He said domestic revenue had always fallen short of the budget in the last couple of years, which had resulted in the revenue gap increasing significantly since 2011.
“Ghana would not have recorded any fiscal deficit. Low revenue mobilisation is the cause of the country’s fiscal imbalances and the rising public debt,” he noted.
Speaking at the institute’s pre-2018 budget forum in Accra on Tuesday, Prof. Kusi called for a complete review of the mining stability agreement which was signed between the government of Ghana and mining companies.
He also called for a major review of the concessions granted by the Free Zones Act to enable operators in the zone to contribute to government revenue.
He said tax exemptions and concessions granted operators in the free zones were also undermining effective revenue mobilisation.
Prof. Kusi said in order to maximise domestic revenue and ensure that the government benefited fully from the mining sector, it had to undertake a complete review and renegotiation of all mining contracts and agreements in the country.
That, he said, would require an amendment of the Minerals Act (2006).
He said maximising the country’s domestic revenue would require that a critical look be taken at the taxes paid by mining companies.
“The mining sector in Ghana has a dominant potential to contribute to national resource mobilisation. However, the sector’s contribution to government revenue has not grown at the same pace with growth in the sector, as its overall impact to national development is not very visible.
“This is because the incentives accorded mining companies have limited the share of government revenue from the sector and constrained opportunities to mobilise adequate revenue to fund social and economic programmes,” he added.
Reviewing Free Zones tax concessions
According to the Free Zones Act, 1995 (Act 504), a free zone enterprise shall have the right to produce any type of goods and services for export, except goods that are environmentally hazardous.
Free zones operators and enterprises granted licences under the act are exempted from the payment of income tax on profits for the first 10 years from the date of the commencement of operations, and the income tax rate after 10 years shall not exceed a maximum of eight per cent, while companies operating outside the free zones pay between 25 and 30 per cent.
Also, free-trade zone shareholders are exempted from the payment of withholding taxes on dividends arising out of their investments.
Prof. Kusi stated that “the issue here is that while the output of companies operating from the free zones form part of the country’s GDP, not much tax is paid by them due to the displacement of the tax bases, seriously eroding the country’s tax/GDP ratio”.
He, therefore, called for the need for a major review of the concessions granted by the Free Zones Act to enable the operators in the zone to contribute to government revenue.
“Ghana’s domestic revenue-GDP ratio has remained far below the standard of its middle-income peers in Africa. It averaged 20.4 per cent between 2012 and 2015, compared to other sub-Saharan African countries where it averaged 27.1 per cent for the same period,” he noted.
“This leaves a revenue performance gap of 6.7 percentage points of GDP. Over the same period, government’s expenditure averaged 27.7 per cent of GDP, compared to 32.3 per cent for its African peers, and this development made the International Monetary Fund (IMF) to once describe Ghana as taxing like a low income country but spending like a middle income country,” he explained.
Prof. Kusi said if the country had performed like its regional competitors, with an average domestic revenue-GDP ratio of 27.1 per cent, the country could have generated GH¢26.6 billion extra domestic revenue between 2012 and 2015 which could have paid off the total fiscal debt of GH¢22.3 billion recorded for the period, with an extra GH¢4.3 billion to take care of other expenditure.
He said the non-revenue GDP ratio suggested that the country’s actual domestic revenue was far short of what its economic potential and institutional development should generate.
Factors affecting revenue mobilisation
Prof. Kusi pointed out that low revenue mobilisation was associated with structural factors such as low income, demographic factors, share of agriculture to GDP, a large informal sector and an under-developed financial market.
He said alongside the structural factors were macroeconomic stability and governance which also influenced revenue mobilisation in the country.
“The task of mobilising more revenue is also complicated by increased erosion of tax bases resulting from the non-payment of taxes on capital gains, tariffs and other trade taxes.
“Also, as the country tries to attract more foreign investment, it experiences great pressure to sustain revenue from corporate income taxes because of tax competition,” he added.
Prof. Kusi said other factors were weaknesses in tax policies and administration, which were underpinned by tax evasion and corruption.
“All of these work together to undermine the country’s efforts to enhance domestic revenue,” he stated.