Plans to introduce a digitised system were announced by vice president Mahamudu Bawumia in early November. Bawumia said that broadening the tax net is “imperative” and said that a new mobile tax filing application is now ready for use.
The plan has the potential for “immense positive outcomes”, says Courage Kingsley Martey, senior economist at Databank Group in Accra. “We believe issues of corruption in the tax system, evading the tax net and under-declaration of taxable income could be significantly reduced if the system is digitized.”
Increased revenue collection is crucial to improving Ghana’s public finances, Martey argues. Ghana’s revenue-to-GDP ratio hovers around 14%, about half of what the revenue benchmark required for a lower-middle-income country, he says. “Ghana’s revenue base is not wide enough for direct taxes and even for indirect taxes.”
- Debt-interest payments account for 45% of total revenue, leaving Ghana’s debt affordability metrics looking weak, Martey says.
- But if Ghana is able to increase its revenue-to-GDP ratio from 14% to 20%, the interest-to-revenue ratio would likely drop below 40%, he adds.
- “This would significantly improve debt affordability and sustainability” and could spur a rebound in investor confidence, he argues.
The government in October shelved plans to raise $1b in debt, leading some economists to fear the prospect of the country facing a period of effective lock-out from international debt markets. But real GDP and fiscal revenue growth are likely to be sufficient over the medium term for the government to service existing liabilities and slow the rate at which it accumulates further debt, says Leeuwner Esterhuysen, an economist with Oxford Economics in South Africa.
- The 2022 budget statement due on November 15 needs to focus on fiscal consolidation, promoting economic growth, and further revenue mobilisation, Esterhuysen says.
- “Ghana has already made good progress, and the effective implementation of a digital tax system will be positive.”
The main challenge with taxing Ghana’s informal sector is the large number of businesses with very low productivity, Martey says. “Applying the existing system of tax administration would impose a high marginal cost for each dollar collected, and this makes it not viable to tax the informal sector under the existing system.”
The optimal approach, he argues, would be to ensure the informal sector adopts the ongoing digitalization drive. This would make it relatively easier to pull the sector into the e-tax system and reduce the marginal cost of taxation, he says.
Tax exemptions also need to be rationalised and reduced, Martey says.
- “The general consensus among all stakeholders, including the government and the IMF, is that Ghana’s tax exemptions regime appears too generous, with gaps that are being exploited.”
- Ghana loses about 2% of GDP to tax exemptions annually, he calculates. “A drastic reduction in the tax exemptions would reduce the revenue losses and boost the resource envelope available.”
- A bill to review the exemptions regime has been delayed since 2019 and as yet shows no signs of making progress in parliament, Martey says.
Still, better tax collection won’t fix the problem on its own. Ghana also needs to get a grip on public spending, Martey says.
- The authorities need to strictly enforce the Ghana Integrated Financial Management Information System (GIFMIS), he argues.
- This would ensure that all items of public expenditure go through a digital framework to “ensure accountability and reduce off-budget expenditures.”
Smart implementation of digital tax collection and widening the tax net would help to put Ghana’s public finances on a firmer footing.
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