Last week two statements from the Ghana Revenue Authority, both gave clear indication that major tax administration reforms are in the offing, and will be implemented this year with a view to drastically increasing tax revenues accruable to the government. The reforms will underpin efforts to greatly increase non-debt domestic financing of the national budget at a time government is rapidly running out of space for net new public borrowing even as the exigencies of COVID 19 and its economic effects, combined with the inordinate cost of financing the public debt already owed, are giving government sharply increased financial bills as compared with previous years.
Ahead of the official unveiling of the 2021 budget proposals expected to be presented to Parliament for approval in March, the Ghana Revenue Authority has revealed that it is targeting GHc60 billion in tax revenues for the year. This represents a 32.7 percent increase on the GHc45.338 billion collected in 2020.
The confidence to aim for such a sharp increase in targeted revenues is the result of several factors. One is that the GRA outperformed its 2020 fiscal year revenue collection target of GHc42.7 billion by GHc2.6 billion, this translating to six percent above target and a 3.3 percent increase over the GHc43.9 billion collected in 2019. This achievement, in the face of the adverse effects of COVID 19 on economic activity during the last nine months of last year has encouraged government to aim for a drastically larger amount this year.
However critics point out that the 2020 target was lowered from an original GHc47.25 billion prior to the coronavirus outbreak. That target was 7.6 percent higher than the outcome for 2019, and the eventual downward revision, taking into account the anticipated negative effects of COVID 19 translated to an expected decline in revenue collection of 6.2 percent below the 2019 outcome. Effectively therefore the outcome for 2020 was still slightly below the original target for last year, prior to the eventual downward revision.
The other is sheer necessity. This year government wants to reduce the fiscal deficit from a record high 11.8 percent incurred in 2020 primarily as a result of COVID 19 instigated extra government spending, to 8.6 percent. This is supposedly the first step in a medium term plan to bring the fiscal deficit back to not more than 5.0 percent of GDP as demanded by the temporarily suspended Fiscal Responsibility Act of 2019. Government hopes to achieve this by 2023.
The biggest challenge in this regard though is that because of government’s current fiscal deficit circumstances – debt servicing requirements will be significantly higher than ever before – plus the need to do fiscal stimulus spending to continue the economic rebound begun in the last quarter of last year, the requisite fiscal consolidation for 2021 can only be achieved by drastically increased public revenues rather than by a combination of this and significantly lowered public spending. To be sure government is already looking to lower its recurrent expenditures – for instance, it has reduced the number of ministries by eight – but this will not even cover the extraordinary public spending that will be necessitated by increased public health costs this year – for instance the cost of purchasing and distributing COVID 19 vaccines – as well as ongoing fiscal stimulus spending to prevent a slump in economic activity that could all to easily trigger a full-blown economic recession.
Added to this challenge is the fact that net public borrowing will have to be restrained this year, in part because Ghana’s exceeding the generally accepted debt sustainability of 70 percent of GDP last year – it had reached 74.4 percent by the end of 2020 according to the latest data released by the Bank of Ghana – presents the spectre of significantly increased interest rates demanded by commercial lenders to government to compensate for the perceived increased associated credit risk. Importantly, the expansion of oil exports as a source of debt repayment, from which creditors have found comfort on the past, is currently undergoing a temporary hiatus; not only have no new oilfields commenced development since the Sankofa Gyaname field came on stream in 2017, but no timelines have been established for the commencement of developing the two latest discoveries: Aker’s Pecan field and Springfield’s Afina field.
Domestic borrowing still has strong prospects but this is at the risk of crowding out a credit-hungry private sector. Besides as the economy gets closer and closer to its inherent full productive capacity again, heavy domestic borrowing could start generating inordinate inflation and cedi depreciation again, a situation avoided last year because of the underlying slump in economic activity caused by the effects of the coronavirus outbreak.
This means Ghana needs GRA to dramatically step up its tax revenue collections, and this underpins the ambitious new targets for 2021 which the Authority is aiming at.
Rev. Ammishaddai Owusu-Amoah, Commissioner General of GRA is optimistic that they can be met. “Whiles we are waiting for the Minister of Finance to tell us the overall budget that we have to collect for 2021, we have set for ourselves an aggressive target of collecting 60 billion in 2021. This represents about 32 percent year-on-year increase if we compare to the 45 million that we collected this year. Definitely, this is an ambitious target, but we have underlying strategies and programs to ensure that we will be able to get to this target,” he said.
The strategy will focus heavily on tax collection from sectors that have not been overly affected by COVID 19 such as financial services and those that have actually benefitted such as telecoms. This strategy worked well in 2020.
