A Thesis submitted to the Institute Of Distance Learning
1.1 BACKGROUND TO THE STUDY
Every government has two main avenues through which to generate revenue: external borrowing and internal generating of revenue through taxes and levies. The former comes with an albatross of debt payment that for long hangs around the neck of the state to settle. The later option comes with facing the displeasure of citizens and residents who pay taxes and levies with a lot of resentment (Obawana, 1996).
The raising of tax revenues is the most central activity of every state. Most importantly revenue from taxation is what literally sustains the existence of the state providing the funding for everything from social programmes to infrastructure investment. As the people become more sophisticated, so do their demand on their government to provide their needs, in which case the government must of necessity increase its revenue mobilisation to meet such demands.
It is for this reason that taxation as a source of government revenue has become so important and there is no state or government that does not apply taxation in one form or the other. It becomes imperative for those involved in the collection of taxes to be highly skilled and motivated and all impediments removed to ensure effective and efficient tax collection for the state. There are various tax options available to governments to raise revenue that have been applied since time memorial.
Taxes consist of direct tax and indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a “pecuniary burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority”. This should be distinguished from a voluntary payment or donation but any contribution imposed by government, whether under the name of toll, impost, duty, custom, excise, or other name, (Black’s Law Dictionary, p. 1307 (5th ed. 1979).
Economists, however, do not consider all revenue accruing to government as taxes. For example, transfers to the public sector such as tuition at public universities and fees for utilities provided by the local governments.
Governments also obtain resources by creating money (e.g., printing bills and minting coins), through voluntary gifts (e.g., contributions to public universities and museums), by imposing penalties (e.g., traffic fines) by borrowing and by confiscating wealth.
In Ghana tax collection is performed by the Ghana Revenue Authority comprising of the Ghana Excise and Preventive Service (CEPS), the Value Added Tax (VAT) Service and the Internal Revenue Service (IRS). When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying individual or entity (IRC, 1986).
Money provided by taxation has been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.) public works, social engineering and the operation of the government itself. Governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, public transportation and pensions for the elderly. Energy, water and waste management systems are also common public utilities (Abdallah, 2006).
In the governments quest to perform its duty of providing development to the people it faces a lot of challenges; one of which is the challenge of revenue generation and its encumbrances. In a developing country like Ghana, there are numerous challenges of revenue mobilization.
According to Alligham and Sandmo, (1972) Governments’ abilities to collect taxes depend on people‟s willingness to comply with the laws and also their perception of the risk of detection and punishment for evasion and default. This is evident even in advanced economies like Great Britain, United States of America and Japan, where despite all their sophisticated tax network, high literacy rates and punitive measures they continue to lose revenue through tax evasion, avoidance and default. Recently, a popular actor in the United States of America, Wesley Snipes was sentenced to serve a three year jail term in Pennsylvania federal prison for tax default.
1.2 STATEMENT OF THE PROBLEM
The rebasing of Ghana National Accounts put the GDP at GH¢42.065 billion for 2009, which indicates that tax revenue/GDP ratio of 14% is far less than the 23% required of middle income countries (Budget Statement of Ghana, 2011). This means that revenue mobilisation through taxes is very low indicating that many people are outside the tax bracket. Of about 7million workers in Ghana, only 1.5million are income tax payers.
Table 1: Tax Revenue by Agencies, 2004-2009 (in % of Total Tax Revenue
Source: GRA News, 2010 Note: Totals are in million Ghana Cedis
A shortfall of about 9% of GDP in tax revenue means that there was a gap of GH¢2,553.06 million and GH¢3,803.17 million for 2008 and 2009 respectively. Added to this is the problem of tax leakages which is often worsened by poor functioning tax authorities due to a variety of reasons; under–resourced and under–trained administrators, lack of motivation and poor tax collection systems, failure of legal enforcement mechanism for tax collection, small penalties for non-payment and too many tax incentives and holidays. These factors create opportunities for domestic and foreign entities to abuse the system since tax officials frequently lack the required technical skills to unravel complex international fiscal structures that are used to escape taxation, and because penalties are insufficient to stop tax evasion (Bird, 2003).
