Widen tax net for development and poverty alleviation
Widening the tax net is likened to the biblical command by Jesus to Simon Peter in Luke chapter five verse four of The Holy Bible: “Put out into deep water, and let down the nets for a catch”. (the New International Version)
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Taxation is essentially a compulsory citizen’s levy which in a way establishes a relationship with the state. Taxation affects all citizens, whether they are taxpayers or not.
The way taxes are raised has an impact on the economy, particularly the corporations, small businesses, traders and consumers. Therefore, if taxes are levied on only a few citizens, the situation calls for concern.
In the world all over, tax authorities are enjoined to widen the tax net so that the tax burden will be lighter and the tax revenue increased. Narrow tax net limits the opportunity for collecting large revenue for development.
Definition of tax base
Tax base is the fundamental levy structure applied on taxable assets, investments or income streams that is subject to taxation, or applied on the assessed value of a single asset that is subject to taxation. In other words, tax base is the baseline levy for tax assessments.
In Ghana, the tax base is determined by what the tax authorities (Ministry of Finance and Ghana Revenue Authority) state as the minimum amount of annual income that can be taxed (taxable income). If this minimum amount (tax threshold) is lowered, less tax will be collected, if it is raised, more tax will be collected.
The Income Tax Rates (Amendment) Regulations, 2010 (LI. 1965) provided that the chargeable income of resident individuals amounting to Gh¢1,008 or lower was not taxable. The rate of tax was nil. The Internal Revenue (Amendment) Act, 2012 (Act 839) increased the threshold from Gh¢1,008 to Gh¢1,440.
These examples show that in 2012, the income tax base was narrowed. Resident individuals who earned Gh¢1,440 in 2010 were paying income tax; whereas in 2012 such resident individuals did not pay income tax because the tax base was narrowed. Taxes are raised on broad base tax system but in many countries, including Ghana, it is worryingly narrow.
Widening the Tax Net
Every year, the budget statement and economic policy of the Government of Ghana talks about the expression, “widening the tax net”. The respective governments in recent past have tried to bring in tax reforms to widen the tax net.
Tax reforms have essentially two objectives. The first objective is to make the tax laws as simple as possible, and second to have moderate tax rates. Moderate tax rates and expanding the tax net are now internationally accepted as two essential pillars of ensuring simple and stable tax system.
The challenge to the tax system to expand both the revenue base and progressively bring into the net a larger number of taxpayers remains as daunting as ever.
Broadening the tax base by widening the taxpayers’ nets does not necessarily mean more revenues will be collected as the cost of collection must be considered. Any attempt to broaden the tax net needs to take into account whether the extra revenues outweigh the cost of collection.
“I like to pay taxes,” said Justice Oliver Wendell Holmes. “With them, I buy civilisation”. Most people recognise that taxes paid are for public services, but few are as keen to pay as Justice Holmes.
High income taxes tend to discourage effort and entrepreneurship, while encouraging all manner of activities to avoid them. That is why a basic principle of good tax policy has long been, “To charge a low rate over a broad base”.
Clearly, one of the main sources of tax revenue across the world is increasingly paid by a small minority of the eligible taxpayers. Dr Edward Larbi Siaw, a tax policy advisor to the Ministry of Finance and Economic Planning has revealed that only two million out of six million eligible taxpayers pay their taxes.
This state of affairs is a recipe for tax increases. But as Dr Larbi Siaw has pointed out, “the country cannot continue to increase tax rates for those in the tax net and leave out others”.
Although filing income tax returns has been significantly simplified, the tax administrators need to make it more accountable to ensure that compliance levels improve at a faster pace to help increase the number of tax payers.
It is relevant to note that 45 per cent of the population in the United States of America pay tax compared to eight per cent in Ghana. Hence, there is a dire need to broaden the tax net by encouraging the culture of compliance.
One challenge of the tax system to expand the revenue net and capture larger number of taxpayers is the government tax policy on various exemptions and concessions extended under the tax laws.
Admittedly, some of these exemptions and concessions under the tax laws are to serve a number of social and economic objectives. Prolonged continuance of such exemptions may thus, turn detrimental to the economy.
They deplete considerable portion of the tax net which should rather be widened in order to meet the developmental objectives of the country.
Prolonged exemptions also indirectly encourage incompetence and make domestic industry shy away from competition and growth. Further, they erode a major part of the revenue base.
The long-term tax policy of the government should essentially centre on expanding the tax net, inter alia, by limiting and rationalising the exemption provisions.
Create efficient and elite tax administration
Effective, efficient and capable tax administrators able to mobilise domestic fiscal resources are paramount in revenue generation. They provide governments with sustainable, domestically-generated revenue strategy, thereby reducing the reliance on foreign investments, development aid and borrowing.
The Organisation for Economic Cooperation and Development (OECD) concludes that African countries’ deepening of their tax base does not necessarily mean increasing tax rates. Instead, taxes must be applied to different economic activities from the extraction industries to micro-financing businesses, while exemptions must be systematically eliminated.
In the long term, African countries must create a highly qualified, well-paid and efficient tax administration to help mobilise domestic revenue needed for developmental programmes.
However, OECD states further that tax administration reforms must also create a modern system based on voluntary compliance by taxpayers, backed by risk-based selective audits to ensure compliance.
Moreover, in low income states where technical capacities in both the public and private sectors are weak, tax systems must be relatively simple and transparent, easy for taxpayers to understand with simplified payment procedures. The complexity of tax laws and procedures, increase the magnitude of corruption in the tax system.
Tax authorities face the challenge to ensure that tax evasion is eliminated. Each year, the Auditor-General’s reports on the public accounts reveal massive tax malpractices: sometimes a chunk of tax collected is not paid into the consolidated fund.
The tax authorities must do well to mend the tax net so that such revenue losses will be minimised if not completely stopped.
The writer is Vice-President, Chartered Institute of Certified Tax Accountants (CICTA) .