What is the impact of Ghana’s tax reforms? Have reforms succeeded in generating more tax revenues? This paper by the United Nations University-World Institute for Development Economics Research (UNU-WIDER) assesses the changes in the structure, components and impact of taxes in Ghana over the last two decades. Tax revenue has increased, but it is still low in relation to government expenditure.
Tax reforms were introduced in 1983 as an instrument for accelerating growth, reducing poverty and reducing Ghana’s dependence on aid to finance government expenditure. The critical issue has been generating revenues using tax instruments that are least harmful to the poor. Tax reforms focus on the four main components of taxes: taxes on income and property, taxes on domestic goods and services, international trade taxes and value-added tax (VAT). Studies of the distributional impact of these taxes in Ghana suggest that direct taxes (paid directly by an individual or group, like income tax) are the most poverty friendly while indirect taxes (taxes on expenditure) and trade taxes have adverse effects on the poor.
The tax system in Ghana has improved over the last two decades. As a result, the tax-to-GDP (Gross Domestic Product) ratio has more than doubled. However, domestic tax revenue is still low in relation to government expenditure, which remains largely financed by foreign aid. Some observations on Ghana’s tax reforms include:
- Tax reforms have been used for three broad objectives: (i) restore the tax base (ii) provide better production incentives for investors (iii) improve tax administration.
- Taxes have become more ‘poverty-friendly’ due to the changing structure of the tax system. Direct taxes are increasing in proportion to indirect taxes and trade taxes are declining.
- The most radical tax reform was the shift from sales tax to VAT. The first attempt to establish VAT failed due to inadequate institutional investments and political opposition.
- Institutional problems constrain the ability of VAT to generate more revenues.
- Measures to increase tax efficiency include strengthening revenue collection agencies and the automation of clearing procedures.
It is essential for the government to increase tax revenues as foreign aid is decreasing and there is pressure to increase pro-poor spending. The tax net needs to be widened at existing tax rates to generate more tax revenues without harming the poor. However, there are significant problems that constrain the ability to improve efficiency in tax administration and generate more revenue at existing tax rates:
- The institutional structure for tax collection is weak. Low skill levels of staff mean that a significant proportion of taxpayers remain outside the tax net. For instance, businesses and people in self-employment who account for over 34 percent of the economically engaged population need to be included in the tax net.
- Logistics to identify and provide information on potential taxpayers and the source and levels of their income are lacking.
- There has been slow take-off of the automation and computerisation of the customs management system, which aims to reduce leakage in revenue.
