IMF and Tax experts propose ways to increase tax revenue

Adnan Adams Mohammed

The International Monetary Fund (IMF) has advised government to consider increasing the rate of some existing taxes and the re-introduction of others branded as ‘nuisance’ and scrapped in 2017 as part of the government fiscal short-term measures to address revenue shortages.

The Bretton Wood institution, in its 2019 Article IV Consultation report, called for re-introduction of the 17.5 percent VAT on financial services, a tax which was once introduced by the previous government but was scrapped by the present government as it considered it a disincentive for financial inclusion; the re-introduction of the high-income tax rate of 35 percent; further increase the Communication Service Tax (CST) to 12 percent, which was recently increased by three (3) percentage points to nine (9) percent in the 2020 Budget.

This sparked a lot of anger from mobile phone and internet users; and a review of the import duty benchmark, which it says has not generated the expected increase in imports through trade diversion to Ghana ports.

Some tax experts and policy think-tanks have seconded the proposals from the IMF as they believe that, if the government makes these adjustments to the various tax policies and measures suggested above, the economy will gain up to 0.8 percent of GDP in tax revenue. Many Africans wanders why the governments keep on running a fiscal deficit amidst massive borrowing despite continues upsurge of taxes.

“The biggest hole in public coffers is not money squandered or stolen, but that which is never collected in the first place”, Yankuba Darboe, the Gambia’s top revenue official has said, adding that, “politicians across Africa are asking ever more of their tax collectors, with good reason.”Just to describe the pressure on tax authorities to meet targets.

However, tax expert Abdallah Ali Nakyea, sees and understands otherwise of the IMF proposals in the Article IV Consultation statement. He sees the focus of IMF basically on reforms and implementation of existing tax laws and regulations.  

“For me, the shortfall in revenue mobilization is correctly captured in the paragraph below and not increases in tax rates and introduction of new taxes,” the tax expert has posited.

It is for this reason, the IMF, is further advising government to also implement long-term measures such as tax policy reforms, a comprehensive tax exemption policy, and an effective tax administration system in order to maintain a healthy level of tax revenue in the long-term.

“Tax policy reform could focus on mining taxation and exemptions. Measures in mining and petroleum should mainly consider a comprehensive review of the mining legislation and fiscal regime applicable to all future contracts; unifying various laws into a single extractive industry legislation. The exemption bill, submitted in Parliament, does not address several tax expenditures which could be considered for further streamlining.

Specifically, efforts should target non-standard VAT, custom duty exemptions on imported supplies and domestic sales, particularly on cereals, vehicles, cocoa, sugar, wood, and oil. Tax administration should focus on the adoption of the draft Compliance Risk Management Strategy (CRMS),” the Article IV Consultation press release said.

Mr Nakyea further pointed out that, indeed the IMF’s own statement in the same document sets out the critical challenge worth overcoming to enable Ghana increase its tax/GDP ratio instead of increases in tax rates and introduction of new taxes.

More so, when this government’s development and growth strategy hinges on moving away from taxation to production.

Moving from taxation to production is a good strategy that needs focus as it leads to more domestic revenue mobilization if properly rolled out, monitored and evaluated.

For example, it entails encouraging and supporting the 1D1F so jobs can be created, incomes earned and taxes (PAYE) improves; corporate income tax receipts would also improve; those who will export will also enhance foreign exchange receipts.

This is where Ghana Beyond Aid fits in to encourage us all to be tax compliant, declare and pay the right taxes due the state, pay up other non-tax revenues such as ensuring state-owned enterprises making profits remit to the government its fair share, paying up our property rates, etc.

“In all the above, transparency and accountability is the hallmark to voluntary tax compliance and efficiency. If citizens do not see where and how these revenues are deployed but read always of corruption, embezzlement and mismanagement of the public purse, it is discouraging and enhances tax evasion and noncompliance.

“A number of tax exemptions have outlived their significance and require review for some to be abolished and others renegotiated.”

The 2020 Budget statement shows that total revenue and grants for the first nine months of the 2019 amounted to GH¢36.3 billion (10.5percent of GDP) which represents 13.6 percent shortfall relative to the target of GH¢42 billion (12.1 percent of GDP).

Tax-to-GDP ratio in Ghana has persistently been low compared to its peers in Sub-Saharan Africa (SSA). On average over the last two decades, the tax ratio in Ghana has remained around 12.8 percent of GDP below the SSA average of 15 percent.

The persistent shortfall in revenue has pushed government to increase borrowing, especially from external sources, to finance its many projects, thereby, putting the economy in list of countries regarded by the IMF as having a high risk of debt distress.

Mr Ali Nakyea noted that, a number of studies on tax exemption have been done, yet, the issue is implementation by successive governments has been lacking.

“I know of not less than four and one done last year by our own affiliate GACC last year. The government only needs to be bold to implement the recommendations in the various studies done.”

“We brought the problem on us....that the IMF is asking us to increase VAT and re-introduce taxes on financial services. The fiddling with the GDP with frequent rebasing to make the debt/GDP ratios look good is the bane of all these!  Where is the tax effort from the additional GDP discovered during rebasing? Once we rebase and fail to reckon with taxes, the tax-to-GDP-ratio will expose us!”

Meanwhile, an anti-corruption crusader, Vitus Azeem believes the IMF proposal on the income tax increase is good.

“I feel strongly that we need to spread the income tax bands and so I support the marginal tax rate of 35%. Imagine two people earning incomes of GHC200,000 and GHC2 million each annually, both paying tax at 30% each, Is it fair? Is it progressive?”

“Besides, the lower bands are very narrow”, he added.