One of the major sources of government revenue is taxation. Taxes are very critical and significant mechanisms in mobilizing resources for the development of any economy. Taxes are basically compulsory financial levies imposed on individuals and business entities by governments. According to James and Nobes (1997), a tax is a compulsory levy made by public authorities for which nothing is received directly in return. The rationale for this article is to examine whether the promise made by the government to the business community and by extension to all the citizens, that they will shift the economy from excessive taxation to production is on track.
NPP Government will move the economy from taxation to production: 2016 Manifesto
The 2016 manifesto of the New Patriotic Party (NPP) promised to shift the focus of the economy from excessive taxation to production. This will be done by offering the required incentives for economic productive activities to thrive, thereby creating employment opportunities to address the high unemployment situation in the country at the moment. In fact, this economic model was welcomed by most economists and policy analysts as the surest way to drive businesses in the country. Indeed, industry players, manufacturers as well as businesses were equally excited with the aforementioned economic policy.
The manifesto further stated that the deliberate plan to shift the focus of the economic policy from taxation to production will possibly lead to:
- reducing the corporate tax rate from 25% to 20%.
- abolishing the special import levy.
- abolishing the 17.5% VAT on imported medicines not produced in the country.
- abolishing the 17.5% VAT on Financial Services.
- abolishing the 5% VAT on Real Estate Sales.
- abolishing the 17.5% VAT on domestic airline tickets
- reducing VAT for micro and small-scale enterprises from the current 17.5% to the 3% flat rate introduced by the Kufuor-led NPP Government.
Some economists argued that considering the taxes to be abolished, the government may go dry with respect to domestic revenue generation. Interestingly, the manifesto actually provided an alternative and innovative means to generate sufficient revenue to cater for any gap in revenue generation. Such initiatives were:
- broadening of the tax base as a result of formalization of the economy
- increase in tax compliance.
- reduced government expenditure as a result of increased collaboration with the private sector and prioritization of government expenditure.
- savings from the reduction of interest rates paid on the country’s debt stock.
- elimination of corruption, especially in the procurement of goods and services, which is eliminated at about 1.5% of GDP.
- plugging leakages in the administration of public finances.
The justification for the proposed reduction and abolishment of taxes stems from the fact that, during the Kufuor-led administration, the NPP government between 2001-2008 slashed corporate taxes from 32% to 25% and at the same time increased revenue. This implies that the NPP had a track record with respect to tax reduction without affecting domestic revenue mobilization.
2017 Budget Statement and Economic Policy: walking the talk
It is worth noting that, the 2017 budget statement and economic policy which was presented to Parliament on Thursday 2nd March 2017 by the Hon. Minister for Finance, Ken Ofori -Atta, on the theme “Sowing the Seeds for Growth and Jobs” actually delivered the 2016 manifesto on tax reduction and abolishment. In fact, the government was applauded by industry actors and most of them even requested more reductions so as to make them more effective in order to increase production capacity. Equally so, some economists and policy analysts, including myself cautioned the government against the rush in the execution of the policy. That is the reduction and abolishing of taxes. Indeed, the government actually walked the talk by abolishing the following taxes:
- 1% Special Import Levey.
- 5% VAT/NHIL on Financial Services.
- 5% VAT/NHIL on Selected Imported Medicines.
- 5% VAT/NHIL on domestic airline tickets.
- 5% VAT/NHIL on Real Estate sales.
- excise duty on petroleum
- duty on the importation of spare parts.
It is worth noting that the following taxes also received reduction:
- reduced National Electrification Scheme Levy from 5% to 2%.
- reduced Public Lighting Levy from 5% to 2%.
- replaced the 17.5% VAT/NHIL rate with a flat rate of 3% for traders.
- reduced Special Petroleum tax rate from 17.5% to 15%.
Per the 2017 budget statement and economic policy, the Hon. Minister for Finance, indicated that the rationale for the implementation of the above tax incentives was to improve the business environment, instill fiscal discipline and promote investment in critical sectors of the economy to set the stage for job creation opportunities. The question whether or not the above policy initiative did actually achieve its intended purpose shall be analyzed later in another piece. But, I’m certain that, it really played a critical role in the kind of real GDP growth we experienced in the 2018 and 2019 fiscal years.
Introduction of new Taxes: 2021 Budget Statement & Economic Policy
The impact of the pandemic on Ghana’s economy was severe. In fact, it actually distorted most of the macroeconomic fundamentals. In an attempt to fix the macroeconomic fundamentals, the government, in the 2021 budget statement and economic policy introduced three key new taxes. That is,
- Sanitation and Pollution Levy (SPL) of 10 pesewas on the liter of petrol/diesel under the Energy Sector Levies (Amendment) Act, 2021 (Act 1064).
- COVID-19 Health Levy of one percentage point increase in the NHIL/VAT.
- Financial Sector Clean up Levy of 5% on profit before tax of banks.
IMF Justification for Tax Increment
According to the IMF, the impact of the pandemic on the sub-Saharan Africa economies created three main challenges for the region. Firstly, to meet increased spending needs; secondly, to contain a pronounced increase in public debt, and finally, to mobilize more tax revenue. The fund further indicated that public debt in sub-Saharan Africa increased to about 58 percent of GDP in 2020, interest payments also reached a worrying 20 percent of tax revenue. With respect to Ghana, the Public debt has reached 76.1 percent of GDP as of the end of the fiscal year, 2020. The fiscal debt leaped to 11.7 percent of GDP as against a revised target of 11.4 percent of GDP (GSS, 2021). IMF indicated that increased tax revenue mobilization is usually the main policy lever for bridging the gap between spending pressures and sustainable public debt.
Is Ghana Really on Track?
The quest by the government to move the economy from taxation to production is gradually beginning to diminish due to the reality on the ground, more importantly, due to the deadly effects of the pandemic, coupled with persistent shortfalls in domestic revenue mobilization. This was as a result of the government’s inability to broaden the tax net and also the ever-increasing government expenditure.
It is the considered view of the writer that Ghana is really not on track to move the economy from taxation to production. My respectful opinion is that there should be a re-thinking into the policy of shifting the economy from taxation to production. It is a good economic model but ought to be done and implemented in a manner that stimulates real economic growth and development. It is hereby suggested that:
- Specific industries and businesses capable of increasing productivity and also creating jobs should be identified and supported in the form of tax reduction, not the general wholesale of tax reduction.
- Government must identify new zones. That is businesses, not yet in the tax net or partially in it, and get them taxed so they can relieve existing taxpayers with persistent increases in taxes.
- Government must devise a strategy by ensuring that the leakages are blocked and therefore expenditures are managed better.
By Daniel Amateye ANIM
The writer is a Development Economist and Chartered Business Consultant. Daniel is the Chief Economist at the Policy Initiative for Economic Development. Currently, he is the Director of Research and Analysis, B&FT.
email: danielamateye@gmail.com, Tel; 0244 47637 / 0201939350