AN ASSESSMENT OF TAX REFORMS AND ITS IMPACT ON INVESTMENT DECISIONS IN GHANA
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INTRODUCTION
Every government, particularly those in developing countries, is worried about their country's economic progress. As a result, they work hard to attain better rates of economic growth and increase the living standards of their inhabitants.
The main challenge has been how to attract investors and create the necessary domestic resources using tax tools that are least damaging to both the government and the investors. Obviously, this will include revamping the tax system to guarantee efficiency by broadening the tax net without necessarily raising the tax rate.
Governments continue to encourage foreign investment as part of their economic policies. In the early 1990s, Ghana began a privatization effort. The government had controlled more than 350 state-owned firms, but over 300 had been privatized by the end of 2000, and 351 had been privatized as of December 31st, 2005, leaving only a handful of state-owned enterprises. In the 2007 budget, for example, the government indicated that privatization of Ghana Telecom, Western Wireless (Westel), Tema Oil Refinery, Ghana Oil Company, and State Insurance Company was a priority. They also sought privatization by selling state-owned shares on the Ghana Stock Exchange (GSE).
The government knows that attracting foreign direct investment necessitates an enabling legislative environment, and as a result, it has introduced legislation encouraging foreign investment while also repeating measures that have previously impeded it. Investment in the United States, for example, fell a few years ago. A new tax Act was enacted in 2002 and 2003 to encourage investment. This aided the economy in regaining its footing by late 2003, when investment resumed its pre-recession pattern and the economy expanded at a robust pace of 3.9 percent, notwithstanding the disruptions caused by storms and a sharp jump in oil costs. A Joint Economic Committee study undertaken in the United States showed evidence that cutting the cost of capital through tax reform may be both timely and effective in encouraging economic growth (Feldstein, 1982).
Governments must make more efforts to entice investors into their countries through tax changes if they are to achieve economic development and raise living standards.
Taxation is the most important source of government revenue. In order to develop the private sector and increase family disposable income, the government established various tax incentives for venture capital investment and decreased tax rates on personal and corporate income in the 2006 budget. With reference to the National Reconstruction Levy, the tax rate for firms in categories A and B was reduced, while the rate for other categories was eliminated.
Several studies have found that changes in the tax structure have a significant influence on investment decisions. Feldstein (1982) discovered that since 1965, unfavourable changes in tax factors have reduced investment by more than 40%. Recent empirical research by Hassett and Hubbard appear to have established an agreement that the elasticity of investment with regard to the tax-adjusted user cost of capital is between -0.5 and -1.0. Hassett and Hubbard highlighted additional research that showed that taxation has had a significant impact on investment during the previous forty years. According to House and Shapiro's study, temporary investment tax breaks do boost investment.
1.1 BACKGROUND STUDY
This study takes into account key factors that influence investor decisions on where to invest. These, which include the location, kind of activity, and time factors, are critical since the tax rules related to each of them differ in terms of the tax rate to be paid, incentives, exemptions, relief, and holidays to be enjoyed (World Bank, 2012).
Since of the constant changes in tax legislation, there is a need for such information to be made public because it helps to determine the growth of the economy, channel resources to a certain sector of the economy, and safeguard local businesses while attracting international investment.
This is what Ghana has just begun on, and my study will aim to evaluate the budget from January 2010 to April 2012 in order to see the numerous initiatives by the government to produce additional money by recruiting investors into the nation (Wenzel, 2018).
Recent budget analyses have revealed that the government is constantly lowering the tax rate in order to broaden the tax net. Despite the fact that, in terms of tax revenue composition, our primary source of income is obtained from indirect taxes (particularly VAT), these are indirect taxes paid to the state by consumers on certain products and services through registered persons or enterprises. It has been shown that direct tax revenue is increasing. It accounted for 38.71 percent of total tax income in 2010 and climbed to 42.84 percent in 2011, which may be ascribed to the government's consistent decrease of the corporate tax rate as part of its attempts to enhance the climate for private sector enterprises (World Bank, 2012).
These few changes, as well as many more that have not been discussed here, have highlighted the importance of observing how decisions on where to invest, what to invest in, and when to invest alter when the tax system relating to these changes changes. These are major concerns that must be addressed since the transformation of developing countries into developed ones is heavily reliant on how much people spend in economic progress.
- ORGANIZATIONAL PROFILE
The Ghana Revenue Authority (GRA) under the ministry of finance and economic planning of the republic of Ghana is a public service organization charged with direct tax administration.
GRA as a revenue agency is very strategic in the achievement of national goals. It has therefore embarked on a mission of improving the quality of service delivery to taxpayers and the general public through simplifying processes and clarifies rules and procedures. It has set up time frames for prompt completion of tasks in order to render them more transparent to the public. The main objective of the Ghana Revenue Authority (GRA) is to create a customer oriented revenue collection organization focused on quality service to enhance voluntary tax compliance.
The Ghana Revenue Authority (GRA) is assisted in its endeavor at improved quality service delivered by the ministry of public sector reform.
