First Deputy Governor of the Bank of Ghana Dr Maxwell Opoku-Afari has said the large informal sector of the country has hindered the optimum realization of tax collection over the years.
He said the introduction of the Tax Identification Number (TIN) and its subsequent replacement with the Ghana Card is expected to attract a wider base of Ghanaians into the tax bracket and help widen the tax net.
The replacement of TIN numbers with the Ghana Card, he revealed, has increased the registered TIN numbers from some 5 million to over 15 million.
This should help bring in a lot more people into the tax bracket, going forward, and facilitate the raising of revenue from the large informal sector, Dr Opoku-Afari said.
Delivering a public lecture at the University of Ghana Business School on Thursday, September 2, he said “The informal sector comprises Micro and Small Enterprises, and will require a simplified and modified tax system to bring them into the tax fold.
“It is for this reason that the recent announcement by the Vice President of the introduction of a Modified Taxation Regime is very critical, and could unlock the binding constraint to tax collection in Ghana.
“Permit me to share tax reforms measures in Georgia which has helped to enhance domestic revenue significantly. Georgia introduced a simplified tax regime for Micro Small and Medium Enterprises (MSMEs) in 2010, where businesses with a certain threshold in annual revenues and with a very minimum employee threshold are designated as “micro” businesses and exempted from income tax.
“Firms with annual revenue within a certain range are designated as “small” businesses and have the option to be taxed based on revenue instead of profits, at a rate of 3 or 5 percent. This was one of many tax reforms that had been introduced in the country.
“A revised tax code passed in 2004 simplified the tax system, reduced rates, and eliminated a number of “nuisance’ taxes that had been generating little revenue. A flat rate of 20 percent replaced the progressive personal income tax rate. Corporate income tax was also at a flat rate of 15 percent.
“The revenue lost from lower tax rates was compensated by a broader tax base, better compliance and strict enforcement. By 2008, with a streamlined tax regime, Georgia’s tax revenue to GDP ratio had doubled to 25 percent. Other reforms included modernization of registration, filing and management of payment obligations; and making enhanced audit and verification part of the tax administration process.
“The Georgia example is clearly how we grow the private sector, with the reduced tax burden, so over time, the booming private sector can also grow government revenue.
“Of course, tax regimes must take into account country specifics, but lessons from Georgia and other countries on how best to tax the informal sector through formalization will support our efforts in this area. Guyana, Cambodia, Liberia and Georgia are noted as having used information management systems to boost revenue mobilization by computerizing the administration of taxes and customs, automating most processes including simplified e-filing, the introduction of a one-stop internet portal as well as the introduction of tax identification numbers.
“Royalties from Natural Resources: Ladies and Gentlemen, Ghana is a country rich in natural resources, and these royalties from natural resources constitute much of the country’s non-tax revenue.
“However, Ghana’s non-tax revenue from these royalties are around a mere 4 percent of GDP compared with a country such as Botswana, where non-tax revenue, mostly from diamond exploitation royalties constitute significant portions of domestic revenue.
“These resources are non-renewable resources, and their exploitation degrades the climate and the environment, and therefore constrains sustainable development. Efforts to ensure that we maximize revenue from these natural resources should therefore be intensified.”
In the area of digitization, he said efforts at the digitization of government’s revenue collection and payment systems must be intensified to ensure that revenue leakages and wastes are curtailed, and corruption in this area is eradicated or minimized. Digitization as we know facilitates the capacity to process vast amounts of data and can be leveraged upon for effective tax administration.
“In addition to providing tax authorities with quick access to more reliable information, it also reduces the cost of tax administration to both administrators and taxpayers by eliminating the numerous manual processes involved.
“Tax authorities in Sub-Saharan African (SSA) are leveraging digitization and technologies to support tax administration. The use of online e-tax portals, mobile tax payments, and online reimbursement of value-added tax credits by some countries can be learnt and implemented here.
“Research shows that simplified e-filing of tax obligations lowers tax compliance costs, improves tax collection and reduces tax fraud. In Kenya digitization has helped reduced direct interaction between tax officers and taxpayers, and thereby deterred bribery. There is however the need to effectively develop the requisite infrastructure and ensure compliance and enforcement. And here, Ghana is also leading the way. I must commend the government for the bold initiative to introduce the Ghana.Gov project. We are already beginning to see the transformative effect of this purely homegrown initiative.”