A STUDY INTO THE IMPACT TAX REFORMS ON INVESTMENT DECISIONS IN GHANA (A CASE STUDY OF GHANA REVENUE AUTHORITY, ACCRA)
Governments need to put
in more effort in attracting investors into their country through tax reforms
if it wants to achieve economic growth and enhance standards of living. The
research considered certain variables that affect investor’s decision as to
where to invest. These included the location, type of activity and time
variables, which were very important due to the fact that, the laws pertaining
to each one of them concerning the tax rate to be paid, incentives, exemptions,
relief and holidays to be enjoyed varies.
The data for the research
were obtained from both primary and secondary data. To obtain first hand information on
whether investors in the country did consider the tax system in their
investment decision, the study used questionnaires and interviews. The researcher
designed 22 questions for the taxpayers and was distributed to 30 companies and
In the research, it was
discovered that tax
laws influences investment and location decision and for that matter a very
important tool in attracting investors into the country. Again, the tax incentive that has the
greatest impact on investment was also the reduction of corporate tax rate.
However, certain constraint such as the level of interest rate and uncertainty
about the economy were also discovered.
recommended that there was
the need for reforms of the general tax system by
creating efficiency and transparency in tax collection and elimination of
unnecessary taxes and levies, which adds unnecessary costs to transactions.
KEY WORDS: TAX
REFORMS, INVESTMENT DECISIONS, INCENTIVES, TAX SYSTEM, TAX RELIEF, INTEREST
Every government and
most especially those in the developing economies are concerned about the
economic growth of their nation. As a result, they put in much effort to
achieve higher rate of economic growth and raise the standard of living of its
The critical issue has
been how to attract investors and generate the needed resources domestically
using tax instruments that are least harmful to both the government and the
investors. This will obviously involve reforming the tax system to ensure
efficiency by widening the tax net without necessarily increasing the tax rate.
Governments continue to
encourage foreign investment as an integral part of its economic policy. Ghana
embarked on a privatization program in the early 1990s. The government at one
point controlled more than 350 state-owned enterprises but nearly 300 were
privatized by the end of 2000 and as at December 31st 2005, 351 had
been privatized leaving just a handful of state-owned enterprises. For example,
the government’s, stated priority privatization in the 2007 budget included Ghana Telecom,
Western Wireless (Westel), Tema Oil Refinery, Ghana Oil Company and State
Insurance Company. They also pursued privatization through selling of
State-owned shares on the Ghana Stock Exchange (GSE).
recognizes attracting foreign direct investment requires an enabling legal
environment and has passed laws that encourage foreign investment and repeated
some that has previously stifled it. In the United States for example, there
was a decline in investment some years ago. In order to stimulate investment, a
new tax Act was introduced in 2002 and 2003. This helped the economy to regain
its stand by the late 2003, investment returned to its pre-recession trend and
the economy expanded at a healthy rate of 3.9% and despite the dislocations
that was as a result of the hurricanes and steep rise in energy prices, registered
3.2%. A research conducted in United States by a Joint Economic Committee
presented a case that, “lowering the cost of capital through tax legislation
can be both timely and effective in stimulating economic growth”.
Governments need to put
in more effort in attracting investors into their country through tax reforms
if it wants to achieve economic growth and enhance standards of living.
The most important
source of government revenue is from tax. According to the 2006 budget, the
government introduced some tax incentives for venture capital investment and
reduced tax rate on personal and corporate income in order to strengthen the
private sector and enhance the disposable income of householders. Tax rate for
companies in categories A and B were lowered, and rate for other categories
were abolished with regard to the National Reconstruction Levy.
Various studies have
shown that changes in the tax system have great impact in investment decisions.
Feldstein (1982) observed that “adverse changes in the tax variables since 1965
have depressed investment by more than 40%” Hassett and Hubbard “recent
empirical studies appear to have reached a consensus that the elasticity of
investment with respect to the tax-adjusted user cost of capital is between
-0.5 and -1.0” Hassett and Hubbard cited other studies that concluded that tax
over the last forty years have had a large effect on investment. A research by
House and Shapiro showed that temporary investment tax incentives did stimulate
In my study, I will
consider certain variables that affect investor’s decision as to where to
invest. These, which include the location, type of activity and time variables,
are very important because the tax laws pertaining to each one of them concerning
the tax rate to be paid, incentives, exemptions, relief and holidays to be
Due to these continuous
changes in the tax law, there is the need for such information to be publicized
since it goes a long way to determine the growth of the economy, divert
resources to a particular sector of the economy and also protect the local
industries, at the same time attracting foreign investors.
This is what Ghana has
embarked on in recent times and my study will try to analyze the budget from
January 2010 to April 2012 and see the various attempts by the government to
generate more revenue by attracting investors into the country.
Analyses of the budget
in recent times had indicated that the government continually decreases the tax
rate to widen the tax net. Even though in terms of tax revenue composition, our
main source of revenue is derived from indirect taxes (VAT especially), these
are indirect taxes paid by consumers on some goods and services to the state
through registered individuals or businesses. It has been realized that revenue
from direct taxes continues to rise. In 2010, it constituted 38.71% of total
tax revenue and increased to 42.84% in 2011 and this can be attributed to the
persistent reduction of the corporate tax rate by the government as part of its
efforts to improve the environment for private sector businesses.
These few changes and
many others that have not been mentioned here brought to the fore the need to
observe how decision on where to invest, what to invest in and when to invest
changes as the tax system pertaining to these changes. These are serious issues
which must be considered because the transition of developing countries into
developed countries depend largely on the extent to which people invest their
resources to promote economic growth.
1.1. 1 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
Ghana Revenue Authority (GRA) is assisted in its endeavor at improved quality
service delivered by the ministry of public sector reform.
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
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
The Ghana Revenue Authority (GRA) has
five (5) main Departments. These are:-
STATEMENT OF THE PROBLEM
In every thriving
economy, investors’ main aim is to invest scarce resources to yield maximum
returns on them. The government also needs to cater for its expenditure and
development of the country.
It has therefore become
necessary to generate the needed resources from domestic economy using tax
instruments that are least harmful to both the investor and the government
In Ghana, there have been several policies to
attract investors into the country but it is not clear whether investors
utilize these policies which have been put in place to benefit both the
Government and investors in all.
It is in light of this,
that this research tries to investigate into the following issues:
How the changes in the tax system
affects investment decision in the country.
Whether tax reliefs, incentives,
exemptions and holidays have an impact on investment decisions on a particular
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
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?
SIGNIFICANCE OF THE STUDY
The study will be useful in the following
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.
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
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.
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,
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.
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.