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Very well done Government!

Don’t stop here- be bold!
August 14, 2006

The Economic Management Team
Government of the Republic Ghana Accra

Dear Gentlemen/ Ladies,
Two important fiscal developments occurred last week, which earned the government important marks on the economic.

The first, a very bold decision to replace the 15 per cent ad-valorem tax on petroleum with a specific based tax that will collect the same amount of revenue. Proof that these changes will help reduce the rather shaky tax base provided by an Ad Valoren structure was noted by Mr Kwamena Essilfie Adjaye, an Economic Advisor to the government, “It was to forestall….macro-economic instability rising out of the abolishing of the ad-valorem tax that the government increased the Excise Duty Specific.” So “Ghanaians would experience the real benefits of the abolition of the 15 per cent ad-valorem during the next [fiscal]adjustments.”

The second is the decision to introduce a flat tax (VAT) “of 3 per cent to register businesses with yearly turnover of a minimum of 200 million cedis and a maximum of 1.2 billion cedis when it becomes operational.” “The scheme to be introduced later this year is aimed to force unregistered businesses to register and pay tax”.

This has the potential to formally recognise the massive underground economy which can generate revenue several times over the $US 547 million Millennium Challenge Account signed by the President with a myriad of conditionality.

A flat tax makes sense and it means a significant shift from the skewed regime that directly taxes only 1.6 million Ghanaians out of a potential number of 10 million working population. Certainly better than an attempt to tax remittances sent to relatives by Ghanaians abroad. These fundamental tax changes will not result in loss of revenue. More importantly, as a tax expert puts it “when you move to a specific regime you stabilize revenue, value fluctuates as markets move and thus tax revenue moves as well.” Moving from a VAT to specific tax regime aligns Ghana with the Organization of Economic Cooperation and Development (OECD)* and thus most developed economies. The government must continue this trend, apply this regime to other excise tax structures most notably beer and spirits. Currently they are taxed at Ad Valorem rates of 50 and 25% respectively. The same principles apply here, Ad Valorem tax regimes are not stable, as prices fluctuate with world markets revenue derived fluctuate as well.

Recent wild fluctuations in oil prices helped to convince revenue authorities of the need to change in Ghana. Ad valorem regimes are crippled by price fluctuations, revenue derived rises and falls based on events out of the country’s control. That is why the government must not stop here, be bold. Last year the Government promised a review and change in the way it taxed the alcohol industry, recent events provide just that opportunity. Change all ad valorem tax regimes to specific, require the changes be revenue neutral and if needed build in an inflationary trigger to maintain the real value of the rate.

These changes align Ghana with the OECD and an emerging African trend. South Africa made this change in 2003 and saw revenue increase, Kenya made the change on beer only the next year and also saw an increase in revenue.

No Government can be faulted for wanting to achieve such objectives as technical progress, incentives, education, healthcare and infrastructural development.

However, the dilemma that governments face is how to finance these objectives in an equitable manner using non-discriminatory revenue mobilisation tools. Since no tax is a good tax unless it leaves individuals in the same relative position as it finds them, the government could do one of four things: reduce its own expenditure by leaving the private sector to provide these services ; reduce the number of taxes and fees on business and entrepreneurship; bring down business regulatory requirements and bureaucratic work or enhance an efficient tax regime by widening the tax net without necessarily increasing tax rates.

While the latter remains a challenging task, it seems that an incentivised private sector could deliver on the creation of more skilled jobs and a handsome corporate social responsibility package in the provision of basic social services. One such incentive is reforming tax structures.

And eventually logical policy would be to switch tax regimes from the current ad valorem to specific taxation based on percentage alcohol content (alcohol by volume).

A specific duty is a fixed levy on the total number of products rather than the total value or cost of production as ad valorem is. It obviates the temptation for fiddling company accounts and lowers costly auditing by government revenue officials. A specific duty regime makes it easier for government to forecast its revenues ahead of production. Importantly, too, it reduces cross-border smuggling. Businesses, like individuals, vote with their feet when favourable conditions beckon next door.

Commendably, the government will attempt to make a revision of the excise duty regime by year’s end as promised by the Finance Minister in his 2006 Budget statement to Parliament.

To the government’s fiscal team and members of parliament, we respectfully entreat you to do more Your promised intervention for an interim reduction of excise duty on beers from 50% to 35% would be commendable. But above all, your call on the executive arm of government to shift tax regimes, from ad valorem to specific would be remembered as a voting record that was business-friendly and national wealth flourishing.

To the Finance Minister in particular, you may finally be guided by the words of J.R. Mc Culloch, one of the founders of economics, who said: “The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass and there is no amount of injustice and folly you may not commit.”

Franklin Cudjoe is director of Ghanaian think-tank, Imani (www.imanighana.org). He is also a co-author of The Water Revolution: Practical Solutions to Water Scarcity and author of a forth coming publication, “Hobbled Trade: Trade Barriers within Africa”. His email is franklin@imanighana.org

** The OECD is a group of like-minded countries. It is rich, in that its 30 members produce 60% of the world’s goods and services, but it is by no means exclusive. Non-members are invited to subscribe to OECD agreements and treaties, and the Organisation shares expertise and exchanges views on topics of mutual concern with more than 70 countries worldwide, from Brazil, China and Russia to least developed countries in Africa.

Earnestly Submitted

Franklin Cudjoe
Executive Director
Imani: The Centre for Humane Education
P.O.Box AT 411
Tel+233 21 417094


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