The impact of taxation on Ghana’s economic growth

As Prof P.A.V. Ansah, a tax expert puts it “I have come to the conclusion that tax paying is such an unpleasant thing that anyone who loves paying tax or even pays without complaining ought to have his or her head examined...but without revenue from taxes, there would be no social life as we know it and would be nearer to the jungle whence we are all presumed to have emerged.”

Edward Dua, a former Director-General of the Audit Service in his book, “Income Tax, Gift Tax, And Capital Gains” acknowledges that the answer to “what is a tax?” is difficult but refers to a widely quoted story of a child who was asked to define an elephant. His definition: “An elephant is large and grey, lives in a herd of elephants.”

Edward Dua Agyeman goes ahead to define Taxation as “…the demand by the Central Government or local government for a compulsory payment of money by citizens of a country other than as payment for some specific service or as a penalty for some specific offense.”

It is an undeniable fact that taxation has been one of the basics of any organized state in history, and the key aspect is that, taxes are imposed on citizens by law.

There are two main functions of Taxation; raising revenue and regulating the economy. Governments in much less complex societies have few roles and responsibilities, and the financial commitments of such governments are minimal, however, as society grows into a more complex state, governments’ commitments become enormous and complex as a result of the changes in financial needs of the people hence taxes increase, and their effects on the economy become essential.

In the past years, governments have made good use of taxation as a tool for regulating the general economy. Income tax is the largest source of national revenue and its effect on inflation, unemployment, and other social and economic objectives has become a prime consideration for enacting tax laws hence, as a social democrat, the imposition of a progressive tax is welcome.

Adam Smith in the Wealth of Nations proposed Four canons of taxation:

•Taxes should be certain, not arbitrary

•People should contribute taxes in proportion to their income and wealth

•Taxes should be levied in the most convenient way

•Cost of imposing and collection of taxes should be kept minimal

There has been a recent addition in principles, which says taxes should be both competitive and international because every trading nation is operating in a global economy hence, the level of rates of taxes determines nations' competitiveness in the global trading platform.

It is an obvious fact that in Ghana today we are affected by a significant budget crisis within which we have to repay short-term and long-term liabilities. This crisis could be solved by two concrete channels-channel of reducing public spending and channel of increasing taxes.

Recently the Minister of Finance announced a reduction in expenditure by 20 percent, a good initiative in line with the above channels but the question is HOW WOULD THESE GAPS BE FILLED?

Ghana’s ratio of tax collection to GDP is 12 percent with the aim of reaching a tax to GDP ratio of 20 percent by 2023.

In doing so, the tax system should be designed to raise revenue in an efficient, equitable, and sustainable way.

The main source of tax revenue in Ghana is typical of other countries around the world; Corporate Income Tax (CIT) and Personal Income Tax (PIT) applying to corporate profit and individual earners respectively and Value Added Tax (VAT). Import duty, Petroleum taxes, and Excise duties are all present in the indirect tax.

Apart from the above, Ghana also has a less common type of tax measure. These include but are not limited to, the National Fiscal Stabilisation Levy (NFSL), National Health Insurance Levy (NHIL), Ghana Education Trust Fund Levy (GETFL), Financial Sector Clean-Up Levy (FSCL), Covid-19 Health Recovery Levy, Sanitation and Pollution Levy, among many others.

OTHER TAXES ON PASSIVE INCOME:

1. Withholding tax on rent

2. Dividends

3. Withholding tax on natural resources

4. Lotto winning

5. Interest

6. Royalties

7. Fees and allowances to Directors

8. Commissions to sale agents

9. Capital Gain Tax on assets

10. Gifts tax on gifts received

The revision of the VAT Flat rate scheme for registrable retailers with an annual turnover exceeding GhC500, 000.00 and all wholesalers will be required to charge VAT at a standard rate of 12.5% on the taxable value of goods plus LEVIES.

The hidden tax here which will be transferred to the final consumer is the 6% levy (NHIL, GETFL, and COVID-19 Levy)

Also, as cited in paragraph 415 of page 100 of the Budget Statement and Economic Policy of the Government of Ghana for the 2022 Financial Year, extensive consultations with stakeholders including youth associations and educational institutions across the country have led to the development of the YouStart Initiative as a key vehicle to create ONE million jobs in three years under the GhanaCARES Programme, yet an entrepreneur pays tax at a higher rate (at 30%) than a corporate entity (at 25%).

Also, a non-resident person pays tax at a maximum rate of 25%.

By these plethoras of taxes, we have exhausted all the avenues in taxing gains and profit, hence now resorting to taxing capital.

If we really want to assist young entrepreneurs and small and medium scale businesses to grow, then there is the need to amend the current rate to a moderate rate that can help to retain more profit for business growth.

With the rapid growth of electronic transactions, some countries across Sub-Saharan Africa have introduced taxes on Mobile Money transaction fees, which have manifested in various forms.

For instance, in Tanzania, an excise tax of 10 per cent is levied on Mobile Money transactions fees.

In Zimbabwe, there is a 0.05 US$ on fees, Kenya 10% on fees for Mobile Money transactions. In Ivory Coast, a 0.5% on fees for cash transfers over Mobile Money. In Uganda, 1% rate was levied on fees on all Mobile Money transfers except those done by banks but then revised it downwards to 0.5% in July 2018, a month after the introduction as Mobile Money transactions dropped by almost a quarter after the introduction.

Cameroun also introduced a 0.2% on Mobile Money transactions fees on January 1, 2022.

All these countries stated above levied the tax on THE FEES CHARGED by the Service Providers as tax base but not on capital.

It is very clear in Sections 4, 5, and 6 of the Income Tax Act, 2015 (Act 896) that tax is assessed on gains or profit but not on CAPITAL as proposed by the Electronic Transaction tax popularly known as Killer E-Levy.

Taxing Mobile Money transactions has the potential of discouraging the electronic payment systems while encouraging cash preferences and financial exclusion, especially for low-income earners.

Taxing Mobile Money will also increase the cost of obtaining a small loan from lending institutions and rural banks by petty traders.

The E-Levy decreases access to funds for the poor in the rural areas where banks do not serve, who borrow small amounts for education, health, trading activities, and household upkeep.

Within the period of July to December 2021 alone, tax waivers and exemptions amounted to about Gh¢950, 000, 000. 00. This can build so many schools and hospitals. Also, there are so many Free Zones and Hospitality companies that are enjoying tax exemptions for a period between 5 to 10 years.

This I call “Free Trade” because most company business life span is far less than 10 years.

The solution to resource mobilization challenges is not about introducing new taxes but rather about cutting down the granting of tax waivers and exemptions, building the capacity of staff, and encouraging tax compliance among others.

CONCLUSION

In conclusion, the introduction of E-Levy as a cheaper way of mobilizing money will have a detrimental effect on the growth of businesses in Ghana.

Let me make it clear today that levies are not a final tax. Levies are added back to income for VAT purposes.

(Double Taxation)

This simply means that the levy charged as per online business transaction will be added to the total income monthly for tax purposes.

E-Levy has no tax base; it is taxed on capital, not gain nor profit which makes it a killer tax.

Taking inspiration from Edward Dua Agyeman who in explaining the difficulty in defining a tax, by alluding to the child’s definition of an elephant as “large and grey, which lives in a herd of elephants,” maybe our current predicament is due to the fact that this particular elephant is blue.

It is also proper for the government to give a listening ear to the numerous Ghanaians, who are against the E-levy and drop it. After all, no one forces a bitter pill into the mouth of the sick.