Ghana turns to domestic taxes to finance development over money market woes

By Jonas Nyabor

Posted on Tuesday, 18 January 2022 16:05
A man holds Ghana's cedi notes in Accra
A man holds Ghana's cedi notes in Accra. REUTERS/Luc Gnago

Limited access to the international money market has forced managers of Ghana's economy to look inwards for much needed revenue to finance its development. Finance minister Ken Ofori-Atta now says raising money from domestic taxes is the way to go.

The hard part: finding ways to convince millions of untaxed people in Ghana to contribute to the national kitty.

Only 8.2% of working Ghanaians pay income tax according to Ofori-Atta, who is developing ‘burden sharing’ strategies to pull the rest in.

“Only 2,364,348 are bearing the burden of the entire population as taxpayers as of August 2021. This is a trend that needs to be addressed to build a more equitable society,” the finance minister said while presenting the 2022 budget to parliament in December.

The low tax-to-GDP ratio of the country makes it hard to finance the country’s developmental agenda.

In the face of limited access to the international financial market, a proposed 1.75% electronic financial transaction levy (the E-levy) is the government’s first tool to bring in the informal sector.

“The essence of our proposal on the E-levy is to widen the tax net and generate the required revenue to support entrepreneurship, youth employment, build our infrastructure and reduce our debt. E-Levy represents our greatest opportunity to, in the medium term, broaden the tax base and meet the tax-to-GDP ratio of 20% as pertains among our peers,” Ofori-Atta told the press last month.

What other options are on the table?

With an African average around 16%, the tax-to-GDP ratio in Ghana, 13%, is inadequate to meet the country’s developmental needs and service its debts says James Dzansi, an economist at the International Growth Centre in Accra.

Ghana will still need to explore other options in addition to its domestic tax mobilisation drive to sustain the economy, he tells The Africa Report.

“Ghana needs all options on the table including going to the financial market or the IMF. The projected GH¢6bn from E-levy will not be enough to pay Ghana’s debts,” he says.

Ghana’s Finance Ministry is hoping to raise GH¢6bn ($1.15bn) annually from the proposed E-levy and even more from property taxes which is the government’s other major revenue opportunity.

Innovative approaches needed

Property taxes have long been discussed but the urgency of the economic situation has brought them to the front of the queue. The government has started a nationwide data collection exercise on all properties for the purposes of taxation.

“Property taxation is equitable and provides the most sustainable form of local government financing,” says Alex Ampaabeng, a fiscal policy analyst at Oxfam in Ghana.

In a December 2021 Oxfam Ghana policy brief, Ampaabeng noted that Ghana would be plunged into a situation of unsustainable debt if innovative approaches towards mobilising domestic revenue are not adopted.

He recommends an overhaul of Ghana’s tax exemption regime and tackling revenue leakages lost through corruption and underreporting to guarantee effective mobilisation of domestic taxes.

By 2018, tax exemptions in Ghana amounted to $1.1bn, about 1.6% of the country’s GDP according to President Akufo-Addo in his 2019 State of the Nation address.

The 2020 Auditor General’s report also revealed that GH¢12bn ($2bn) was lost to revenue leakages, an amount significant to the Ghanaian economy.

Bottom line

Dzansi says while the government’s new drive to look inward is well-intended and necessary, it must be careful not to stifle business growth in the process since that will only worsen the situation.

“While the government is working to improve compliance to taxes, they should be mindful of not doing things that will hinder the growth of firms because the growth of firms is linked to the hiring of unemployed youth who eventually become taxpayers,” he said.

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