decline. Manufacturing, service and agricultural sectors are reeling under difficult business conditions: high taxes, high utility tariffs, high interest rates, and high inflation among others.
These sectors will continue to remain uncompetitive for the foreseeable time.
The section on ‘Paying Taxes’ in the 2016 World Bank Doing Business (DB) Report paints a bad picture of Ghana: Ghana stands at 106 in a ranking of 189 economies.
DB sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations.
The DB “Paying Taxes” indicator measures among others the total number of taxes and contributions required, the method and frequency of filing and paying taxes, and the time required to comply with tax obligations.
At the local level, the Association of Ghana Industries’ (AGI) Business Barometer Indicator (BBI) does the job quite well. The BBI is a quarterly study which measures the level of confidence in the business environment and expectations of private sector players as far as the macro economy is concerned. It has a baseline mark of 100 points, with points above the baseline indicating a high business confidence and points below the baseline indicating low business confidence.
Since the last quarter of 2014, business confidence levels further dipped below the baseline to 85 and 87.9 respectively in the first and second quarter of 2015.
This low level of the index was largely attributed to the fact that power supply did not improve as expected.
The third quarter of 2015 saw the BBI rise above the baseline revealing that a significant percentage of Ghanaian business owners were of the conviction that the business environment had seen some improvement despite the prevailing challenges in the economy.
In contrast to the third quarter, the last quarter of 2015 saw the BBI fall to 95.94. During the period, a larger percentage of respondents (45%) attested that the business environment had remained the same since the third quarter while 31 per cent of respondents also believed the conditions in the business climate had worsened.
This dip could be explained mainly by the fact that power supply improved at a relative slow pace as against the general expectation. The power crisis, which resulted in frequent load shedding, increased the cost of production.
In summary, the inadequate supply of electricity, multiplicity of taxes, the high cost of lending, as well as the high number of procedures required to start a business, among other challenges led to an unfavourable business climate during the third and last quarter of 2015 and subsequently to the fall in the BBI and Ghana’s comparatively low ranking on the DB Report.
Ghana’s tax policies don’t favour businesses
One daunting challenge still encountered by businesses of all sizes and in almost all sectors is the multiplicity of taxes and tariffs. In the second, third and fourth quarters of 2015, the BBI documented multiplicity of taxes as the third major challenge after the Ghana Cedi depreciation and inadequate power supply.
The adoption and implementation of the ECOWAS Common External Tariffs (CET), albeit commendable as it standardises taxes across the sub region, has resulted in a net increase in import duties on certain commodities.
The new additions and increments in import duties which now stand at 35 per cent have been opposed by trade associations namely, Ghana Union of Traders Association (GUTA).
In any case, the implementation of the CET is inevitable since it’s a regional policy decision. Government’s approach to the implementation of the CET was out of proper context. The government ought to have better engaged the appropriate trade unions, namely importers and exporters associations in comprehensive policy discussions.
According to the DB Report 2016, businesses make 33 tax payments a year, spend 224 hours a year filing, preparing and paying taxes amounting to 32.70 of profits.
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These numbers, standing alone, may not adequately portray the tax burden on local businesses. But going a little further by undertaking a global and regional comparative analysis explains Ghana’s ranking of 106 out of 189 economies in the ease of “paying taxes” of the DB Report; falling from 102, from the previous year.
An efficient tax regime
Ghana, like most developing countries still faces tough challenges in its attempt to establish an efficient tax regime, with the aim of increasing tax revenue and attaining sustainable budget expenditures.
Recent policy initiatives by the government have led to a number of additional taxes introduced on goods, services and incomes. As compared to other countries in Sub-Saharan Africa, Ghana’s tax regime as it is today seems unfavourable to businesses as they are confronted with multiple taxes in various sectors of the economy.
In the 2016 Budget and Economic Policy statement, government introduced a number of tax policies in view of addressing issues regarding tax exemptions, tax evasion and low compliance and “controversially”, revenue maximidation.
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The new income tax law (Act 896) which took effect in January 2016, is laudable in some regard, as it seeks to revise and consolidate the many scattered tax laws and amendments into one document and also simplify the Act’s provisions to enhance efficiency and facilitate compliance.
It has, however, not been welcomed unreservedly by Ghanaian businesses, workers and labour unions owing to the introduction of new taxes and the increase in the rates of existing ones.
Unfavourable tax regime
The tax regime remains quite unfavorable to the business environment. Evidently, the government is better off undertaking a structural reform of the tax regime. Changing the structure of the Tax Payer Basket is more palpable than ever.
In order to maximise revenue influx, the government ultimately benefits for investing in the necessary infrastructure that widens the tax-base. Indeed, this will go a long way to address the budget deficit; which appears to be the justification for the increment in rates of existing taxes and the introduction of new ones.
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If the status quo persists, Ghana risks losing existing tax payers to other economies with favourable business environments.
The multiplicity of taxes discourages entrepreneurs from setting up new businesses and already established businesses could be motivated to evade some taxes and other required charges, namely utility tariffs.