A GNA Feature by Philip Tengzu
Wa, (UW/R), Aug. 10, GNA – Taxation remains one of the most important tools for mobilising resources to finance national development interventions and to provide quality services.
It undoubtedly serves as a source of funding for governments to finance key development interventions in health, education, road infrastructure, and sanitation, as well as other essential public services.
Ideally, tax systems are expected to be progressive, where an individual’s tax is coterminous with his or her income or wealth to enable the wealthier people to contribute proportionately more to the national purse.
However, concerns continue to arise about whether Ghana’s tax system is actually progressive and fair, particularly to people living in poverty and the financially disadvantaged.
Ghana’s tax system
Ghana’s tax system is composed of both direct and indirect taxes, where personal income tax rates are progressive, with one’s tax rate directly proportionate to his or her income.
Also, corporate entities are taxed on their profits, while consumers pay Value Added Tax (VAT) and statutory levies on goods and services.
In recent years, the Ghana Revenue Authority (GRA) has introduced reforms targeted at the informal sector, including the Modified Taxation Scheme (MTS).
Ghana’s informal sector accounts for a significant share of employment and economic activities, making it an important source of domestic revenue mobilisation.
The scheme, therefore, seeks to simplify tax administration for micro, small and medium-sized enterprises to improve voluntary tax compliance and expand the country’s tax base.
However, despite these reforms, economists maintain that the overall tax burden remains unevenly distributed when local government taxes and indirect taxes are considered and renders the system non-progressive.
The missing opportunity
Despite its significance, however, Ghana’s tax system could be described as non-progressive, considering not the magnitude of revenue collected but who bears the greatest tax burden.
Successive tax reforms had largely focused on expanding the tax net to businesses, particularly those in the informal sector, salary earners and VAT, but evasive of accumulated wealth.
Professor Godfred A. Bokpin, an Economist and Professor of Finance, argues that a tax system that focuses mainly on income and business transactions, while leaving substantial wealth relatively untaxed, cannot be considered truly progressive.
He, therefore, opined that the country’s tax system must evolve beyond taxing business activity to also capture accumulated wealth.
Comparing Ghana’s tax system to those of developed countries such as the United States of America (USA), the finance professor observed that Ghana would have been better off if wealth such as net worth were taxed annually.
He contended that with the current tax architecture of the country, individuals who own substantial assets and investments may contribute proportionately less than expected because wealth had not been adequately captured within the country’s tax framework.
It is, therefore, arguably true that though high net worth individuals make up a small fraction of the country’s population, taxing this group could significantly strengthen domestic revenue mobilisation without materially reducing their wealth.
For instance, assuming the net worth of Ghana’s business mogul, Mr Ibrahim Mahama, is $800 million, and this net worth is taxed at one per cent, that would be $8 million.
That means Mr Ibrahim Mahama would be contributing about $8 million to Ghana’s chest annually, as well as taxes from his business operations.
Prof. Bokpin, therefore, observed that wealth taxation had been adopted in different forms across several countries to reduce inequality in taxation and to finance public investment.
He, thus, maintained that exploring similar approaches could help narrow Ghana’s development financing gap.
The tax burden on small businesses
Ghana’s tax reforms had arguably targeted the informal sector, including traders and small businesses such as shop operators.
Many traders made regular tax payments through market tolls, business operating permits and several other local government charges.
Even within the informal sector, there still exist inequalities, with the petty trader who sells tomatoes, onions or pepper on tables in the market paying more taxes than the shop operator who, perhaps, sells building materials.
For instance, some traders at the Wa Central Market pay GH₵3.00 each day to the Wa Municipal Assembly, equivalent to about GH₵90.00 a month, while some shop operators say they pay GH₵15.00 a month.
Some of these petty traders sometimes pay taxes even before they make sales, unlike shop operators and formal sector employees who pay taxes at the end of the month after accumulating profit over the month or after earning salaries.
“Sometimes they (petty traders) are paying all these levies out of their capital and not out of their profit. By the time you realise, their capital is going down”, Prof Bokpin observed.
However, poor recordkeeping among many informal businesses clouded their judgement of the potential or real impact of the taxes on their business operations and sustainability.
The Ghana News Agency’s (GNA) interviews with traders at the Wa Central Business District indicate that many do not currently consider the taxes they pay to be excessive.
Madam Osman Zuleiha and Mr Arafat Rahat, who own shops in Wa and pay GH₵15.00 monthly as tax, believe the tax has no impact on their business.
“The tax is just GH₵15.00 (a month), so it has no effect on my business or the prices of my products”, Mr Rahat said.
Similarly, Madam Suraiya Salifu, a trader at the Wa Central Market, said she pays a tax of GH₵3.00 daily but that the tax has no direct impact on her business.
Nevertheless, Prof. Bokpin observed that the cumulative effect of the daily and monthly levies over time could place a heavier burden on low-income earners with narrow profit margins than is recognised.
Taxing wealth
For Prof. Bokpin, taxing high-net-worth individuals would present an important opportunity to redesign the tax system around the principle of ability to pay rather than simply expanding taxes on business activities.
He believes that one practical way of shifting attention from taxing businesses to taxing wealth is through more effective property taxation.
He argued that people who could afford to build and accumulate valuable properties generally have greater economic advantage and capacity to contribute to local development through annual property rates.
He explained that improving property tax administration could provide district assemblies with sustainable revenue for financing decentralised development projects.
That would help reduce their excessive dependence on the central government for financial resources occasioned by the Assemblies’ reliance on the unsustainable daily market tolls collected from petty traders.
Building a fairer tax system
The debate about taxation in Ghana was not merely about increasing revenue, but also about ensuring fairness.
Prof. Bokpin argued that taxation was a social contract between citizens and the state and that taxpayers would be more willing to comply if they saw transparent and responsible use of public resources.
According to him, ensuring stronger measures to eliminate leakages and corruption within local revenue collection systems was not only ideal in improving local government revenue, but would also encourage tax compliance.
“When taxpayers see politicians or duty bearers abuse tax revenues, they adjust the terms of the contract by avoiding taxes as a way of compensating themselves for the unfair exchange.
So, we have to make sure we block all those leakages and the corruption around these tolls that we collect”, he observed.
Ultimately, strengthening accountability alongside reforms that place greater emphasis on taxing wealth rather than continually expanding taxes on businesses and income would make Ghana’s tax system both fairer and more effective.
Therefore, as Ghana seeks to improve domestic revenue mobilisation, a central argument is that future tax reforms should not merely ask how to tax more businesses.
Rather, they should also question how accumulated wealth and properties could contribute more equitably to financing national development.
For thousands of market women and petty traders across the country, a progressive tax system means more than paying taxes.
It means paying taxes that reflect their actual ability to contribute while receiving visible benefits from the revenues collected
In sum, strengthening property tax administration, addressing leakages in local revenue collection, exploring taxation of high-net-worth individuals, and improving public accountability could contribute significantly to building a more equitable tax system.
GNA
Edited by Benjamin Mensah
Reporter: Philip Tengzu, GNA
[email protected]