Menace of Tax Evation

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In an attempt to reduce the complexity of the tax system and to broaden the tax net in order to enhance efficiency, capture the informal sector, discourage tax evasion and generate sufficient revenue, Ghana’s tax system has undergone several structural reforms since the past three decades (Annan, Bekoe and Nketiah-Amponsah, 2010). For example in December 2009, the three tax revenue agencies, the Customs, Excise and Preventive Service (CEPS), the Internal Revenue Service (IRS), the Value Added Tax Service (VATS) and the Revenue Agencies Governing Board (RAGB) Secretariat were merged in accordance with Ghana Revenue Authority Act 2009, Act 791. The Ghana Revenue Authority (GRA) thus replaces the revenue agencies in the administration of taxes and customs duties in the country. The establishment of the GRA is a culmination of years of plans to streamline the administration of tax collection in Ghana which began in 1986 when CEPS and IRS were taken out of the Civil Service and made semi- autonomous and self-accounting public sector institutions with separate boards.

In addition, the GRA as part of its restructuring programme launched a new tax policy document to give tax payers the opportunity to compute and submit their own tax returns towards maximising revenue. The document dubbed: ‘Self Assessment Policy’, is also geared towards improving administrative services, reduce compliance burden and cost, facilitating business investment as well as improvement in the integrity in the tax regime (www.gra.gov.gh). During the restructuring period, new structures were created, new problems have cropped up, new responsibilities have been defined and relocated, and new management strategies have been introduced.

However, in spite of the several fiscal reforms implemented there exists a vast gap between tax payments required by law and those actually collected and surrendered to the country. This is attributed to a large informal sector that is not completely captured on to the tax net. Hence the presence of a large informal sector implies activities which are liable to tax payments are hidden from the tax authorities and the related tax revenues are not collected (Abdallah, 2006). The informal sector is beset with the evasion of tax such as deliberate under-casting of figures, substandard recording methods, etc, which creates a challenge for tax administrators to identify the exact amount to be paid by an individual or business entity (Boateng et al., 2012).

In Ghana, the informal sector and the self-employed account for over 80% of the total employment (GLSS5, 2010). Thus, developing the appropriate tax system that will effectively capture the informal sector is always challenging. Tax evasion has hence reduced Ghana’s revenue thereby decreasing public services that citizens receive. It has also caused distortions in the economy which influence policy makers to make misinformed decisions (Atuguba, 2006). As noted by Abdallah (2006), one of the key factors identified as contributing to the difficulty in taxing the informal sector is the low standard of record keeping. In most developing countries including Ghana, the self-employed lack proper record keeping which makes it difficult if not impossible for any proper assessment of income to be determined by the tax authorities (Adibura, 2011). In addition, governments lack the necessary political will to enforce tax laws for fear of losing popularity. In view of the above challenges, this study aims to elaborate on the menace of tax evasion in Ghana and recommends strategies to reduce the over reliance on donor partners in funding key government activities.

1.3 Objectives of the Study

This study discusses the menace of tax evasion in Ghana. To address the main objective of the study, the following specific objectives will be addressed:

- To examine the effect of tax evasion on the Ghanaian economy;

- To examine the determinants of tax evasion by Micro, Small and Medium Scale Enterprise (MSMEs) in Ghana;

- To identify challenges with mobilization of tax revenue from MSMEs in Ghana and

- To recommend strategies geared towards the reduction and management of the menace of tax evasion in Ghana.

1.4 Research Questions

In line with the research objections, the following research questions are presented below:

- What is the various effect of tax evasion on the Ghanaian economy?

- What are the determinants of tax evasion by MSMEs in Ghana?

- Are SMEs aware of their tax obligations to Ghana Revenue Authority?

- What are the challenges with mobilization of tax revenue from MSMEs in Ghana?

- What strategies if when implemented will result in the reduction and management of the menace of tax evasion in Ghana?

1.5 Significance of the Study

Since most workers in Ghana operate MSMEs, tax policy reforms geared towards this group would go a long way to improve revenue needed by government of Ghana to sustain the economy. In addition, the recognition of the fact that most of Ghana’s labour-force is found in the MSME sector, their contribution to tax revenue is crucial in raising the essential revenue needed by government to spend on public goods and services for the benefit of the populace. Also, challenges faced by GRA and MSMEs in tax administration and compliance would be identified and possible remedies sought.

The results of this study will reveal the factors responsible for continuous tax evasion in Ghana years after structuring and restructuring the tax system. The study will help to identify challenges related to tax evasion that prevents higher tax targets from being achieved and possible solutions recommended to curtail it to the barest minimum. Recommendations from the study will also assist GRA in their quest to reduce wastage and plug leakages in the administration of tax to increase revenue mobilization (www.gra.gov.gh). In addition, policy makers would have the advantage of improving on strategies and laws for administering tax on the informal sector in Ghana from the findings and conclusions drawn out from the research.

Furthermore, the study is intended to add to the body of knowledge on tax administration in Ghana and seek to provide an insight into the challenges of tax revenue mobilization, tax evasion and how they can be tackled to improve government revenue. Lastly, this study