Weak tax collection deepening debt and fuelling inequality – Study

The economy is collecting barely one-third of the tax revenue it should, a new study has revealed exposing a severe domestic revenue mobilisation crisis that is fuelling debt accumulation, widening inequality and undermining economic stability.

The research, Illicit Financial Flows (IFF) and Revenue Mobilisation in Ghana, presented by Dr Gloria Afful-Mensah of the University of Ghana at a tax dialogue workshop organised by the Media Foundation for West Africa (MFWA) and Oxfam in Ghana shows that in 2018 only US$25million of an estimated US$82million in potential tax revenue was collected, leaving a gap of almost US$57m.

The country’s 16 percent tax-to-GDP ratio also trails far behind peers such as Cameroon, Kenya and Senegal which average around 30 percent.

Corporate income tax (CIT) and VAT show the most alarming leakages with CIT losses estimated at 86 percent and VAT gaps above 60 percent, particularly within the services and agriculture sectors.

The study further reveals stark inequalities, with female-owned and small firms recording disproportionately large tax gaps.

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The report identifies the prevailing tax system’s complexity, widespread exemptions, a large shadow economy, weak compliance and corruption as key drivers of underperformance. VAT exemptions alone cost 1.85 percent of GDP – equivalent to 72 percent of all VAT collected.

With the country’s debt rising by an average of 11 percent annually between 2006 and 2023, the study warns that closing the tax gap is essential for restoring fiscal stability and reducing reliance on borrowing and donor support.

Experts are calling for a comprehensive review of tax incentives, stricter administration and a shift to tax-gap analysis to strengthen enforcement and improve collections.

“A shift from relying on the usual Ghana Revenue Authority revenue targets to a tax gap analysis – measuring the difference between taxes owed and taxes collected – would provide a far clearer assessment of administrative effectiveness and help expose inefficiencies,” she said.

Generous tax exemptions

According to the report, the current tax regime remains heavily burdened by what it describes as “over-generous” exemptions that significantly erode revenue. VAT exemptions alone are estimated to cost the economy 1.85 percent of GDP – equivalent to 72 percent of all VAT collected, placing substantial pressure on the fiscal framework.

Exemptions covering local foodstuffs, road passenger transport, pharmaceuticals and agricultural inputs, though socially driven, have created wide loopholes and a combined fiscal cost of roughly two percent of GDP.

These, together with a complex array of withholding tax rates, continue to complicate compliance and open avenues for abuse.

Coupled with public dissatisfaction arising from government performance, corruption, apathy and a large shadow economy, the current system’s complexity has enabled widespread evasion – deepening the country’s revenue mobilisation challenges, the report added.

Recommendations

The report stressed a need for fundamental reforms to improve revenue mobilisation.

It calls for a full review of corporate tax incentives and exemptions, supported by strong cost-benefit analyses to ensure they deliver real value to the economy.

While recent changes to the VAT law represent progress, the report warns that the VAT gap will remain wide unless government revisits the many broad exemptions – especially in the services and agriculture sectors – to promote commercialisation and formalisation.

“Closing the tax gap is not only an economic necessity but also crucial for achieving inclusive growth, gender equity and a sustainable, self-financed development path,” it concluded.

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