However the sharp increase in the target for 2021 suggests major improvements in tax administration will be implemented. One of these is the full application of the tax identification number scheme as a prerequisite for accessing public goods and services, Combined with the new digital address system and the national ID cards now being rolled out this has the potential to finally rope in millions of Ghanaians in the informal sector who up till now have evaded income tax, only paying consumption taxes. While virtually all the necessary structures have been in place to implement this holistic strategy for widely expanding the tax net have been in place for the past year at least, government has deployed its full implementation, a situation which public policy analysts have attributed to political considerations; but with an electoral mandate for a second and final tenure in office now secured the incumbent government is positioned to implement it without fear of an electoral backlash.
Key here is the policy decision that effective from April 1 this year; taxpayers will be required to use their Ghana Card Identification Number for tax purposes. Announcing this last week, GRA asserted that this forms part of efforts to identify and rope in more eligible taxpayers, especially those in the informal sector and enable organizations to easily share important data with the Authority.
Furthermore, government has been quietly reversing some key tax reliefs announced with fanfare in recent times – for instance, it has reversed the 50 percent cut in import valuation levels for some goods without public announcement. While this policy was initiated to make Ghana’s more competitive compared with those of its neighbours along West Africa’s coast its implementation resulted in a sharp decrease in international trade tax revenues, forcing a partial policy reversal on the quiet.
Public policy analysts also suspect that the drastic increase in the tax revenue target may be heralding long overdue removal of major tax exemptions and possibly a more committed approach to property tax as well. A bill aimed at reducing the amount of tax exemptions given to some enterprises in order to attract more private investment has been in the offing for the past couple of years but neither the executive nor the legislative arms of government have shown much enthusiasm about having it passed into law, raising suspicions that vested interests and lobbying are at work. However, with government now in very dire fiscal straits, it is likely to bite the bullet.
Property taxes have long been seen as a major source of domestic revenues that is not being exploited but again, since the ruling elite would be among the biggest payees, enforcement of property tax laws has not been pursued with much commitment.
Indeed, with government not in need of political donations following its recent electoral victory, it is already showing a willingness to unleash GRA on the upper class. For instance, GRA has now employed data scientists to analyses the transactions of high net worth individuals – persons with at least US$1 million in liquid assets – to ensure they are paying the right taxes to government.
“We are looking at data analytics” confirms Owusu-Amoah. “We have recruited data scientists and data analytic officers. These data analytic officers will be receiving data from about 14 institutions. They will be analyzing it and through the data analyses, we will be able to identify people that are non-compliant taxpayers and make them pay.
“In other words, for example, if we do analytics, and we find out that you are using a latest Mercedes Benz from the data we gather from DVLA and your tax is GHc50, automatically the system will tell you there is something wrong here and before you realize it we will come to you and say we do not think you are paying the right taxes.”
While some of the impending tax administration initiatives may prove politically unpopular they are in response to economic exigencies. Besides, while the rebasing of the economy has successfully delayed Ghana’s passage beyond the 70 percent of GDP threshold for the public debt, it has further exposed the countries shortcomings with regards to its tax collections.
Ghana’s tax to GDP ratio of 12.5 percent is barely half the 25 percent average for lower middle income countries indicating that the country’s tax revenues are far too low. Each successive rebasing increases the size of Ghana’s GDP in statistical terms but leaves tax revenue unaffected; indeed critics of frequent rebasing point to this as evidence that it is primarily a technique used by successive governments (both the Atta Mills and the Akufo-Addo administrations have rebased the economy over the past decade) to create more fiscal space for further public borrowing, but does not impact positively on economic performance measurements in any way. Indeed, Ghana’s foreign development partners have in recent years increasingly pointed to this as a reason for cutting back on the grants and concessionary condition loans they have generously furnished the country with in the past, arguing that it is wrong for them to use so much of their citizens tax payments on a Ghanaian citizenry whose average incomes are rising significantly, but who nevertheless largely do not pay income tax themselves.
All these arguments aside the simple truth is that Ghana needs more tax revenues particularly in the face of emergent extraordinary fiscal pressures. A statistical comparison of Ghana’s tax revenues relative to the size of the economy confirms that indeed government is supposed to be getting far more tax revenues than it is generating currently.
The major erstwhile missing piece in the puzzle has been the strategy for pulling the huge, but so far income tax evading informal sector into the tax net. The solution from the incumbent government, of combining TINs with the Ghana Card and digital addressing, will eventually go down as one of its greatest achievements, if properly implemented.
But proper implementation is what is left, and this depends on whether the incumbent administration has the political courage to finish what it has started – which will vastly improve the State’s finances but will leave both the informal sector and the richest and most influential Ghanaians alike eminently unhappy.
Both the GRA ‘s target for 2021 and the statements it has made with regards to how it intends to meet them suggests that finally, with the next general elections a whole four years away, and the incumbent president not having a personal stake in winning it, that political will is now forthcoming.