Choices for government on E-Levy: Notes from Journalists for Business Advocacy

Parliament is scheduled to take a decision on the proposed Electronic Transaction (E-Levy) Bill, 2021, after the bill had generated fierce controversy and acrimony along partisan political party lines.

The impasse of the passage of the bill was up for discussion at a meeting of the Journalists for Business Advocacy (JBA) at its meeting in Accra last week.

For many, the levy will constrain the growth in the use of digital channels for executing payments and financial transfers.

Proponents of the levy have argued that at the rate of 1.75 per cent, the levy is too small to have significant negative effect on the willingness to use digital payment platforms.

However, the experiences of other African countries that introduced similar levies, such as, Uganda and Kenya, indicate otherwise.

Those experiences suggest that attempts to tax MoMo resulted in a fall of transaction volumes, which consequently led to the withdrawal of the tax measure.

It is instructive that the GH¢6.9 billion projected by government as public revenues from the E-Levy is based on pre –levy transaction volumes; if the levy reduces the use of digital financial channels then tax revenues would fall considerable below that projected target.

For members of the JBA, the introduction of the levy is as much about convincing the international creditor community of government’s commitment to fiscal consolidation, as it is about convincing them about good returns on investments back.

Investor confidence

It is important to note that investor confidence, already fragile in recent months, fell sharply, with the resistance of the implementation of the E-Levy.

It has resulted in yields on Ghana’s Eurobonds being traded on the secondary market rising to an unprecedented 14 per cent.

It is equally instructive that the immediate response of the Finance Ministry to this turn of events was to announce a 20 per cent cut back in budgeted expenditures for 2022, showing that a reduction in the fiscal deficit is the number one priority rather than raising extra revenue to create more jobs as government has consistently maintained.

Philosophy

However, while JBA appreciates the planned public spending cut backs, we also agree with government’s overall economic management philosophy that supply side economics, aimed at increasing economic activity and consequently, public revenues, is a better way forward than a singular focus on demand management as a means of narrowing the fiscal deficit, since the former would create direly needed jobs and encourage new private investment, while the latter would effectively curb such.

Indeed, Ghana’s tax to GDP ratio of barely 13 per cent currently falls far short of the average of close to 25 per cent for lower middle income countries globally.

The government, thus, seeks to use the E-Levy as a key plank in its effort to increase the country’s ratio to a more robust, albeit still inadequate 16 per cent over the immediate term.

But we disagrees with the government’s current plan for increased public revenue to bridge the fiscal deficit in the form of the E-Levy because we hold the view that there are several more efficient, socially fairer alternatives for increasing public revenues.

We realise that the government is taking steps to bring the vast informal sector into the income tax net, using the Ghana Card as the central pivot and we acknowledge that this will take time to accomplish, hence the need for other tax sources to bridge the gap in the meantime.

However, the resort to consumption taxation any time government faces a revenue shortfall has instructively already been criticised by the NPP in opposition as a “lazy” approach for good reason.

Property tax

Consequently JBA recommends three strategies which can be used to significantly increase Ghana’s tax revenues in a fairer and more efficient and effective way than the E-Levy

The first is the immediate application of property taxes. It is our firm suspicion that this was part of the government’s agenda when it introduced digital property addressing, but subsequently that policy has faced severe headwinds from the country’s economic and socio-political elite, who would have to pay the most.

Interestingly, government, in its 2022 Budget proposals, announced its intention to begin collecting property taxes in earnest, but we have heard this before over the years without action, and instructively, there is no major increase in projections for property tax collections this year.

Property taxes only account for about 0.2 per cent of total tax revenues in Ghana. Compare this with 20.73 per cent in France, six per cent in Singapore and 21.2 per cent in Taiwan.

As far back as 2000 there were 61,096 tax liable properties within the Accra Metropolitan Assembly (AMA) alone with tax value of GH¢150 million, even at Ghana’s low tax of between 0.5 per cent and five per cent depending on the location and valuation of the property.

The proportion of this actually collected though was insignificant.

Accra only accounts for about half of what is actually collected and with the growth in the number of taxable properties over the past two decades, some experts estimate that property tax, diligently applied, could rake in some GH¢3 billion at least.

Tax exemptions

The second is tax exemptions. Tax exemptions encourage foreign direct investment which made Ghana to forgo as much as $2 billion in some years.

For example, in 2017 alone companies granted free zones status in Ghana were given import duty exemptions of $475 million, along with another $276 million in income tax relief.

At current exchange rates, this collectively amounts to some GH¢4.5 billion, which is not that much short of the expected revenue from the E-Levy.

In 2018, a company under a contract to expand Tema port and manage the expanded portions was granted tax exemptions to the tune of $834 million which, at current exchange rates, is close to GH¢5 billion.

The bill aimed at streamlining tax exemptions — which everyone accepts is often granted to well-connected people rather than those whose businesses — offers the best strategic benefits for the Ghanaian economy.

The bill has been awaiting passage into law for several years, despite the intense pressure from both local and foreign advocacy groups to have it passed.

Transfer pricing

The third is the issue of transfer pricing by multinationals operating in Ghana. This involves the deliberate over-invoicing of production inputs, financing and the likes by local Ghanaian subsidiaries of certain multinationals.

This serves to both increase their costs thereby lowering their net income and consequent income tax obligations, while at the same time increasing foreign exchange outflows to their foreign parents, serving as a form of capital flight.

Ghana identified this as a major issue more than half a decade ago with the government at that time promising to address it, but nothing has been heard about it again.

Effectively, like with tax exemptions, this amounts to government allowing wealthy foreign investors avoid paying huge tax liabilities and choosing instead to take the alternative of imposing a regressive E-Levy that worsens the plight of some of the poorest.

If these three holes alone in Ghana’s tax administration framework were plugged — there are other smaller ones too — the state would make far more than it stands to make from implementing the proposed E-Levy with all its accompanying, indisputable ill effects.

Informal

Eventually, the incorporation of the informal sector and self-employed professionals into the income tax net should be able to raise Ghana’s tax to GDP ratio to over 20 per cent, stabilising government’s fiscal position.

JBA, therefore, calls on government to address these three tax administration issues urgently and concertedly.

It is ironic that the controversy over the E-Levy has been a prime contributor to this problem since foreign bond holders in particular, have interpreted resistance to the imposition of the levy as an indication that Ghana is not adequately committed to fiscal consolidation and consequent improved credit worthiness.

We acknowledge that successive administrations in Ghana have rarely adhered to tax sunset clauses in the past, but this does not exclude them as strategy; it only means government should be more responsible going forward.

Ultimately, the E-Levy should, at most, serve as a short-term fix, because of its obvious strategic draw backs with regard to financial inclusion through digitisation.