IMANI Alert: How Government’s tax regime hurts
Ghanaian businesses make 33 different tax payments a year, spend 224 hours a year filing, preparing and paying taxes amounting to 32.70% of profits- DB Report 2016.
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. 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 Government 2016 tax initiatives. 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 2% decline.
Manufacturing, Service and Agricultural sectors are reeling under difficult business conditions: high taxes, high utility tariffs, high interest rates, high inflation among others. These sectors will continue to remain uncompetitive for the foreseeable time.
The 2016 World Bank Doing Business (DB) Report regarding the “Paying Taxes” indicator 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 2013, the BBI has dipped below the baseline. In the second quarter of 2014 the index recorded 22 points, making it the lowest ever recorded. However, in the third quarter, it rose to 42 points and further to 98 points in the fourth quarter.
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.
It also indicated that more than half of respondents were optimistic of an improved business environment in the fourth quarter. This positive expectation could be attributed to the Ghana Cedi stabilization, improved power supply, the International Monetary Fund intervention (IMF Extended Credit Facility Program), and the inflow from the cocoa syndicated loan as well as the issuance of the Euro bond.
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% 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 as businesses either had to cut output or supplement power supply with power generators.
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 unfavorable 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% have been opposed by trade associations namely, Ghana Union of Traders Association (GUTA).
This situation has triggered strike actions to oppose these additional taxes and increments as businesses are already slapped with substantial number of levies and charges at the ports, amidst the harsh economic conditions.
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: to avoid any confusion, the government ought to have better engaged the appropriate trade unions, namely Importers and Exporters Association 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. 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.
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 maximization.
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.
An increase in Capital Gains Tax (from 15% to 25%) and Withholding Taxes (from 5% to 7.5 %) could affect the working capital of businesses, especially Small and Medium enterprises. The increments in the rates of these taxes practically affect the prices of goods and services. This, obviously, will cause a declension in outputs and force them to either lay off workers, partially or completely shut down.
Furthermore, businesses operating under tax concessions in Ghana will now have to pay Corporate Tax at the minimal rate of 1% under the new law; this will likely deter new businesses from setting up in critical sectors such as agro-processing.
The Value Added Tax (VAT) has also made the headlines. In 2013, Government increased VAT from 15 per cent to 17.5, under the pretext of bridging the infrastructure gap. The recent decision to increase VAT through the Energy Sector Levies Act, 2015, (Act 896) has been met with hostility on the side of labour and trade unions alike, as they claim it’s “unfair” and “unjust”.
The government has demonstrated its intention to remove VAT on locally produced goods and raw materials as part of its policy to support local industries. The implementation, however, remains objectionable.
The tax regime remains quite unfavorable to the business environment. Evidently, 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, Government ultimately benefits for investing in the necessary infrastructure that widens the tax-base.
Indeed, this will go a long way to address Government budget deficit; which appears to be its justification for the increment in rates of existing taxes and the introduction of new ones. 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.
Going forward, there is the need to revisit the structure of the tax regime in order to restore business confidence in the economy. More importantly, the government should consider the following policy proposals:
Any other subsequent tax policies should seek to achieve tax efficiency and equity, and not just increase tax rates.
The need to introduce policies that allow for the progressive formalization of the large informal sector using simplified and technology-powered regulatory systems in terms of business registration and tax compliance. About 80% of Ghana’s economy operates in the informal sector; this explains Government’s inability to enforce tax laws and mobilize revenue.
The government should take concrete steps to enforce its decision to remove VAT on locally produced goods and raw materials as part of its policy to support local industries. This policy should be expanded to include other sectors, particularly the agri-business.
Government should engage more actively with all stakeholders in the private sector in the context of any new policy intervention. This helps to avoid any revolt on the side of trade unions as we have seen in recent past.
Ultimately, it’s important that government adopts a creative approach to raising the necessary funds to run its affairs. The obvious over dependence on a limited tax-base and multiple tariffs and levies is clearly becoming unacceptable.
If the status quo is allowed to continue any further, Ghana risks losing key corporate tax payers as some companies will evidently relocate to neighboring countries with better business environments; as has been the case in recent past. As the 2016 DB Report points out, the use of technology and it derivatives to streamline business regulation is arguably non-existent in Africa, including Ghana. Reforms in this regard are urgently needed.
The use of electronic means for filling, paying and complying with tax regulations should be incorporated in all polices. The World Bank says, “Online procedures account for 0.5 days in the total time calculation” when starting a business in Ghana. In a recent letter addressed to the Registrar General Department regarding the regulatory framework that governs the processes of starting a business in Ghana, IMANI spelt out some policy measures the Government should institute in order to optimize the process for business registration.
These measures include, enabling online business registration throughout the process, developing a Public Education Toolkit to educate stakeholders on Online Services, building a solid human resource for the administration of online services among others. All these measures will practically widen the tax base for effective revenue mobilization.