17.01.2013 Feature Article

Why Taxation reform is needed in Ghana

Why Taxation reform is needed in Ghana
17.01.2013 LISTEN

Revenue is an essential part of government business and government is in the business of being able to provide its citizens a marked improvement in their quality of life.

Government can only do this by receiving revenue it gets from various sources such as external sources like the IMF/World Bank which ideally should be the last resort.

The main source of governments' revenue is generated from internal sources like exports and the money it receives from taxation. Because of a lack of robust leadership when it comes to dealing with foreign multi-national companies especially in the minerals sector, Ghana does not receive enough income from its chief exports like Gold and Oil.

This can be testified by the fact that as far as gold revenue is concerned, Ghana only receives a paltry 3% as revenue from the mainly western mining firms that operate in this country.

Likewise the same can be said for Ghana's oil where despite relatively favourable prices on the world oil market, government's share of oil revenue is again pitiful.

It is primarily because of the lack of revenue it receives from its exports that revenue from taxation is absolutely key. Taxation is potentially a huge source of income for the government.

Revenue from taxation is used to pay civil servants, pay external debts and more importantly contribute to the national development of the country by embarking on social intervention policies such as providing affordable housing, providing affordable inter/intra city transport, improving the road infrastructure, improving the rail infrastructure, providing efficient energy sources, providing adequate and comprehensive healthcare and free education up to the university level.

Taxation comes in many guises such as income tax, Value Added Tax (VAT), tax on imports of goods and services, road tax, vehicle income tax and tax paid by multi-national firms operating in Ghana.

However because of flaws in the current taxation system that for example allows foreign multi-national companies operating in Ghana like Vodafone to pay NO TAX to the government of Ghana and due to the uncoordinated system of tax collection in this country whereby virtually millions of Ghanaians pay no tax, government revenue from taxation is woeful.

This lack of revenue is the chief reason why Ghana has a deficit in ALL of the social intervention policies mentioned above and as such has to borrow money from external sources such as the IMF/World Bank.

It is against this reality that the need for government to enact massive tax reforms in this country becomes a reality that needs urgent attention paid to.

For this feature, I want to concentrate on a major form of taxation and that is income tax.

At present the income tax net is not wide enough with only a minority of Ghanaians paying their fair share of income tax with many many others, some because of clever accountants, either paying no tax whatsoever, or paying very little tax to the state.

Also government is missing out on huge income tax revenue from the massive informal sector. It is estimated that the informal sector employs about 80% of Ghanaians. Now taking this into consideration it is quite obvious that something urgently needs to be done to bring these citizens of Ghana into the income tax system as they are citizens and through their activities are contributing in a massive way to the development of the nation.

A solution to incorporating tax revenue from the expanding informal sector is to introduce a self-assessment tax scheme whereby employers in the informal sector, many of whom are self-employed can make an accurate assessment of the amount of tax they are able to pay, based on their earnings.

To ensure this, a self-assessment form for the informal sector needs to be established. Such a form could have on it tax brackets as the following table illustrates:

Income Tax bracket Turnover per annum in GHS
1 5,000 – 10,000
2 10,000 – 15,000
3 15,000 – 20,000
4 20,000 – 25,000
5 25,000 – 30,000
6 30,000 – 35,000
7 35,000 – 40,000
8 40,000 – 45,000
9 45,000 – 50,000
10 50,000 – 100,000
11 100,000 – 300,000
12 300,000 – 500,000
13 500,000 – 1,000,000
14 1,000,000 and over

Please note that the above table and just an example of a possible self-assessment tax code system and can be modified to meet specific needs and criteria.

The turnover would be the figure ascertained after expenditure has been taken away from the income generated by the entity. Each income bracket would have its own tax code which would automatically have its own percentage point based on annual turnover.

For example in the above table income bracket 1 would generate a tax percentage of say 5%, whereas income bracket 13 would generate a tax percentage of 45%.

By having this system one would be taxed equitably and fairly based on one's turnover and it would be fair to assume that the higher one's tax bracket the more tax they should contribute to the government and hence contributing to national development.

The above table should not been seen as a measure to tax wealth creation.

It should be seen however in the bigger picture and that is to generate enough internal revenue for the government which can be used for many social intervention policies that would benefit everyone in society, not just the wealthy.

Income Tax is a necessary evil and Ghanaians should see the paying of income tax not as a burden but as a national and patriotic duty contributing to the overall development of the nation for generations to come.