Among informal business owners in Ghana, there is a widespread sense that taxes are arbitrary and unfair. When tax systems are seemingly random people lose their trust in public institutions which may lead to tax evasion, according to NAI researcher Emmanuel Orkoh.

Operating in the informal sector in Ghana, as in many other places, does not mean being exempt from having to pay tax. Informal businesses, though typically outside the formal tax net, often report paying taxes to municipal authorities—and in some cases, to officials from the Ghana Revenue Authority. In many cases, tax collectors conduct field visits to small shops and other informal firms.

“The tax officers basically look on the shelves in a shop and by counting the products on display they estimate the turnover and how much tax the owner should pay”, NAI researcher and development economist Emmanuel Orkoh explains.

Therefore, amounts paid vary based on location, business size, and sales. It is a random system, both in terms of who is subject to taxation and the level of tax they pay. While it's unclear whether these payments are included in official tax revenue, some compliant businesses believe they are unfairly burdened, according to Orkoh.

“When the system is arbitrary and random, it opens up a negotiation between tax officer and tax payer. This can easily lead to corruption. And in the long run, it risks eroding the social contract in society. This may incentivize tax avoidance and underreporting”, Orkoh points out.

But taxes in the formal sector have also created a perception of overload among people in Ghana. A recent survey carried out by Orkoh and NAI researcher Jörgen Levin shows that tax burden is high and not equal for firms of the same size.

Public dissatisfaction with taxes has become a political issue in Ghana, and likely to have been one of the reasons behind the opposition’s victory in the elections in December 2024.

The new government has already removed several taxes as part of its campaign promise to improve the business environment and ease the burden on households. These include a 10% withholding tax on betting and gaming winnings, a 1.5% tax on unprocessed gold from small-scale miners, and the carbon emissions levy. In addition, the new administration abolished the highly contested 1% Electronic Transfer Levy on transfers exceeding GHS 100 per day, which had been introduced in 2024 by the previous government. However, the government has introduced a new fuel tax , but its implementation has been postponed due to potential ripple effects of the Israel-Iran conflict on global fuel prices.

“Many view this as dishonest. Because first the government takes public praise for removing taxes, but later they sneak in a new one through the back door. