Citi Newsroom

Terkper asks: Is Ghana’s Personal Income Tax regime turning harsh on low-income earners?

Terkper asks: Is Ghana’s Personal Income Tax regime turning harsh on low-income earners?

Introduction

The 2018 Mid-Year Review proposed an additional 35 percent top marginal rate for taxpayers under the Personal Income Tax (PIT) regime. While this has become the main attraction, we note that the Bill to amend the Income Tax Act, 2018 (Act 896) repeats an important downward adjustment in the 5 and 10 percent brackets, which took effect with the 2018 Budget itself (see Table 1). In comparison with FY2016, all brackets benefited from the traditional periodic increase.

It is necessary to note that PIT is paid by (a) employees on salaries and allowances; and by self-employed persons and partners on profits. In essence, the PIT paid is a non-corporate business tax from the perspective of these latter two taxpayers.

Table 1: Existing and proposed PIT rates and brackets

Whilst the proposed new 35 per cent top marginal rate makes the new PIT regime appear progressive—as is also the case with the 2018 Budget increase in personal exempt threshold from GH¢2,592 to Ghs3132—it is important to take note of the regressive nature of this downward adjustment for low-income persons in the 5 percent  and 10 percent brackets. In general, the repetition will be regressive for low-income persons in the 5 and 10 percent bands, who are experiencing the effect of the reduction of the income subject to in those two bands—from GH¢1,296 to GH¢840 and from GH¢1,812 to GH¢1,200 respectively.

Ironically, the bands for the 17.5 percent and 25 percent in the 2018 Budgets are increased (from GH¢33,180 to GH¢33,720 and from GH¢28,850 to GH¢81,108 respectively). This will further worsen the regressivity of the overall tax regime since the taxpayers in these two categories are likely to be middle-income and high-income earners.

Tax burden on sample of incomes

Table 2 uses a sample of incomes to calculate the tax burden under the existing PIT regime. It shows the PIT payable under the existing regime for each band for the sample income levels. The Effective Tax Rate (ETR) is calculated by dividing the total tax paid by the total annual income earned.

 

Table 2: PIT payable in FY2017

We now perform the same calculations in Table 3 for FY2018 under the Original Budget as well as proposals in the Mid-Year Review and the Amendment Bill.

Table 3: PIT payable under 2018 Original and Mid-Year Budgets

Comparison of FY2017 and FY2018 regimes

Table 4 compares the tax payable and effective duty rates for the more progressive FY2017 and new PIT regimes in the Original and Mid-Year Review Budgets.

Table 4: Comparison of existing and new proposals

Some selected Issues

 

  • Progressivity and redistribution: Our PIT regime is losing its redistribution effect—which has always been a key element of our social intervention agenda for low-income persons. This is a key economic principle for even market economies, where low-income-earners get reasonably high personal exemptions and wider incomes in lower brackets. In Ghana, we have sought to achieve this by setting a goal of exempting the minimum wage from tax, by equating it to the personal exemption limit.

 

 

  • Bracket or band size: A similar redistribution goal underlies the five percent and 10 percent bracket. Hence, the reduction in the 2018 Original and Mid-Year proposals, rather than ensuring an upward adjustment of the bracket (as with the zero bracket), seriously goes against that rule. The main effect of a reduction, unreasonable band-size, and lack of frequent upward adjustment is “bracket creep”—where the low amount in a lower bracket result in critical incomes being pushed into the higher bracket (i.e., the fourth 17.5 percent).

 

In the current Mid-Year proposals, low-income earnings are being forced instantly into a burdensome higher bracket: that is GH¢1,296 less GH¢840 equal to GH¢456 is moved from the five percent to the 10 percent bracket. It is also shown in the increase in effective rate for ghc10,000 (i.e., 0.08 percent) being higher than that of ghc25,000 (i.e., 0.03 percent)  

 

  • Equalising CIT and PIT marginal rates: As noted earlier, the PIT for self-employed persons and partners is a business tax. Hence, from the 1990s, Ghana set a deliberate goal of equating the top marginal PIT rate with the Corporate Income Tax (CIT) to prevent the shifting of the tax base. Hence, for a long time, this was achieved at 25 percent.

 

As a business tax, the 35 percent rate may be high for sole proprietors and partnerships, thus making their entities non-competitive. This could result in reclassification of personal benefits as business costs (and deductible) to reduce profit. Examples include fuel as business expenses and registration of luxury cars in the name of business entities.

 

  • Middle-class burden: Another phenomenon that GRA was charged to correct is sharp increase in income from about 1,800 (or lower at 1,200) to about GH¢38,000. This may have huge revenue benefits—subject to evasion and avoidance—but constitutes a huge burden for the middle-class. A very large amount of their incomes are catapulted into a higher 17.5 percent (previously 15 percent) bracket and higher effective rate.

 

Conclusion

These are not exhaustive discussions of our tax policy but we appear to be driven by revenue considerations at the expense of the efficiency and equity principles or rules. While this is not new, we should not worsen it with contemporary decisions. This could affect productivity, tax evasion or avoidance, and competitiveness of the economy.

As we noted, under the 2018 proposals, the only low-income category that benefits from a low tax impact are those who earn incomes below the PIT exempt threshold, a level of income that does not attract any tax rate.

The steepest increase in effective tax rate (ETR) hits taxpayers within the existing 25 percent and the new 35 percent categories. Clearly, a case can be made for a review of rates, possibly in the 2019 Budget, to remove the regressivity associated with the annual low incomes within the 5 percent and 10 percent income categories.

By: Seth Terkper

The writer is a Former Minister of Finance

 

Source: citifmonline.com

Original Story on: Citi Newsroom
Scroll to Top