Menace of Tax Evation

CHAPTER ONE

INTRODUCTION

1.1        Background of the Study

Building the capacity of developing countries including Ghana to mobilize more tax revenues is now at the top of the development policy agenda (Drummond et al., 2012, Levin and Widell, 2006) since meeting the needs of Ghanaians requires huge funds. It is therefore the responsibility of government to source for funds to enable her provide basic amenities. One of the most important ways the government of Ghana raises per capita incomes and supports the increase in Gross Domestic Product (GDP) is through taxation. Thus, all citizens are expected by law to discharge their civic responsibility by paying their taxes as these contribute to the development and administration of Ghana (Murkur, 2001). However, widespread tax evasion revealed in persistent public resistance to pay is an important challenge in raising revenue in any part of the world (Muhrtala and Ogundeji, 2013). Tax evasion is thus seen as one of the most important and complex economic-social phenomenon causing problems to almost all countries Ghana inclusive (IMF 2011, Pâslaru, 2006).

Every government has its own development programme to pursue thus one way of financing such progammes is through revenue derived from taxation. Every country generates revenue from two main sources namely external borrowing and internal generation of revenue through taxes and levies. Taxes are grouped into direct tax and indirect tax. Direct tax is money paid out directly to the government based on what the individual earns (Sandmo, 2004). This tax includes income tax, property rate, gift tax and capital gains tax. Indirect tax on the other hand is indirectly paid by the final consumer of goods and services. The incidence of the tax can be shifted or transferred to another person who is receiving the goods and services or transaction (Sandmo, 2004). It includes general and selection taxes on sales of consumable goods, value added tax (VAT) on goods in the process of production, taxes on legal transactions, customs duties and excise duties on locally manufactured goods (Sandmo, 2004).

These taxes are key to the development of every country. Thus revenue from taxation sustains the existence of countries providing the funding for every activity from social programmes to infrastructure investment (Boakye, 2011). Other benefits of taxation includes giving governments power to allocate resources; enables government to provide/support social development; to stabilize the economy; the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.) public works, social engineering, the operation of the government itself (Boakye, 2011), improvement in the education systems, health care systems, public transportation, energy, water and waste management systems etc. (Abdallah, 2006).

In Ghana, taxation has undergone several reforms over the years all geared at improving the efficiency of tax administration by widening the tax net to capture most businesses. The first customs law was passed under colonial rule in 1855 which was later replaced in 1876 by a customs law based on the United Kingdom Customs Consolidated Act, 1876 (Twerefou et al, 2007). Income tax was first introduced in the then Gold Coast on November 1st, 1943 by the income tax ordinance 1934 (ordinance No. 27 of 1943) which was amended several times in 1961 and September, 1966 (Twerefou et al, 2007). Other taxes introduced include the Mineral Duty 1952, Betting Tax 1952, Casino Revenue Tax 1955, Property Tax (1961), Entertainment Duty Tax (1962), Airport Tax, Hotel Customers Tax, Standard Assessment and Excess Profit Tax. The current tax structure of Ghana is diversified comprising two main direct taxes - individual income tax and corporate tax and three main indirect taxes -VAT, excise and customs duties (Twerefou et al, 2007). According to Twerefou et al (2007), the introduction of VAT, Act (546) in 1995 to replace Sales and Service tax has resulted in the widening of the tax net.

However, even with several tax reforms in Ghana, the Ghana Revenue Authority (GRA) which is responsible for assessment of direct taxes, collection of direct taxes and payment of amounts collected into the consolidated fund have experienced several challenges with regards to evasion of tax by citizens. As stated by Fuest and Riedel (2009), there exist no universally accepted definitions of tax evasion. Sharma and Dang (2011) defined tax evasion as an illegal practice where a person, organization or corporation intentionally avoids paying the true tax liability. Tax evasion is thus committed by a person who, as a taxpayer, makes no tax declaration or only an incomplete one that is false or non-completion of the tax declaration (Boateng, Prempeh, Marfo, Kotoko and Banahene, 2012). Thus the taxpayer hides income hence making a proper assessment impossible for the tax authorities (Sharma and Dang, 2011). Kayaga (2007) also notes that tax evasion consist of willful and conscious non-compliance with the laws of a taxing jurisdiction which can include a deliberate concealment of facts from revenue authorities.

Tax evasion can occur for a number of reasons such as non-declared or under-reported income from work or domestic business activities, the failure to notify the taxing authorities of one’s presence in the country if he is carrying on taxable activities; the failure to report the full amount of income; the failure to pay over the proper amount of tax due; failure to report items or sources of taxable income, profits or gains where there is an obligation to provide such information or if the taxing authorities have made a request for such information (Kayaga, 2007). Tax evasion causes various inefficiencies in the economy. One negative effect of tax evasion (underground economy) is that it distorts reported data, and this often causes inefficiency in the economy (Embaye, 2007). Tax evasion affects the distribution of the tax burden as well as the resource cost of raising taxes. The resulting tax revenue loss may cause serious damage to the proper functioning of the public sector, threatening its capacity to finance its basic expenses.

Although Ghana’s revenue performance has improved over the years as a result of tax reforms, it is still comparatively low and clearly does not meet the country’s needs. The government must therefore implement measures aimed at improving its tax policy to increase government revenues and one key strategy is to reduce the evasion of tax in Ghana. This study therefore discusses the menace of tax evasion in Ghana.

1.2        Statement of the Problem

Tax reforms have been an important component of broader economic reforms in developing countries which is geared towards an increase in public revenues by enlarging the tax base, improving tax mobilization techniques, introducing VAT, and improving the efficiency of tax administration by improving transparency and reducing corruption and tax evasion (Atuguba, 2006). Even though this has resulted in the improvements in revenue generation, many developing countries including Ghana have failed to generate the requisite tax revenue to finance their public expenditures (Adamopoulos, 2010). For example, tax revenue has only been enough to finance between 50-60% of total budgetary expenditures. Ghana has thus over the years failed to raise the tax revenue required to finance the public sectors (Fuest and Riedel, 2009). In 2005, the average tax revenue to GDP ratio was equal to 15%, and in the poorest countries, the group of low income countries, tax revenue was just 12% of GDP (Fuest and Riedel, 2009). Thus many developing countries including Ghana rely heavily on external development assistance to support budgetary implementation.