Policy think tank, IMANI Ghana is advocating for reforms in policies on starting a business and the payment of taxes in Ghana.
According to IMANI, “…in the medium to long term, it is crucial that Ghana positions itself as a favourable destination for businesses, especially in starting a business and paying taxes.”
“The Doing Business Index (DB) 2015, a World Bank index for evaluating the business climate of a country, ranked Ghana at 96 in 2015 and 93 in 2014, for starting a business, indicating retrogression. The rank for paying taxes, which was 99 in 2014, shifted to 101 in 2015, also indicating a negative outturn.”
To reverse these trends, IMANI suggests that it is critical that the processes involved in starting a business and paying taxes be streamlined adding that “improving our competitiveness places the country in a favourable spot in attracting foreign direct investments and also stimulating entrepreneurship locally.”
Below is the full statement:
IMANI Alert: Reforms needed in starting a business and paying taxes in Ghana
By Sandra Tsikor & Maud Martei
Ghana’s economy has experienced major developmental setbacks over the past few years. However, with the current extended credit facility under the IMF, some of these shocks will be mitigated in the short term. However, the road to recovery and growth is a long one, and of the strategies to be adopted, it is crucial that promotion and expansion of private sector activity tops the list.
For instance, the dearth of unemployment the nation is grappling with can be tackled only with jobs created through expansion of the private sector. A thriving private sector spurs GDP growth which has positive externalities on poverty reduction, health and quality of life.
As such, in the medium to long term, it is crucial that Ghana positions itself as a favourable destination for businesses, especially in starting a business and paying taxes. The Doing Business Index (DB) 2015, a World Bank index for evaluating the business climate of a country, ranked Ghana at 96 in 2015 and 93 in 2014, for starting a business, indicating retrogression. The rank for paying taxes, which was 99 in 2014, shifted to 101 in 2015, also indicating a negative outturn.
To reverse these trends, it is critical that the processes involved in starting a business and paying taxes be streamlined. Improving our competitiveness places the country in a favourable spot in attracting foreign direct investments and also stimulating entrepreneurship locally. A simple comparison between Ghana and the sub-Saharan region, as well as with the Organisation for Economic Cooperation and Development (OECD) suggests that there is tremendous growth potential which remains untapped.
Starting a business
Registering a business is a fundamental first step for any businessman interested in doing business in Ghana. A significant component of Ghana’s economy runs in the informal sector. However, this crucial group often bypass official registration procedures for a myriad of reasons, although time factor, cost, strain and bureaucracy are the usual suspects.
Comparison with Sub-Saharan Africa
According to the DB report, the number of procedures to start a business in Ghana is 8. This aligns with the sub-Saharan African average but is twice that of the OECD average (Table 1). When competing in a global economy, average is uncompetitive, especially when the solution lies in simple reforms. For instance, in starting a business in Ghana, applying for a business license from the Metropolitan Authority takes about 7 days, the longest of the 8 procedures. The time for this single step is longer than the total time it takes to start a business in Burundi, which is 5 days. Burundi’s registration process consists of three steps. The first procedure is to submit all documents at a one stop shop, obtain a registration certificate and a tax identification number. Next is to pay the registration fee and then finally, to make a company seal. Similarly, Cote D’Ivoire, Ghana’s neighbour, only requires 4 procedures, which also includes a one stop shop. These countries, some of which are recovering from political unrest, are making deliberate moves to attract businesses and transform their economies. If Ghana chooses to rest on its oars, it will soon be overtaken in the region.
Starting a Business Comparison with the OECD
Ghana can also perhaps adopt the strategies that the OECD uses to maintain a low number of procedures and days for starting a business. New Zealand, ranked first within the OECD for starting a business, has only one procedure. That procedure is to register online with New Zealand’s Companies Office.
This online process is comprehensive and includes an application for an Inland Revenue number (IRD), issued by New Zealand’s Inland Revenue and the registration for the Goods and Services Tax (GST).
Altogether, this procedure takes less than one day to complete. Canada, ranked second within the OECD for starting a business, also has one procedure – an online process. Evidently, most of the top most ranked countries have web based procedures.