VISION
The Vision of the GRA is to be an effective Tax Administration Agency that applies the tax laws fairly, efficiently and with integrity in order to collect revenue for National Development.
MISSION
The Mission of the GRA is to optimize tax revenue through the fair application of tax laws, to promote voluntary compliance through improved customer service and taxpayer education, and to effectively and efficiently administer the tax laws through well-trained and motivated staff.
The Ghana Revenue Authority (GRA) has five (5) main Departments. These are:-
- Operations
- Research, Planning and Monitoring
- Finance
- Administration
- Legal Services
1.2 STATEMENT OF THE PROBLEM
The primary goal of investors in any functioning economy is to maximize profits on finite resources. The government must also account for its expenditures and the country's progress.
As a result, it has become imperative to raise the required resources from the domestic economy using tax tools that are least detrimental to both the investor and the government.
In Ghana, numerous policies have been put put in place to attract investors, but it is unclear whether investors are taking advantage of these rules, which have been put in place to benefit both the government and investors in general.
In light of this, the following problems are being investigated in this study:
- How do changes in the country's tax structure effect investment decisions?
- Whether tax relief, incentives, exemptions, and holidays influence investment decisions in a certain place.
1.3 RESEARCH OBJECTIVES
- To find out the extent to which the various tax reforms affect investment decision in the country.
- To evaluate the various tax reforms in the formal sector over the past few years.
- To explore the impact of corporate tax on firm location decision in Ghana.
1.4 RESEARCH QUESTIONS
i. What are the rationales behind or the reasons for tax reforms?
ii. What are the problems of tax reforms?
iii. What are some of the tax incentives used in attracting foreign direct investment?
iv. Should tax rate concepts be used to examine the effect of tax reform on investment?
1.5 SIGNIFICANCE OF THE STUDY
The study will be useful in the following ways:
Firstly is that, it will educate prospective investors on the best alternative business to invest in, based on the tax law for that particular sector.
Secondly, it will also encourage existing investors to expand their investments to other sectors of the economy as well.
Furthermore, it will also enlighten investors to the various tax incentives, reliefs, exemptions and holidays available to and how they can take advantage of them.
Moreover, it will help individuals to also understand how investors react to changes in the tax system and how it affects the economy both negatively and positively.
And fifthly, the study will add more value to existing literature since it will be updated with current issues and rates in the various sectors of the economy.
And lastly, in Ghana, it is a requirement for the attainment of a Bachelor of Science degree. It is also a requirement of All Nations University for a degree program.
1.6 SCOPE OF THE STUDY
This study is to assess the changing structure of the tax system in Ghana from January 2010 to April 2012 and suggest ways to improve the tax administration in the country to bridge the gap between public expenditure and domestic revenue.
Abdallah (2006) Taxation in Ghana defines taxation as the levying of compulsory contributions by public authorities having tax jurisdiction to defray the cost of their activities. It can also be seen as a means by which government implement decision to transfer resources from the private to the public sector.
Various types of tax can be grouped into Direct or Indirect. Direct Tax include: Income tax, capital gains tax, gift tax and corporate tax. Indirect Tax includes Excise duty, Custom duty and Value Added Tax (VAT). They are called indirect because the Administering authorities, the Customs, Excise and Preventive Service and the VAT Services do not collect taxes from consumers but do so indirectly through importers, manufactures and other intermediaries.
Reilly and Norton, Investments (2003), 6th edition defines investment as the current commitment of resources for a period of time in the expectation of receiving future resources that will compensate the investor for:
- The time the resources are committed
- The expected rate of inflation
- The risk, that is uncertainty of the future payments
Internal Revenue Act (2000), Section 94 defines investment as a manner in which a person may derive gains, profits or income other than from a business or employment.
Details of this will be given in chapter two.
1.7 LIMITATIONS OF THE STUDY
During the study, the researcher encountered certain limitations such as time constraint. This did not permit the researcher to expand his population base and to make certain enquires into areas that could have been useful to the study.
There was difficulty in having access to certain information due to the fact that sufficient records were not available.
And lastly, target respondents may not be willing to provide adequate and prompt feedback of questionnaires.
1.8 METHODOLOGY
This study took the form of cross sectional studies employing the survey strategy. This will enable me to collect large sample of data from a sizeable population in a highly economical way and allow for easy comparison. The researcher used purposive sampling technique in selecting his sample size of 30 respondents. My case study will be the staff and management of The Ghana Revenue Authority, koforidua Branch.
Source of data:
Primary source data will be collected through structured interviews and questionnaires. Secondary source of data will also collected from journals, books, academic or scholarly articles, government publications reports and articles from the internet.
1.9 CHAPTER SCHEME
This study will be organized in the form of five chapters:
Chapter one deals with introduction, problem statement, objectives significance, methodology limitation and scope of the study.
Chapter Two will deal with a discussion of the trends and reforms of the tax system.
Chapter Three will analyze data collected.
Chapter Four will look at the impact of changes in the tax system on investment decision in Ghana.
Chapter Five will deal with findings, recommendations and conclusions.
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