Viewpoint: Ayesha Bedwei Ibe
In 2022 Ghana’s government sought financial and technical assistance from the IMF to strengthen the economy. This decision was taken after several debates about whether the country needed support from the international organisation to improve its economic situation or if the country could resolve the issues by itself.
External factors such as the Covid-19 pandemic and the ongoing effects of the conflict between Russia and Ukraine were partially to blame for Ghana’s financial struggles as the country lacks the necessary economic protection to absorb negative shocks from severe global shifts. Regardless of the underlying factors, it is undeniable that Ghana’s economic fundamentals were not as strong as touted. Eventually the situation reached the point where the government recognised the need for external assistance to restore stability.
IMF bailouts always come with conditions. For Ghana’s current programme, these include front-loaded measures to bring public finances back to a sustainable path, mobilising domestic revenue and improving the efficiency of public spending. Parliament enacted several revenue mobilisation bills in 2023, such as the increase of the value-added tax (VAT) rate by 2.5 percentage points to 15%, the introduction of a new tax band of 35% for individual taxpayers with annual income in excess of GHS600,000 ($55,000) and the introduction of the Growth and Sustainability Levy, payable by all resident entities. These new taxes are expected to generate over GHS4bn ($363m) in revenue per year.
The authorities have primarily focused their tax mobilisation efforts on the formal sector. However, these efforts have not generated sufficient revenue to support the government’s budget for development. In fact, this approach has created a precarious fiscal imbalance. The formal sector – comprising large corporations, registered businesses and individuals with regular employment – remains the primary source of public tax revenue. Taxes, such as income tax, corporate tax and VAT predominantly target the formal sector, which has created a distorted tax base that fails to capture a large portion of Ghana’s economic activity. The informal sector comprises proprietary micro and small-scale enterprises consisting of self-employed producers, wholesalers, retailers and consumers.
A quick analysis of the 2024 budget revealed that the informal sector is expected to generate income tax revenue of GHS912m ($82.8m) and GHS1.6bn ($145.3m) for 2023 and 2024, respectively, as compared to a total income tax revenue budget of GHS52.8bn ($4.8bn) and GHS65.8bn ($6bn). Thus, tax from the informal sector contributes less than 3% to the total income tax revenue, as per the budgets for 2023 and 2024. As of early 2023 employment in the informal sector accounted for about 80% of employment in the country. This means the informal sector, which accounts for a significant portion of employment, is not being considered as a potential source of revenue mobilisation.
Taxing the informal sector presents unique challenges due to the lack of structure and documentation required for traditional tax assessment. Many informal workers earn their living from street vending, smallscale agriculture and domestic services, and they do so in a cash-based economy that is difficult to regulate.
The government can use digital technologies such as mobile payment platforms and digital wallets to streamline tax collection in the informal sector. Moreover, a robust public awareness campaign is crucial to educate informal sector workers about taxation’s benefits and contribution to the country’s development.
Ghana’s over-reliance on tax revenue from the formal sector is an unsustainable strategy. Taxing the informal sector, though challenging, is essential to broaden the tax base and boost revenue. By introducing simplified tax schemes, promoting digital payments and conducting awareness campaigns, the authorities can bring the informal sector into the tax net. Economic stability and development hinge on embracing this change, ensuring a fair and equitable contribution from all sectors.
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