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A Senior Lecturer at the University of Ghana School of Law, Legon, Dr Abdallah Ali-Nakyea, has called for the speedy passage of the Tax Exemptions Bill, 2019 into law to help improve revenue collection and lift the pressure on borrowing.
He said the delay in the passage of the bill was worrying, as it denied the state much needed revenue to fund critical expenditures.
Beyond increasing revenues, the tax expert said, a tax exemptions law would help harmonise the tax exemptions and incentives regime.
It would also help make it more efficient, he added.
Tax exemptions are tax waivers given to local and foreign companies to encourage increased investment and more foreign direct investments (FDIs) in the economy.
But there are concerns tax exemptions are depriving the nation of expected taxes for development.
Earlier this year, the International Monetary Fund (IMF) told the Daily Graphic that exemptions were the weakest link in all efforts to improve tax collection, adding that between three and five per cent of Gross Domestic Product (GDP) was lost every year to the current tax holiday regime.
That translated to a loss of between GH¢11.5 billion and GH¢19.2 billion in taxes for 2020, using the year’s provisional GDP figure of GH¢383.3 billion.
For 2021, when GDP is projected to rise to GH¢433.8 billion, the IMF estimates presuppose that between GH¢13 billion and GH¢21.7 billion will be lost to tax exemptions.
Delivering a lecture in Bolgatanga last Tuesday on the topic: “Ensuring an increase in revenue mobilisation through taxation for the purpose of accelerated national development: The role of the lawyer”, as part of the Ghana Bar Association’s (GBA’s) ongoing 2021 Annual General Conference, Dr Ali-Nakyea said governments in developing and middle-income countries had not been able to achieve revenue targets because of tax exemptions.
“Developing and middle-income country governments typically offer various tax exemptions in order to attract investment, which lowers tax revenues,” he noted.
However, he pointed out that “the problem with this practice is that exemptions do not appear to result in higher investments and are, therefore, a pure loss of revenue”.
The Senior Lecturer, who is also the Director of Ali-Nakyea & Associates, a tax attorney, solicitor and consultancy firm, further explained that the problem also had to do with the fact that “exemptions were often used for political reasons and consequently risked being linked with corruption”.
“One obvious solution to this problem is to take away exemptions,” he said.
However, he was of the view that if “this is politically difficult, the negative effects of exemptions could be mitigated by inducing transparency into the system, either by making rules about exemptions firmly stated in laws and regulations or publicly disclosing information about exemptions”.
Dr Ali-Nakyea intimated that the consequences of barriers to tax revenue mobilisation, which resulted in low tax revenue, provided the impetus for revenue mobilisation if political leaders sincerely desired to meet the needs of their people.
Touching on tax collection, the Senior Lecturer said the current tax collection of between 10 and 20 per cent of GDP did not have the potential to support the rate of development required in the country.
He said there was room to enhance tax revenue mobilisation to fill up the revenue gap, which was the difference between taxes paid and taxes owed by law.
That, he said, necessitated the wider and renewed interest by governments and multilateral institutions in enhancing tax capacity, which was the ability of individuals and businesses to pay taxes, stemming from the recognition that tax capacity was at the core of state building and development.
Tax law/role of lawyers
Dr Ali-Nakyea indicated that whereas tax laws might be extremely well designed and detailed, unless the accompanying tax administration was able to handle those laws in terms of having the appropriate staff to interpret and implement them, there would always be challenges.
Therefore, due to their technical and professional background, lawyers had an important role to play in revenue mobilisation, he said.
“Taxation is predominantly law cloaked in economics; for there is no taxation unless the law says so, as clearly stated in Article 174(10) of the 1992 Constitution — No tax shall be imposed other than by or under the authority of an Act of Parliament,” he said.
According to the Senior Lecturer, Ghana had consistently faced challenges with raising enough revenue to fund its expenditure.
“The main area depriving the country of economic growth is leakages; these leakages arise from tax evasion, illegal exploitation of mineral resources, poor fiscal policy, illicit financial flows, corruption, among others,” he noted.
He said according to the Ghana Statistical Service (2020) and the Bank of Ghana (2018) reports, tax revenues in Ghana did not match public expenditures.
While government expenditure increased by 20 per cent from 2017 to 2018, tax revenues grew by 17 per cent, he noted.
He proffered some solutions to the tax gaps that existed in some developing and middle-income countries, including Ghana.
“Having realised that it is imperative to get out of the wide gap between the required tax revenue to finance the provision of public goods and services, governments of developing and middle-income countries have to look for appropriate solutions,” he emphasised.
According to Dr Ali-Nakyea, the African Economic Outlook (AEO 2010) had suggested that tax reforms to garner in the required increase in tax revenue should be implemented in three stages — short-run, medium term and long run.
The senior lecturer observed that one of the most efficient ways for policymakers to raise revenue was to close as much of the “tax gap” — the difference between revenue actually collected and the potential revenue that could have been collected — as possible.
Therefore, he said, policies to improve domestic tax mobilisation should be targeted at corporate income tax and Value Added Tax (VAT) compliance, especially in an era of increasing trade liberalisation.
“The corporate income tax gap is estimated to be at least 81.6 per cent, the highest among the estimated tax gaps, followed by VAT gap of 39.3 per cent and import duty tax gap of 32.5 per cent,” he said.