The International Monetary Fund (IMF) has expressed concern about the continuous granting of generous tax exemptions to companies and investors at a time when the economy needs increased revenues to navigate its way out of a debt trap.
The fund said tax exemptions remained the weakest link to all efforts to improve tax collection, necessary to narrow the fiscal deficit and tame a debt burden that now required almost half of total revenue and grants to service.
Its Resident Representative to Ghana, Dr Albert Touna Mama, said in response to Graphic Business’s questions that exemptions were depriving the State of billions of cedis every year, with conservative estimates showing that between three per cent and five per cent of Gross Domestic Product (GDP) was lost every year to the current tax holiday regime.
Value of losses
This translates to a loss of between GH¢11.5 billion and GH¢19.2 billion in taxes for 2020, using the year's GDP estimate of GH¢383.3 billion.
For 2021, when GDP is projected to rise to GH¢433.8 billion, the IMF estimates presuppose that between GH¢13 billion and GH¢21.7 billion will be lost to tax exemptions.
It comes at a time when the entire capital expenditure budget for 2021 is projected at GH¢11.4 billion while funds needed to deliver these projects in goods and services are estimated at a little over GH¢5.9 billion.
In 2019, President Nana Addo Dankwa Akufo-Addo said tax exemptions were "proving to be an 'Achilles’ heel' and a growing menace to fiscal stability and revenue generation" and promised to rid the system of such largesse.
A Tax Exemptions Bill that was programmed to overhaul the system, starting from 2019, has since failed to go beyond the laying stage in Parliament.
The resident representative was responding to a question on the appropriateness and effectiveness of the tax measures announced in the 2021 Budget Statement.
Dr Mama renewed the IMF's call on the government to institute measures to plug the "leakage" and ramp up revenues to make up for increased spending.
While admitting the negative effects of taxes on the populace, especially on the economically disadvantaged, he said Ghana could not achieve sustained development if it failed to boost its domestic revenue collections.
He said the emergence of the COVID-19 pandemic and the resultant fiscal impact on economies globally had shown that countries needed to collect more revenues domestically.
"As it has become apparent, countries with greater capacity to collect revenues domestically have also been the countries better placed to support health systems and protect people from losing jobs and incomes, and sparing companies from bankruptcies.
"For example, advanced economies have been able to run fiscal deficit at 13.3 per cent of GDP in 2020, with government revenue at 34.8 per cent of GDP in 2020," the fund's resident representative to Ghana said.
The Achilles heel
"Be that as it may, the many leakages from tax exemptions remain the 'Achilles’ heel' of all efforts to improve tax collection, with between three and five per cent of GDP per year in uncollected revenues.
"For instance, an estimated GH¢5.3 billion was lost in 2018 from exemptions to just import duty, import Value-Added Tax/National Health Insurance Levy (VAT/NHIL) and domestic VAT (not counting income tax, etc.)," Dr Mama said.
He said while efforts to plug the leakage continued, "at the minimum, we should start capturing these leakages in the budget documents".
"The bottom line is that painful as it is, the government is doing the right thing in starting to raise tax revenues—which are below 13 per cent of GDP.
"But there is room to make the tax revenue mobilisation efforts in this programme more progressive and to share the burden of fiscal consolidation more fairly," he added.
In his State of the Nation Address in 2019, President Akufo-Addo said should the country continue at that rate with tax exemptions, "in less than 16 years, half of Ghana’s revenue base will be given away as tax exemptions".
Subsequent to that, a Tax Exemptions Bill was laid in Parliament in the first quarter of 2019 to, among other things, "rationalise the current exemptions regime on taxes, levies, fees and charges by varying, where necessary, and consolidating existing statutory provisions on tax and other exemptions and to provide for the administration of exemptions”.
But since then, nothing has been done.
The bill was one of the exit requirements under the Extended Credit Facility (ECF) programme with the IMF which ended in April 2019.