The knotty issue of tax waivers has returned to the front burner of macro-economic management discourse in Ghana.
Under the framework that the newly installed President John Dramani Mahama administration has inherited from its predecessor, Ghana could, this year alone, forgo some US$350 million in revenues, through tax exemptions to be granted primarily to foreign direct investors. That framework, if retained could result in similar forgone revenues in subsequent years as well.
But the process for granting such tax waivers has, in recent years, increasingly been mired in controversy, with the outgone Nana Akufo Addo administration committing to cut back on such tax exemptions but subsequently failing to implement that commitment. Matters came to a head towards the end of last year when the then NDC minority in Parliament – now the clear majority – refused to accede to the then government’s last request to grant a batch of tax waivers for investors participating in the one district one factory programme, arguing that this was just a means for the outgone government to enable its friends and cronies to evade taxes and duties at the expense of the state.
Since the installation of the President Mahama administration however, the controversy over tax exemptions has risen to a whole new level. This is because the tax revenues forgone through them has become a prime option for replacing at least part of the estimated GHc6-9 billion in revenues that would be lost to the new government’s intended abolishment of the e-levy, COVID 19 levy, betting tax and emissions tax this year.
While there are other alternatives, such as better tax administration and public expenditure discipline, the fiscal benefits of these cannot be accurately forecast in quantitative terms unlike the reduction or removal of the tax exemptions, and so the International Monetary Fund – whose ongoing US$3 billion financial bailout programme for Ghana gives it to right to heavily influence fiscal policy – will be reluctant to accept reliance on those measures alone.
To be sure there is a risk in scrapping the tax waivers; it could discourage foreign direct investment at a time investor sentiment regarding Ghana is already inordinately low.
However, this challenge also presents an opportunity – one which Ghana should have grasped decades ago. Tax exemptions given to foreign investors have costs outside of forgone state revenues which have not been properly considered. One is that it encourages foreign direct investors who make huge profit margins but whose repatriation of those profits puts exchange rate pressures on the cedi, especially during the second quarter of each year. Another is that it encourages such investors to import equipment and production inputs rather than seek to secure them locally, thereby adding to forex expenditures. Finally they create an uneven playing field between such foreign investors and their indigenous investor counterparts.
It is therefore time to shift the focus of incentives away from tax exemptions for foreign investors who wish to import most of their production inputs, towards local investors who deserve to be supported in research and development efforts aimed at adding local value through the substitution of imported production inputs with those sourced locally.
Indeed this would make the bridging of the impending tax revenue gap simply an added advantage.
