Ghana is likely to miss its tax-to-GDP ratio target of 20% by 2023 as its revenue mobilization remains low for quite some time now. According to a report from the Institute for Fiscal Studies (IFS), Ghana’s tax-to-GDP ratio has only increased by 5% in the past 11 years and stands at 13% as of 2019.
“At 13% in 2019, Ghana’s tax-to-GDP ratio remains far below the government’s target of 20% by 2023. Though this ratio is 5 percentage points higher than in 2000, it has remained at the same level since 2017”.
Meanwhile, the IFS noted that Ghana’s tax-to-GDP ratio is fairly typical of countries in sub-Saharan Africa. However, considering countries of a similar income level across the world, Ghana’s tax revenue collections are relatively low. According to the IFS, out of 36 lower middle-income countries with available data, Ghana ranked 26th in 2018.
As a result, the IFS highlighted some factors that possibly explain the differences in tax revenue mobilization across the countries. Basically, the IFS analyses revealed two variables that determine tax revenue collection.
Differences in tax revenues among countries
First and foremost, is the size of the tax base to which the tax applies. The base is partly a function of structural and macroeconomic factors, and partly a function of tax policy and administration. Some of which include compliance, enforcement, reliefs and exemptions.
However, the IFS highlighted the difficulty in comparing tax revenues across countries due to differences in the factors that determine the size of the tax base.
Another important factor that determines revenues is the (average) tax rate applying to the relevant tax base. The IFS stated that although tax rates for a given tax base may vary by individual taxpayer, they are easier to compare across countries than tax bases. This is particularly true for taxes such as CIT and VAT. The reason being that, they are mostly statutory and applies to the majority of the tax base.
Furthermore, the report shows considerable variation in the headline CIT rate in the sample, ranging from 10% to nearly 35%. As a percentage of GDP, CIT revenues range from 0.7% to 5.5%. Moreover, the statutory rates range from 10% to 20%, and Ghana is close to the top of the sample in this respect.
Correlation between tax rates and tax revenues
Besides, the IFS found a positive association between tax rates and tax revenues. But highlighted that Ghana’s revenues are below expectations given its headline rate. The IFS cited compliance, VAT registration requirements, or the breadth of exemptions as some possible factors responsible for the shortfall.
Per the IFS report, recent growth in corporate income tax revenues in Ghana exceed those in other countries using similar tax rates. This, according to the IFS, largely reflects significant increases in Ghana’s CIT revenue collection in recent years.
“Much of the growth in Ghana’s tax revenues since 2000 has come from increased corporate and personal income tax and VAT and similar taxes. These taxes made up over 70% of total collections in 2019 – up from 57% in 2000”.
Declining VAT revenues
However, the IFS bemoaned the fact that revenue growth from VAT and similar taxes have stagnated more recently. According to the report, Tax collections on imported goods have become far less important in the revenue mix, though they remain significant.
More specifically, the report reveals that taxes on imported goods, including VAT on imported products, accounted for 30% of overall tax revenues in 2019. This represents a sharp decline when compared with 54% in 2000.
Furthermore, the report reveals that the contribution of import duties specifically to total tax revenue declined from 18% in 2000 to a low of 12% in 2019.
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