Budget presentation presents an opportunity to improve and reform the tax system in a number of important ways for the benefit of all Ghanaian though tax reform has been highly controversial any time it is announced. Tax reforms constitute major policy instrument for growth and poverty reduction. This country has consistently spent more revenue than it is able to generate. The gap has always been financed through the donations of other countries, just to help us survive as a country, making us aid dependent.
In our Ghanaian community, if you are unable to harvest enough food to feed your family but always beg for food from your neighbors, you are tagged as lazy. We need to raise more revenue than we spend, lest we continue to borrow from our friends.
Taxation is not the only source of revenue, but taxation is the most popular tool to raise revenue in every civilized nation. “Taxes are what we pay for civilized society” is the famous quote by US Supreme Court Justice Oliver Wendell Holmes which has been inscribed above the entrance to the headquarters of the Internal Revenue Service in US.
But how do we collect more taxes to to feed ourselves and reduce the borrowing or even help other countries who may be in need?
Another budget period is here and it is a good opportunity to reform our strategies on revenue generation in the area of taxation. If tax reforms are not well strategized, we will not achieve the intended objective.
Tax reforms should comply with some basic guidelines. As an ordinary citizen I think tax reforms should have the following features.
Transitional Implementation arrangements.
For effective implementation of tax reforms, adequate transitional arrangements must be made in the law. If there is going to be any tax reform in the upcoming budget, we expect the tax reforms to have enough transitional arrangement, ensuring that the law is not passed overnight for it to take effect the following day. Such short time period makes tax compliance almost impossible, leading to tax evasion and avoidance in some cases.
The tax reform introduced in the mid-year budget brought too many challenges to tax administration in terms of compliance. The major change in the Value Added Tax System, delinking the National Health Insurance Levy and the Get Fund from the traditional Input-Output VAT mechanism has issues which is yet to be resolved especially with compliance issues starting from 1 August 2018.
To the business community, this separation of the NHIL/Get Fund Levy was a massive reform which demanded serious changes to existing systems. System changes takes longer than it was anticipated in the mid-year reform. Unlike some advanced countries where systems are relatively flexible, such flexibility is not readily available in Ghana. Most large companies have their systems for accounting for VAT provided by foreign software providers and changes to such software to account for any drastic tax reform cannot be done overnight.
Unfortunately, both parliament and government did not give enough transitional arrangements period. The Bill was signed into law on 31st July 2018 as Act 970 and it was effective 1st August 2018. The implementing agency, the Ghana Revenue Authority was compelled to implement the law on 1st August 2018.
To complicate matters, there was so much confusion as to its meaning and mechanism such that, only tax experts could understand what was required by the law. Many Ghanaians did not understand what the Minister meant by “straight levy” during the budget implementation. The GRA had to issue an interpretation or practice notes to explain the meaning of the tax reform.
Section 100 (1) of the Revenue Administration Act, 2016 (Act 915) provides that, “to achieve consistency in the administration of tax laws and to provide guidance to persons affected by the tax laws, including tax officers, the Commissioner-General may issue practice notes setting out the interpretation placed on provisions of a tax law by the Commissioner-General.
Unfortunately the practice notes (Administrative guidelines) was issued on 24th August, 2018, 24 days after the effective date of implementation.
Compliance with the tax law was thus complicated. Interestingly, the Customs division of the GRA could not implement the new taxes according to the requirement of the Act. I remember vividly one time when I asked the Commissioner whether I could be charged penalties during a tax audit for not complying with the tax law from 1st August as required by law, because the customs division also could not implement it as required by law.
The most important feature of the mid-year VAT reform was that businesses are not allow a deduction of input VAT of 5% levies starting from 1st August, which prior to 1st August 2018, was allowed as a deduction. But we must remember that, business have accrued a right of input tax deduction prior to the change. Businesses have input Vat (under the old system at 17.5%) which some are yet to take credit or deduction. Such input VAT, according to the VAT law, expires after 6 months. Denying businesses of their accrued right may have some constitutional implications because it appears to be taking away, the property right of taxpayers who have accrued input VAT under the old law.
Thus businesses have six months to claim deduction. In my view, taxpayers cannot be denied this input tax under the old system at 17.5%. Worse of all, the GRA officers are not accepting any VAT returns that has arrears of input VAT of 17.5% under the old system, implying that, anyone who had unclaimed input VAT has lost that right. So has the 6 months input tax claim period been repealed? Should a new law passed affect my constitutional right?