Table 1: Starting a Business in Ghana Comparison with Sub-Saharan Africa and OECD Averages
|Number of Days||14||27.3||9.2|
Comparison with Sub-Saharan Africa
As noted earlier, one of the reasons for a large informal sector is because of complex bureaucratic systems. This also applies to tax administration in Ghana. In terms of paying taxes as a business, the number of payments required in Ghana and the amount of time it takes to make those payments are less than the Sub-Saharan African averages, but below the OECD averages.
In Ghana, businesses make 32 tax payments each year. For instance, the social security contributions are paid each month in Ghana; that is 12 times each year. Ghana’s DB 2015 rank for paying taxes is 101. Our profile in the DB ranking indicates that, in the case of corporate tax for example, 5 corporate income tax payments at a statutory income tax rate of 25% is required annually. In Cote D’Ivoire, the rate is also 25% and 3 payments per year are required. In Nigeria (Lagos and Kano), the rate is 30% and only 1 payment is required. Clearly, there’s an element of tax rate and frequency of payment, the latter of which may be more amenable to rapid reforms for substantial impact.
Comparison with the OECD
As demonstrated below in the table, the OECD average for tax payments per year is 11.9. With Ghana’s 32 payments, the OECD’s average of 11.9 indicates that there is room for lowering Ghana’s number of payments. Ireland, which ranks first in the OECD countries in terms of paying taxes in 2015, requires only 9 payments per year. Each of the taxes required for doing business in Ireland needs to be paid only once a year. This is certainly in contrast to Ghana where the Social Security Contribution and Value Added Tax (VAT) both need to be paid 12 times a year. In addition, in Canada, each of the required tax needs to be paid only once a year and can be done online.
Table 2: Paying Taxes in Ghana Comparison with Sub-Saharan Africa and the OECD
|Number of times (per year)||32||38.2||11.9|
|Hours per year||224||310.8||175.4|
Evidently, majority of the top performing economies, be it in starting a business or in paying taxes employ web/online based solutions. It is crucial for Ghana to tow that line. In this regard, the on-going Ghana e-Government Project, which is an effort to computerise the entire government system must be mainstreamed and implemented fully and effectively. However, because access to internet in Ghana is not as highly prevalent as it is in the OECD countries, the online process would not be an absolute procedure but rather a preferred one.
Secondly, the one stop window approach is employed effectively for the top performing countries. In addition to making the processes of business and tax administration simpler for businesses, the one window approach has the added benefit of enhancing collaboration amongst agencies, thereby reducing duplications in systems and resulting in cost savings. Perhaps, one stop shops in Ghana can serve as locations where a fledging businessman can present their required documents to be dispersed to the other avenues.
Looking at Ghana’s tax payments of 32 per year, the OECD’s 11.9 payments per year seems incredulous. However, it is possible with strategic policy and management practices. As mentioned before, most of the OECD countries require only one payment for each tax they require. Therefore, Ghana can also try and consolidate its payments for each tax into one payment. For example, the Social Security Contributions’ 12 payments per year could be consolidated into one payment. In other words, there would be one annual payment for Social Security Contribution. If frequency of payments is decreased, clearly total hours spent paying taxes will also decline.
Ghana is merely staying afloat in business competitiveness. In fact, in the DB 2015 Report, Cote
D’Ivoire, Togo, Benin, Senegal and the Democratic Republic of Congo were included in the list of top 10 well performing countries, altogether making an average of 40 regulatory reforms. Two of these countries, with similar business profiles, are immediate neighbours to Ghana. With deliberate and aggressive moves from its neighbours and competitors in the region to position their various countries as the preferred business destinations, Ghana cannot afford to simply stay afloat. These recommendations ought to be considered in order to make doing business in Ghana easier. Ultimately, this is a clarion call for Ghana to also get serious, make reforms and stay competitively ahead.
This publication is supported by the Atlas Network and is part of the IMANI-Atlas Life Project.
Source: IMANI Ghana