Burden taxes in Ghana: Why many businesses are shutting down

In recent years, Ghana has witnessed a troubling trend: a significant number of businesses shutting down due to the escalating tax burden.

This phenomenon has raised alarm among entrepreneurs, economists, and policymakers, prompting a critical examination of the factors at play and the implications for the country's economic future.

Tax landscape in Ghana

Ghana's tax system comprises various forms of taxation, including corporate income tax, value-added tax (VAT), excise duties, import duties, and social security contributions.

While taxation is essential for national development, providing funds for infrastructure, healthcare, education, and other public services, the structure and implementation of taxes in Ghana have become increasingly problematic for businesses.

High tax rates

One of the primary concerns is the high tax rates imposed on businesses. Corporate income tax in Ghana stands at 25%, which is relatively high compared to neighbouring countries.

Additionally, the VAT rate of 15% adds a significant burden on both businesses and consumers.

High tax rates reduce profit margins, making it difficult for businesses to reinvest in their operations, innovate, and grow.

Complex tax administration

The complexity of Ghana's tax administration system further exacerbates the problem. Businesses often face numerous bureaucratic hurdles when complying with tax regulations.

The process of filing taxes can be cumbersome, time-consuming, and costly, particularly for small and medium-sized enterprises (SMEs) that lack the resources to navigate the intricate tax landscape.

This complexity not only increases operational costs but also creates opportunities for corruption and tax evasion, undermining the overall effectiveness of the tax system.

Multiple taxes and levies

In addition to the standard taxes, businesses in Ghana are subject to a myriad of additional levies and charges. These include municipal and district taxes, environmental levies, and special levies on specific industries.

The cumulative effect of these multiple taxes is a substantial financial burden that stifles business growth and discourages investment.

Many businesses struggle to remain viable under the weight of these various fiscal obligation.

Impact on businesses

The heavy tax burden in Ghana has had a profound impact on businesses across various sectors.

Closure of SMEs

Small and medium-sized enterprises, which form the backbone of Ghana's economy, are particularly vulnerable. Many SMEs operate on thin margins and lack the financial resilience to absorb high tax costs. 

As a result, a significant number of these businesses have been forced to shut down, leading to job losses and reduced economic activity. This trend is particularly concerning given that SMEs are crucial for employment and economic diversification.

Stifling entrepreneurship

The discouraging tax environment also hampers entrepreneurship. High taxes and complex regulations deter potential entrepreneurs from starting new ventures. 

This stifles innovation and limits the creation of new businesses, which are essential for economic dynamism and competitiveness.

Aspiring entrepreneurs may opt to operate informally, further reducing the tax base and perpetuating a cycle of underdevelopment.

Reduced foreign investment

Foreign investors, who play a critical role in Ghana's economic growth, are also deterred by the high tax burden.

Attractive investment destinations typically offer favourable tax regimes, and Ghana's current tax structure puts it at a competitive disadvantage.

Reduced foreign investment means fewer job opportunities, limited technology transfer, and slower economic progress.

Way forward

Addressing the tax-related challenges facing businesses in Ghana requires a multifaceted approach.

Taxr reforms

Comprehensive tax reforms are essential to create a more business-friendly environment.

This includes lowering tax rates to competitive levels, simplifying tax administration processes, and eliminating redundant levies.

A streamlined and transparent tax system will reduce compliance costs, encourage voluntary tax compliance, and foster a conducive environment for business growth.

Supporting SMEs

Specific measures to support SMEs should be prioritised. This could involve providing tax incentives for small businesses, reducing the tax burden on start-ups, and offering technical assistance to help SMEs navigate the tax system. 

By nurturing SMEs, Ghana can stimulate job creation and economic resilience.

Encouraging formalisation

Encouraging businesses to formalise their operations is crucial for broadening the tax base and ensuring sustainable revenue generation.

This can be achieved through incentives such as tax holidays for new businesses, simplified registration processes, and access to finance for formalised enterprises.

A larger formal sector will enhance tax collection efficiency and reduce reliance on a narrow tax base.

Dialogue and collaboration

Finally, fostering dialogue and collaboration between the government, private sector, and civil society is essential.

Engaging stakeholders in the design and implementation of tax policies will ensure that the needs and concerns of businesses are adequately addressed.

This collaborative approach will build trust and create a more stable and predictable business environment.

Conclusion

The high tax burden in Ghana is a significant impediment to business growth and economic development. 

Addressing this challenge requires bold and comprehensive tax reforms, targeted support for SMEs, and a collaborative approach to policy-making.

By creating a more favourable tax environment, Ghana can unlock the potential of its businesses, stimulate economic growth, and improve the well-being of its citizens.