The increase in tax revenue since the early 1990s is often cited as one of the achievements of Ghana’s economic reform; thanks to increase in the base of taxation, changes made to the tax structure, and reorganization of the tax institutions. But progress has been slow since, especially when it comes to personal income and business profit taxes. The commitment to paying taxes is low. Some tax laws are complex, not easily understood. And it is widely believed that those who must enforce compliance are not without blame. This combination undermines the growth of domestic revenues.
The Ministry of Finance and Economic Planning together with the revenue collection agencies recently launched a special revenue mobilization exercise to improve and expedite action on overdue taxes. The exercise turned out surprising results. Twelve companies owed nearly 12.3 billion cedis, nearly enough to finance the administrative expenses of the Ministry of Justice in fiscal year 2006. The exercise led to the shutdown of a number of tax delinquent companies. Some paid up, some negotiated to settle years of overdue taxes to avoid the dishonour of business closure. Unlike the “Operation Tax Harvest” in the early days of the tax reforms, the 2006 exercise followed the tax “amnesty” granted in 2005 with the hope to increase compliance in the payment of taxes.
Prevailing view in some circles is highly critical of such exercises as politically motivated. Given our history in the early 1980s, such cynicism is understandable. In this instance, though, this cynicism is wrong. And political interpretation of the exercise only further calls attention to those who are most affected and their aversion to comply with tax laws.
Justice Oliver Wendal Holmes (US Supreme Court 1841-1935), once said that “taxes are the price we pay for a civilized society”. That dictum, of course, leaves open the debate on whether taxes are too high or too low relative to the protection and services that one derives from the state. But that is an entirely different matter. What concerns us now is the degree of compliance. Hence my question: who pays taxes in Ghana?
The evidence is scanty. However, the Ghana Living Standards Survey carried out in 1998/99 gives us some indication about which groups of individuals most likely are paying taxes and who is not. The survey sought to find out from the respondents about their profession, where they work, for whom they work, and whether taxes were deducted from their pay in the course of the survey period. I summarize below the information from the survey carried out from August 1998 to March 1999.
By industry, the percentage of employees who had taxes deducted from their pay at source ranged from 92% of those in the mining sector to 25%t of those in the construction industry. Payroll deduction of those who worked in the financial service industry was about 77%, and only 45% in the manufacturing and transport sectors.
By occupational classification, the highest compliance rate could be found among those who worked in administrative and managerial positions, professional and technical skills jobs, and those in clerical jobs. Of every 100 workers in these occupations, about 93, 86 and 85, in that order, had taxes deducted from pay at source. The least tax compliant were those who worked in occupations that involved service delivery, sales, transport and construction tradesmen.
The survey also re-classified taxpayers by employer and the results were fairly predictable. Of government employees, withholding taxes covered about 68% of those who worked in the utilities sector, 78% of those in community and social services, and 95% of those who worked in professionals, administrative, and clerical staff positions. As noted earlier, the degree of compliance varied greatly in the private sector. A large segment of those engaged in service delivery and construction, and in distributive trade and commerce, were noted as the least likely groups to have taxes deducted from their earnings at source.
Admittedly these numbers only point to the extent of enforcement of payroll taxes. There is no reason to believe that the individuals who did not have taxes deducted at source are inherently non-tax complaint. More likely, it is their employers that may be at fault. Be that as it may, the following are clear.
First, personal income tax compliance is unevenly enforced across different sectors of the economy and by occupations. There are two interpretations to this finding. About 55 of every 100 people who worked in industries either earned below taxable income or their employers failed to recognize their earnings as taxable. Mining firms thus appear to be more compliant with payroll deduction than other industries that operated in the economy in the nineties.
Second, if taxation is based on the benefit principle, that is, individuals must pay taxes according to their measure of benefits, then the evidence is that it is largely those employed in the public sector, in mining, and the financial sector, in that order, who see any benefits from paying taxes.
But based on the very nature of government expenditure-process and on the ability to pay, many would reasonably argue that those employed in other areas of the private sector must be equally tax compliant. After all taxes are compulsory payments and the individual measure of gains cannot be a sensible rule to go by in deciding whether or not to comply with the law.
Third, because the tax burden is borne by the few, it is to be expected that the actual rates may be high in order to raise any needed revenue and a higher rate itself discourages compliance.
Fourth, if the average private sector earnings are greater than those in the public sector, then there is reason to worry about the degree of tax evasion by those, largely urban, with higher ability to pay and who, many believe, also benefit disproportionately from the provision of public services.
Fifth, while there is a constant push to raise taxes from the informal sector, policy-makers must weigh the cost of the enforcement and the equity-efficiency concerns in order to determine how and where best to allocate the tax collection effort. The survey appears to suggest that the scope of personal taxation within the formal private sector may be greater than seems to be commonly recognized. Widening and deepening compliance with payroll deductions (for both taxes and pension contributions) is easiest and cost-effective to administer. A broader base makes lower rates possible.
To this end, the following sectors deserve the attention of the Internal Revenue Service (IRS): manufacturing (small and medium size firms), the hospitality enterprises, construction and transportation sectors, and professional service providers. Many of these either are self-employed, are in occupations that lend themselves to significant cash payments, or have other forms of income not subject to payroll withholding. They should be encouraged to complete annual tax returns and make quarterly payments towards tax revenues and for social security payments.
What makes tax evasion by persons and businesses possible is that it is difficult to track through payroll records, most often inadequately kept, and it is difficult to assess profits from proprietary businesses. For many in the latter category, the “life style indicator” of the proprietors suggests higher ability to pay.
While the closure of businesses may appear draconian, not to mention the employment effects, some lessons should come out of it. First, in some cases, it is apparent that although personal income taxes are deducted at source, some employers may not remit the taxes to the state accurately and promptly; aided perhaps by corrupt tax officials. For sure, this is not limited to withholding payroll taxes. It is so with the collection of consumption (the value added) tax.
Second, the tax collection drive has revealed that tax delinquent businesses include church run businesses, stevedoring companies, foreign exchange bureaus, restaurants, hotels, and shipping yard companies, all of which are service providers in one form or the other, and, most likely, owned by people with distinguished lifestyles. Such tax cheating can be overcome (not eliminated) through sting operations and random audits.
Third, there is a fundamental issue of whether we are sharing the tax burden fairly? This appears not to be the case now. It is believed that for the same gross income, cocoa farmers and other exporters, for example, pay more in direct taxes than private transport owners, building contractors, lawyers and consultants because of how export taxes are levied and collected. Such pernicious inequities in the tax burden have in the past contributed to smuggling in no small measure of exports.
The government in 2001 initiated measures to rope into the tax net private consultants, lawyers and those in professional practice some of whom were not paying taxes on their income. Although ministries, departments and agencies are required to submit a list of all contracts awarded to consultants to the Internal Revenue Service, it is believed that compliance is low.
Finally, the urgency of the exercise drives home the need to increase domestic revenue mobilization in order to be less dependent on external resources for development. The irony is that, for most donor countries, direct taxes (personal and corporate income taxes) remain the workhorse of the tax system and help to finance aid. To fund development, especially public infrastructure, with any stamp of country ownership and unburdened by donor conditionalities, requires that Ghana strengthens its ability to raise domestic tax revenue; however small. And to achieve that, the tax burden must be shared equitably on the basis of ability to pay.
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