Over the past few months, there have been numerous public calls from various stakeholders on government to significantly reduce the number and types of tax exemptions it grants. This is for good reason; last year alone tax exemptions cost Ghana over GHc5 billion in foregone tax revenues, and much of this benefitted the perpetuators of financial malfeasance leveraging on the exemptions granted, rather than the companies they were actually directed at and the economy as a whole in the form of improved performance at the macro level.
However, another school of thought has now come up with a different argument; but one of no less relevance and crucial importance as the one that is pressing for reductions in tax exemptions.
This new school of thought argues that rather than focus entirely on scrapping the exemptions, they should be widened to incorporate indigenous enterprises, in addition to the primarily foreign corporations that are benefitting from them currently. This would stem the current situation whereby foreign enterprises being given tax exemptions are enjoying significant advantages in terms of operating cost structure and profitability, over their indigenous counterparts, engaged in similar commercial activities, but who are not enjoying similar tax exemptions.
The Ghana Investment Promotion Centre, which has responsibility for allocating tax exemptions in its implementation of the country’s investment code, points out that local enterprises are not enjoying these tax exemptions because they fail to register with the Centre, since registration by wholly Ghanaian owned enterprises is not compulsory. However, while this is true, another problem is that the GIPC has deliberately set a high threshold, with regards to minimum start up capital, for enterprises wishing to be given tax exemptions. Few local enterprises can muster this requisite minimum and thus, they fail to qualify for the tax exemptions on offer.
Those high thresholds were put in place to ensure that foreign enterprises setting up in Ghana would do so on a large scale, in order to secure tax exemptions. We believe it is not necessary to impose similar conditions on local entrepreneurs and investors, in their own home land. Even if a threshold is to apply for indigenous enterprises, it should be much lower than the current one applicable; so that many, if not most, local enterprises can compete on the same terms with their foreign counterparts.
This would mean further forgone tax revenue, hitherto generated from local firms, but this could be recouped by reducing the amount of tax exemptions offered to all, both foreign and indigenous.
Besides, the incumbent government, having declared its intent to replace demand management with expansionary, supply side economic policy, must be aware of the potential benefits of a level playing field, which also encompasses local enterprise, in its efforts to boost economic activity and consequent economic growth.
The move towards a level playing field with regards to tax exemptions should also apply to free zone enterprises as well; companies, whether foreign or indigenously owned, which enjoy free zone status should not enjoy preferential tax treatment on the up to 30% of their production which they are allowed to sell on local markets, since this has given then unfair advantage over their counterparts who sell the same types of products on the same markets but who have to pay significantly higher production-related taxes.
Level playing fields are a key requirement for free market economies if they are to work most efficiently and fairly.
