The COVID-19 has resulted in a sharp decline in global crude oil prices and as result Ghana is expected to lose GHȼ5,679 million in oil revenue in this fiscal year. Again, the country is expected to lose GHȼ808 million in import duties.
The shortfall in non-oil GDP will result in shortfall in tax revenues amounting to GHȼ1,446 million. This brings the total estimated shortfall in non-oil tax revenues to GHȼ2,254 million.
The overall fiscal deficit is expected to increase from the programmed GHȼ18.9 billion (4.7 per cent of GDP) to GHȼ30.2 billion (7.8% of revised GDP). The primary balance will correspondingly worsen from a surplus of GHȼ2,811 billion (0.7 per cent of GDP) to a deficit of GHȼ5.6 billion (1.4 per cent of GDP).
These shortfalls call for urgent and context specific policies to address the fiscal challenges.
The International Monetary Fund (IMF) and the World Bank have responded with a US$1 billion in emergency funds and $500
Taxation remains the main source of domestic revenue for Ghana. Unless the country adopt creative and innovative approaches towards mobilising domestic revenue, it could be plunged into decades of unsustainable debt situations, the consequences of which are obvious - widening gender and economic inequalities and exacerbate cleavages and violence/conflict.
This policy brief seeks to assess Ghana’s options in meeting the anticipated revenue shortfalls for the covid-19 period and beyond. Whilst the government will seek to come out of the effects of post Covid-19 and get the economy running, it must do so with extreme caution and adopt context specific and relevant fiscal policy measures.
Revenue mobilisation policies
Introduce an additional tax band on higher incomes: The government must consider reviewing the existing tax codes and introduce additional tax bracket and higher incomes.
Ghana has high tax rate and [rate] concertation at the lower-end of the income bracket, therefore, the country’s income tax regime is generally regressive. Currently, a taxpayer earning GHȼ420 a month has a marginal tax rate of 10 per cent, a taxpayer on GHȼ20,000 has 25 per cent and an income of GHȼ50,000 attracts 30 per cent.
To promote fairness, the government may consider introducing an ‘additional rate’ tax band of say 35 per cent on incomes over 25,000 a month. Introducing an additional tax rate band could be useful in bridging the inequality gap whilst increasing tax revenue.
Remove personal reliefs on higher income earners: Tax reliefs in the tax code must aimed at reducing inequality, rather than being given on a wholesale, as in the case of Ghana. Currently, taxpayers are entitled to a tax-free amount of GHȼ3,828 a year.
Even though this aims at reducing inequality through tax codes, every taxpayer in the country qualifies. Aside the personal reliefs (i.e. personal allowances), there are several tax reliefs such as married couples’ allowance, child education support, and dependent spouse which are again given to any taxpayer.
Removing such tax ‘freebies’ for higher income tax earners, for example, those earning over GHȼ20,000 a month, could generate substantial revenue whilst promoting one of the core aims of taxation, fairness.
Re-introduce a fair luxury vehicles levies: Another potential revenue opportunity for Ghana is the re-introduction of taxation on luxury vehicles. This tax was abolished in 2019 amidst criticisms. The main issue was the naming and the coverage. The tax failed because it was poorly implemented.
To effectively re-introduce this levy, governments must ensure that it captures the real luxury vehicles, and not to use Co2 emission rate as the basis.
As a guide, vehicles with list price starting from US$30,000, for example, may be classified as luxurious. To promote fairness in the policy design, there should be brackets.
For example, vehicles with value of US$30,000 - US$50,000 may be subject to US$150 levy; between US$50,000 and US$80,000 pay US$200; and over US$80,000 pay US$400 a year. The policy must consider reducing the taxes as vehicles become old. In this case, revaluation may be done every three – fives years.
Implement a digitised property taxation system: Property taxation is equitable and provides the most sustainable form of local government financing.
Within the developed nations, on average, property taxation accounts for about 2.2 per cent of GDP. Interestingly, property taxation makes on average only 0.38 per cent of GDP in Africa.
The main challenge to effectively designing a property taxation system in Ghana is the lack of reliable data about properties and their owners, and poor and often inconsistent property valuation records.
Effective property taxation requires understanding of the local terrain – local authorities tend to have good local knowledge of properties and their owners including new ones under construction.
Therefore, administering such taxes locally has an added advantage of reducing cost of administration and crucially eliminating the incidence of tax dodging.
Review and amend generous tax exemptions: Ghana incurs a substantial revenue loss through poorly-designed tax exemption policies, such as generous no sunset clause tax holidays and other investment allowances which have little or no impact on investment decisions.
Ghana’s tax exemption grew from approximately US$85 million, 0.6 per cent of GDP to US$1.1 billion, 1.6 per cent of GDP in an eight-year period, between 2010 to 2018
A properly reviewed exemptions will directly increase revenue urgently required at this time. The exemptions must be reviewed to ensure that key sectors likely to drive the economy are supported, and not powerful corporations.
The government may consider temporary liquidity enhancing measures such as deferring tax payment to support business cash flows.
Implement effective Taxation of High Net Worth Individuals (HNWIs): HNWI taxation is less common, especially among low-income countries, such as Ghana.
In Ghana, tax administration efforts are usually directed to taxing incorporated bodies and those subject to PAYE taxes at the expense of wealthy individuals.
Most of these wealthy individuals either pay no taxes or grossly underreport their incomes to reduce their tax liabilities, implying that their contribution to the tax kitty is very low in relation to their wealth/income.
Going forward, there’s the urgent need for Ghana to assess the potential to increase the tax revenues through a comprehensive review of the various legislations to taxing High Net Worth Individuals.
To effectively tax wealthy individuals, the GRA needs to collaborate with various relevant international bodies, state agencies as well as other third parties to improve access to taxpayer data.
Improve on tax communication
Effective communication between taxpayers and the tax authority is necessary for promoting confidence in the system.
It enhances compliance decisions and subsequently improves tax revenue.
Communication materials must be provided in different formats and in different dialects to enhance tax knowledge of targeted audience.
The GRA need to adopt customer-centred approaches to build long-term and sustained voluntary compliance culture as opposed to the common and more expensive enforcement approaches which are common features of tax authority responses in these countries.
Robust ICT-led administration system
Leakages as a result of corruption, underreporting, and under collection due to lack of information about taxpayers cost Ghana substantial revenue annually.
The government needs to recognize the impact of technology in promoting compliance. Information and communications technology are increasingly playing a critical role in tax compliance management.
The use of ICT, especially in the hard-to-tax sectors, is crucial as it could promote detection and compliance through automatic gathering of third-party information as a by-product of natural business processes.
Again, ICT systems reduces compliance costs and enhances data capturing for effective tax policy design.
Involve non-conventional partners – Faith-based Organisations (FBOs): Most people in Ghana tend to be influenced in part by faith-based organisations. It is important for the GRA engage these FBOs in promoting tax compliance.
Having leaders buy-in to specific tax policies and initiatives could ignite members interest, enhance their compliance decisions and improve tax revenue.
The coronavirus will pose significant challenges to all tax authorities in the world, and GRA will face a massive challenge in raising the needed revenue.
As the government is confronted with daily and often overwhelming expenditures, there is an urgent need to improve domestic revenue through taxes and other means.
Building political consensus is crucial in implementing some of these critical initiatives. DRM efforts must be a national fight and as such all conversations geared towards scoring political points must be avoided.
The author is the Fiscal Policy Lead for Oxfam in Ghana. He holds PhD in Taxation (University of Birmingham), MBA Financial Management (City Business College, London), and MSc in Accounting and Finance (De Montfort University, Leicester)