Ghana urged to utilise unexploited 5% of GDP tax potential

Findings from a World Bank study has revealed that Ghana has an estimated unexploited tax potential of five per cent of its Gross Domestic Product (GDP) in 2014 which needs to be exploited to control borrowing costs.

According to the findings, while Ghana’s expenditures have grown rapidly, public revenues have remained essentially unchanged as a share of GDP, with tax revenues far below the levels of its regional comparators, such as South Africa, Malawi, Mozambique and Senegal.

The World Bank’s Public Expenditure Review (PER) on Ghana highlighted the need for targeted and concerted efforts on both the expenditure and income sides in order to achieve fiscal consolidation and its macroeconomic outlook.

Presenting highlights of the findings of the review at a the opening of a two-day validation workshop of the report of its Public Expenditure Review on Ghana, Ms Dilek Aykut, the Senior Economist of Macro Fiscal at the World Bank, said the level of Ghana’s tax collection was far short of what its level of economic and institutional development predicted.

She noted that it would be crucial to broaden the tax base and improve tax compliance to control borrowing costs and manage the growth of the debt stock but added that the new Income Tax Act was an improvement over the previous legislation.

The report emphasised the need to streamline Ghana’s tax exemptions as a major way of improving tax revenues. 

“Reforming tax expenditures could enable Ghana boost domestic revenue generation and enhance the efficiency of fiscal policy without compromising its expenditure priorities,” she said.

Ms Aykut said tax exemptions, often used to support the growth of specific sectors or to achieve fiscal equity, complicated revenue collection and gave rise to perverse incentives.

“Moreover, tax expenditures inevitably create economic distortions and give rise to vested interests,” she said.

The cost of Ghana’s tax exemptions was estimated at 5.2 per cent of GDP in 2013, with the bulk of this; 4.2 per cent, being Value-added tax exemptions and preferential VAT. Custom exemptions make up 0.9 per cent.

Ms Aykut stressed the need for government to build its capacity to accurately estimate costs of tax exemptions in order to form an analytical basis to improve tax-expenditure policies, while routinely evaluating business tax expenditures to determine which sectors benefit from preferential tax exemptions and assess their consistency with Ghana’s strategic development goals.

Other policy options proposed included the need for structural reforms to increase economic competitiveness and promote diversification in the non-resource sectors in order to sustain economic growth as oil output declines.

She stressed the need for continued investments in human capital, improve quality of education and health as well as investments in agriculture.

Mr Henry Kerali, the World Bank Country Director, said the PER was timely as the new government was charting a new policy course and commended its achievements so far, describing it as remarkable.

He noted that while Ghana faced challenges including those that led to the subscription to the IMF programme, there was also potentials that could be harnessed  adding; “success will require concerted efforts on both expenditure and income sides”.

He said a major area to be addressed on the expenditure was the large wage bill as well a management of the large debt stock.

He pledged the Bank’s commitment to working with the Ghanaian government to address the challenges and bolster growth.

Mr Kwaku Kwarteng, the Deputy Minister of Finance, commended the outcomes of the review but added that government was aware of the challenges and was taking action to ensure that Ghana became self-reliant.

He noted that the indicators which necessitated the IMF programme was worse after two years of implementation thus the change in government’s strategy to focus on the private sector.

He said the focus of government was to achieve fiscal consolidation while at the same time relieving the private sector and preparing it to be the creator of jobs and play a better role in the economy.

Source: GNA

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