Taxation: A barrier rather than catalyst for growth

By Prof. Samuel Lartey

Introduction

IN Ghana, taxation is often viewed with suspicion and frustration, particularly by those in the productive sectors of the economy.

For many local producers, the tax system is seen as a barrier rather than a catalyst for growth, disproportionately burdening those who are trying to create value.

Meanwhile, those who contribute less to production often find ways to benefit from loopholes or avoid paying their fair share.

This narrative of “punishing those who produce, rewarding those who do” is a sentiment that runs deep, shaped by both historical and contemporary experiences.

The Tax Burden of the Local Entrepreneur

Elsie Afua Akushika is a local entrepreneur in Teshie Bushroad, a small town in Accra, who runs a small manufacturing business that produces handmade wooden furniture.

Elsie’s business, like many small and medium enterprises (SMEs) in Ghana, contributes to local job creation and the economy, employing 15 workers from his community. However, his experience with taxation has been one of constant struggle.

Elsie faces a 25% corporate tax rate, alongside VAT and import duties on the raw materials she needs for production, such as wood and finishing products.

The high cost of importing these materials, compounded by the duties, eats into his profits, leaving him with little room for expansion.

“I am trying to build something for the future, but the taxes make it feel like I’m constantly being punished for working hard,” Elsie explains.

His experience is not unique. Across Ghana, small businesses like Elsie’s are grappling with a tax system that seems to weigh heavily on producers.

With each quarter, Elsie has to negotiate complex tax filings, spend money on accountants to ensure compliance, and pay taxes that take away a significant portion of his revenue.

Meanwhile, informal businesses operating without registration and large foreign corporations benefiting from tax incentives appear to face much lighter tax burdens. This disparity creates a feeling of inequity and fuels the perception that Ghana’s tax system punishes those who are actively contributing to the economy.

The Tax Master: A Distrusted Figure

The Ghana Revenue Authority (GRA) and its officials, often referred to colloquially as the “Tax Master,” have a contentious relationship with local producers.

Historically, tax collection in Ghana has been seen as an aggressive and punitive exercise. Stories abound of tax officials showing up unannounced at local businesses, seizing assets, and threatening closure for non-compliance.

In 2021, the government rolled out the 1.5% E-levy on digital transactions as part of an effort to widen the tax net. While this policy was intended to capture more of the informal sector, the response from small businesses was overwhelmingly negative.

Elsie, like many others, found that the E-levy added yet another layer to his tax burden, impacting his transactions with suppliers and customers who increasingly rely on mobile money for payments.

Elsie’s frustration is mirrored by other business owners in the country. Many perceive the “Tax Master” as someone more interested in squeezing out revenue than helping businesses grow.

This adversarial perception undermines trust in the tax system, making compliance feel like a punishment rather than a civic duty.

The Broader Economic Context: Punishing Producers

Ghana’s tax system is largely driven by the need to raise revenue to fund government spending. In 2023, the government set an ambitious target to raise GHS 105.5 billion in domestic revenue.

However, the methods of achieving this target have drawn criticism. Small businesses and the formal sector bear the brunt of tax collection, while a large portion of the informal economy—representing 80% of the labor force remains untaxed or under-taxed.

The corporate tax rate in Ghana stands at 25%, which is relatively high compared to other African countries. For industries like agriculture and manufacturing, which are crucial to economic growth, this tax burden stifles innovation and expansion.

The agricultural sector, despite contributing 18% to GDP, is hampered by import duties on essential equipment like tractors and fertilizers. These taxes reduce productivity and make it harder for farmers and manufacturers to scale up their operations.

At the same time, multinational corporations, particularly in extractive industries like mining and oil, benefit from generous tax exemptions. In 2022, Ghana earned over $6 billion from gold exports, yet the effective tax rate for mining companies was a mere 8% of their profits. This stark contrast between local producers like Elsie and multinational corporations deepens the perception that those who are creating value are being punished, while those who extract wealth from the country are being rewarded.

Changing Perceptions: Towards Rewarding Productivity

To shift this narrative, there must be reforms that reward, rather than punish, productivity.

A tax system that provides incentives for local businesses to reinvest their profits, create jobs, and innovate could drive growth in critical sectors like manufacturing, agriculture, and technology.

Reducing the import duties on machinery and offering tax credits for businesses that invest in their workforce would go a long way in easing the burden on local producers.

In 2024, the government could look to expand the tax net by formalizing more of the informal economy, which currently escapes taxation.

Simplifying the process of tax registration for informal businesses and providing incentives for compliance could help achieve this.

The Ghana Revenue Authority has already begun digitalizing tax payments, a move that, if expanded, could capture a broader section of the economy and reduce the tax burden on small formal businesses.

Conclusion

Elsie’s story is a reflection of the broader economic challenge facing Ghana’s producers.

A tax system that punishes those who create value is unsustainable. As Ghana seeks to increase its domestic revenue, it is critical that the government shifts towards a more equitable tax regime — one that rewards innovation, production, and local investment.

By reforming the tax structure to ease the pressure on local businesses, Ghana can foster a more productive economy, creating jobs and driving sustainable growth for the future. In the words of Elsie, “We want to build, we want to grow, but we need the tax system to be on our side, not against us.” It’s a sentiment echoed by many, and it’s time for Ghana’s taxation policy to reflect this reality.

Prof. Samuel Lartey
sammylaatey@yahoo.com