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Tax inequality: Formal sector workers pay 16 times more

BY: Emmanuel Bruce

AN analysis of the country’s tax structure for 2021 has indicated that workers in the formal sector are paying 16 times more than those in the informal sector.

A Tax Partner at PwC Ghana, Abeku Gyan Quansah, revealed in Accra that the analysis of data from 2000 to 2021 showed that the informal sector, in spite of contributing about 70 per cent of employment in the country, contributed the lowest in terms of taxes.

“If you do a comparative analysis and you compare it to the other statistics that are made available out there, a lot of work ought to be done in roping in the informal sector.

“For 2021 for example, the amount of taxes that were paid as pay as you earn (PAYE) compared to the informal sector was 16 times higher.

“So, on average, when you pick somebody in the formal sector, that person pays 16 times more than someone in the informal sector,” he stated.

Going into 2022, he said the government planned to reduce this to about nine times.

Although encouraging, the tax expert said it was still very high.

Lecture

The Tax Partner at PwC was speaking at a public lecture held by the Institute of Chartered Accountants Ghana (ICAG), as part of activities to mark this year’s accountancy week.

It was celebrated between May 21 and 27.

Mr Quansah spoke on the theme: ‘Roping in the informal sector in Ghana’s tax net’.

He added that company taxes contributed the highest in terms of taxes, followed by personal income tax such as PAYE.

Reset tax regime

In order to rope workers in the informal sector into the tax net, Mr Gyan-Quansah called for a reset of the country’s tax regime.

He said the current tax regime was too complicated, which made it difficult to rope the informal sector into the tax net.

Making reference to a letter issued by the Ghana Union of Traders Association (GUTA) on taxes, he pointed out that their major concern was the fact that the country’s tax laws and regime were too complicated, which made it difficult for the members of the association to comply.

“They are saying they don’t have a good relationship with our tax administration; they complaining that there is difficulty in calculating and filing and paying their taxes,” he said.

“You are asking the guy in Makola Market to do an initial assessment, do a revision, withhold tax, and pay it. He won’t even mind you because he doesn’t even understand all that,” he pointed out.

He said it was, therefore, time for a conversation on how to address these issues.

“If you do a count of the tax laws that are administered by the Ghana Revenue Authority (GRA), you will get more than 27 laws.

“Should we continue in this stead,” he asked at the virtual lecture

“What is the whole idea of having the value added tax (VAT) and the allied levies of health, education and COVID-19?”

“What did we really seek to achieve by doing that? All these add to the complications.

“All these add to why the informal sector is unable to come into the tax net, according to a report by the International Federation of Accountants (IFAC),” he stated.

He said it was, therefore, time to reform the legal regime for tax administration in the country to make it simple.

He also recommended that a special unit be set up by the GRA to specifically focus on educating the informal sector on the tax laws of the country, in a bid to encourage more to be tax compliant.

“Let’s reset the tax laws, educate them and simplify the process,” he added.

Policies

The tax expert noted that over the years, IFAC member countries had implemented many policies to tax the informal sector, but one of the challenges had been the inability to properly define what an informal sector was.

He said some of the characteristics of the informal sector included businesses that were individually owned or family owned; without incorporation, and their production units could not be registered.

“The informal sector will obviously employ persons but the issue is that are these persons even registered or have tax identification numbers, SSNIT, among others?” he questioned.

“They do not have proper organisational structures, which means that they may not even have a proper division of labour.

“So, the personnel you see serve as the printer, accountant, human resource person and the operations manager.

“This means that whenever we are designing taxes, in order to rope them in, we must consider these various features,” he noted.

He, however, wondered if the the law really applied to them.

“Yes, you may talk about everybody filing his returns by the end of April 2022 but does the person in the informal sector really care,” he asked.

He said the country needed to start conversations around some of these things if it wanted to get the informal sector into the tax net.