Article 107 (b) of the 1992 Constitution provides that “Parliament shall have no power to pass any law - (b) which operates retrospectively to impose any limitations on, or to adversely affect the personal rights and liberties of any person or to impose a burden, obligation or liability on any person….”
In my own view, this practice by the GRA refusing to allow deduction of arrears of input Vat was erroneous because the High Court in the case of Clement Apaak V GRA held in July 2018, that, taxpayers cannot be denied input VAT when the plaintiff was converted from a standard rate of 17.5% to a flat rate of 3%. The right of taxpayers cannot be affected by subsequent amendment of the VAT law. Clearly the lack of transitional arrangement will in future create serious dispute between taxpayers and the GRA during a tax audit if the matter is not resolved.
What is the lesion then? As Ghanaians, we must appreciate that, changes to any tax system should be implemented with appropriate transition provisions. Taxpayers, especially the business community must be able to rely on tax rules in making decisions. In this regard, our law makers must ensure appropriate transitional provisions in any tax law they passed. This is very essential because it permits stability of long-term planning for businesses and investors during a period of tax reform. Our lawmakers and the tax administrators must understand that, a measured transition will allow taxpayers time to understand the new system and to adjust to it and comply fully.
In Ghana today, there is a growing public debate that the numerous tax changes introduced over the years have failed to bring the informal sector into the tax net. But any tax reform should ensure fairness in terms of sharing the tax burden among the citizenry. The GRA has over the years expressed difficulty in taxing the informal sector.
Currently, because the informal sector do don’t get taxed, the overall tax burden is very unevenly distributed across the economy. These inequities under our current tax system are unfair to all those in the formal sector, especially employees who now pay the highest tax band rate of 35% if their chargeable income goes above GHS 10,000 (Same as oil and gas/mining companies whose tax rate is 35%).
The tax system no longer meets the basic tests of fairness but tax system must not only be fair, it must also generally be perceived to be fair. For employees, tax reliefs granted under the fifth schedule of the Income Tax Act are too small that, many people don’t bother completing the forms for the personal reliefs.
The proliferation of selective tax exemptions should be a thing of the past. The greater share of the benefits of such exemptions and deductions often accrues to larger corporations, most of them being foreign companies. The law makers and tax administrators have a lot more work to be done. High-income individuals and profitable corporations should pay a fair share of taxes. Tax reform should reinforce this essential element of fairness. By reducing tax preferences that benefit the few and reducing tax rates to benefit a broad range of taxpayers, fairness can be substantially increased.
Simplicity and Compliance
A critical principle of tax administration is the principle of self-assessment and voluntary compliance. Anytime tax reforms leads to complications in compliance, there is high tendency that, businesses will not comply, making the essence of the reform irrelevant. Currently, the tax laws in Ghana are very complicated to the ordinary Ghanaian. There are also few tax experts in Ghana.
To make the matter worse, our educational curricular does not consider taxation as an important subject of study unless one is studying accountancy or business. The GRA then finds it hard to convince Ghanaians to pay taxes. Some even don’t understand the various taxes they are obliged to pay. This principle of simplicity should be strengthened by making things simple for Ghanaians. Making it simple makes compliance easier and more readily understood by more Ghanaians. A simpler tax system will result in full tax compliance.
Certainly, taxation is not the only source of government revenue. The government should rebalance its revenue sources to reduce the extent of its reliance on taxes, especially personal income tax. There has been too much reliance on direct income tax, neglecting other areas such as property taxes in Ghana. Currently, personal income tax is taxed highest at 35%. Can we reduce this to say 30% so as to leave more money in the pockets of people to spend or save. It is assumed that, when people spend, we will get more revenue in the form of VAT than reducing disposable income of individuals.
The tax system should encourage economic dynamism and growth in a more efficient way through lower tax rates on a broader tax base. Business opportunities, rather than tax planning, should be the driving force behind business and investment decisions. Reducing selective preferences of tax exemptions and lowering tax rates will provide an important boost to investment and job creation. There is no doubt, selective tax exemptions are not helping us as a country. Selective tax exemptions is reported to have cost Ghana GHS 2.6 billion in 2017.
Many big foreign organisations make decisions on the basis of tax considerations rather than business opportunities. Ghana needs firms and investors who will make decisions based on economic potential, not tax savings. The current economic conditions, combined with indirect tax is bias to local manufacturing. It is cheaper to import finished goods than to produce them in Ghana.
Let us use this budget period to change situations to accelerate the growth of this country.