A new policy on the granting and application of tax exemptions is in the offing, having already been drafted by Ministry of Finance and the Ghana Revenue Authority, and Parliament is expected to pass it into law before the end of this year. This a good thing – over the eight-year period 2010 to 2017 alone, Ghana has forgone some GHc5.2 billion in tax revenues because of these exemptions.
To be sure, it is important to remember why the policy of granting tax exemptions was introduced in the first place; Ghana needs to be a competitive destination for direct investment in an increasingly globalized economy if it is to achieve accelerated, market-driven economic growth and fiscal incentives such as tax exemptions are key tools in achieving and retaining this requisite competitiveness. Even as a consensus on the need to rethink strategy with regards to tax exemptions is emerging, Ghana’s economic policy makers would do well to consider the fact that several competing emerging market economies continue to offer them. If Ghana throws them out wholesale, the country could lose large quanta of direly needed private investment inflows to other countries in the region that retains their use.
But the fact is that the tax exemption policy as applied in Ghana today has been severely manipulated and abused enabling enterprises and institutions with the capacity to influence government to gain undue advantage over those without such wherewithal. This has primarily been made possible by the lack of clear-cut criteria as to under what circumstances tax exemptions can be granted.
But while the focus of the critics and reformers of tax exemption policy has been on the financial losses the state is incurring from all this, they have not duly recognized another, perhaps equally important draw back in how it is being applied currently -the distortions it generates with regards to the comparative cost structures of competing business enterprises.
Perhaps this is most vividly illustrated by the situation created by the tax exemptions granted companies that have free zones status. While they enjoy generous tax exemptions because they are primarily non-traditional exporters, they are nevertheless allowed to sell up to 30 percent of their production on local markets. But their tax exemptions as free zones companies give them distinct fiscal advantages over competing enterprises that do not have such status and therefore have to pay all their taxes.
This is simply unfair to those not enjoying the exemptions.
Market driven economies are supposed to derive their competitive strengths from the way they are able to allocate their productive resources in the most efficient ways possible. When fiscal distortions arising from bureaucratic decisions interfere with this process of resource allocation and consequent financial rewards, productive resources are no longer allocated in the most efficient ways available. Which in turn detracts from the competitiveness of the economy in attracting private investment. Which ultimately defeats the very purpose for why tax exemptions were introduced in the first place.