According to the Ghanaian Chronicle of 16th April, 2008 an audit commissioned by the Commissioner of IRS, covering the period from January 2002 to December 2006, into the books of accounts of Golden Gate Services Limited, a private stevedoring company, based at Tema revealed that the company owed the state to the tune of approximately GH¢2.9 million in tax and penalty liabilities. The audit report also showed that the company had underestimated its income by a whooping amount of GH¢4.2 million.
Quite recently, according to Ghana News of 7th July 2011, the VAT Service of the Ghana Revenue Authority had to lock the premises of Western Castings, a steel company in Takoradi which owed taxes to the tune of GH¢566,000.
A report by Christian Aid (2008) also revealed that Ghana tax losses averaged from €30.7million in 2005, €51.4million in 2006 and €62.4million in 2007 in trade with the European Union due to false invoicing and transfer mispricing. Every effort must be made at tackling this problem since it will represent a significant improvement in revenue.
Another constraint in tax administration is the lack of adequate resources to sustain and facilitate the operations of tax agencies. These can be divided into two: human resources which include quantity and quality of tax officials and physical resources which covers a wider dimension, ranging from office buildings and office equipment to vehicles and communication systems.
The research work therefore seeks to assess the challenges of tax revenue mobilization resulting in shortfalls in expected revenue to GDP ratio.
1.3 RESEARCH OBJECTIVES
The main objective of the study is to evaluate the challenges of tax revenue mobilisation in Ghana.
Specifically, the study seeks to:
a. Determine to what extent training and motivation has on tax revenue mobilization in Ghana
b. Assess whether the revenue collectors have the needed logistics to enhance their performance
c. Examine the effects of tax reliefs, incentives and holidays on revenue mobilisation
d. Determine the impact of tax on prices of goods on the market
e. Assess whether punitive measures are deterrent enough for defaulters and evaders of taxes.
f. Assess the effectiveness and efficiency of the various types of taxes in Ghana
1.4 RESEARCH QUESTIONS
The research questions that guided the study were as follows:
a. Do the staff of the revenue agencies have the requisite training and motivation to perform their duties diligently?
b. Are tax collectors provided with the needed logistics for their work?
c. Are tax reliefs, incentives and holidays affecting revenue mobilisation?
d. Are punitive measures that are in place enough to deter defaulters and evaders of taxes?
e. How effective and efficient are the various types of taxes in Ghana?
1.5 SIGNIFICANCE OF THE STUDY
This study is intended to add to the body of knowledge on tax administration in Ghana and seek to provide an insight into the challenges of tax revenue mobilization.and how they can be tackled to improve government revenue.
Also, planning an economy requires that a forecast be made as accurately as possible of the income to be generated within the forecast period to have an idea of how much revenue will be available to spend. Hence, the study will help to identify the problems that may prevent higher tax targets from being achieved and possible solutions recommended to curtail it to the barest minimum if not completely.
Recommendations from the study will also assist revenue agencies in their quest to reduce wastage and plug leakages in the administration of tax to increase revenue mobilization.
a. The data for this research is limited to the extent to which those interviewed were willing to disclose information which they deemed to be less sensitive as most of the people viewed the exercise as one intended to seek ways of increasing the tax liability.
b. There was virtually no proper books of accounts being prepared by most of the identifiable groups from which tax liability could be assessed.
c. Time and resources were also a limitation to the study making it impossible to exhaust all the facts.
The collection of data was restricted to the VAT office, IRS office, businesses and consumers in the Sunyani municipality, hence the findings of the study was generalized to cover all the tax activities in the Sunyani municipality.
The outcome of this study could be extended to other categories of tax revenue collectors in the country with similar characteristics. This should however, be done with great caution and further analysis.
1.8 ORGANIZATION OF THE STUDY
The study is structured into five chapters. The first chapter is an overview of the study comprising a background of the study and the nature of the problem, the objectives and significance of the study. Research questions were proposed and finally discussed the scope and limitations of the study.
In chapter two, a review of the related and relevant literature on taxation is provided
Chapter three explains the methodological framework upon which this study is conducted. The data collection and analysis techniques and how the data was analyzed are discussed.
In chapter four, the researcher discusses the opinions of interviewees on what they considered as the challenges of tax collection in Ghana. The researcher then integrates in the analysis the literature and document that connect with participants‟ opinions.
Chapter five discusses the summary, recommendations and conclusion.