Ghana’s tax system is under scrutiny, with the World Bank revealing that excessive tax exemptions are significantly undermining the country’s revenue potential.
In its 8th Ghana Economic Update, the World Bank points out that the numerous tax reliefs offered to corporations have considerably narrowed the corporate income tax (CIT) base, leading to substantial revenue losses for the country. These exemptions, while intended to stimulate business growth and investment, are costing Ghana more than it can afford, especially in a time when the country needs to bolster its fiscal health.
Between 2015 and 2020, Ghana missed out on an average of approximately 1.3% of its Gross Domestic Product (GDP) in corporate tax revenue each year, according to the World Bank. This shortfall is primarily attributed to the over two dozen different types of tax breaks provided to companies operating in the country. These exemptions, which include a range of incentives meant to attract foreign direct investment and support domestic businesses, are draining the government’s coffers.
The World Bank estimates that these tax breaks cost Ghana around 0.5% of its GDP in lost revenue annually. This is a significant amount that could otherwise have been used to fund critical public services, infrastructure projects, and other developmental initiatives. The World Bank suggests that by reducing or eliminating some of these generous tax breaks, Ghana could enhance its tax system and significantly increase revenue from corporate taxes.
Personal Income Tax: A Lagging Revenue Source
The report also sheds light on Ghana’s Personal Income Tax (PIT) system, which accounts for about 15% of the country’s total tax revenues. This is below the Sub-Saharan Africa (SSA) average of 18%, indicating that Ghana is not fully capitalizing on this important revenue stream. As of 2020, Ghana’s PIT revenue was equivalent to just 2% of its GDP, compared to the SSA average of 3.5%. This gap highlights the significant untapped potential in Ghana’s PIT system.
One of the key issues identified is the narrow base of PIT payers. Payroll taxes, which are collected under the Pay-As-You-Earn (PAYE) scheme, account for more than 99% of total PIT proceeds. However, all other forms of PIT, such as taxes on capital gains, investment income, and business income of the self-employed, make up less than 1% of the total. This is in stark contrast to other lower-middle-income countries (LMICs) like India, where these other forms of PIT contribute more than 30% to total PIT proceeds.
The low participation rate in Ghana’s PIT system is another area of concern. In 2022, less than 25% of Ghanaians of voting age (18 and older) paid payroll taxes under the PAYE scheme, and an even smaller fraction—less than 0.2%—declared any business income. This limited engagement in the tax system indicates a significant opportunity for the government to broaden the tax base and increase revenues.
In comparison, countries with high PIT productivity, such as Norway, Sweden, and Canada, see almost 100% of their voting population filing PIT returns. These countries have established systems that ensure widespread participation in income tax payment, contributing to their robust tax revenues. Ghana’s low PIT participation not only limits revenue but also reflects challenges in the broader tax compliance culture and administrative capacity.
Reforming Tax Exemptions and Broadening the Tax Base
The World Bank’s report underscores the need for Ghana to reassess its tax exemption policies. While tax incentives can play a role in attracting investment, they must be carefully balanced against the need for adequate revenue generation. The current system, with its numerous and generous tax breaks, is clearly tipping the scales too far, resulting in significant revenue losses.
To address this, the government could consider reducing or eliminating some of these exemptions, especially those that are not yielding significant economic benefits. Additionally, efforts should be made to broaden the tax base, particularly by enhancing the PIT system. This could involve measures to increase compliance, such as improving tax administration and expanding the tax net to include more individuals and businesses.
By curbing excessive tax exemptions and broadening the tax base, particularly in the PIT segment, Ghana can strengthen its fiscal position, reduce its dependence on external financing, and build a more resilient economy.
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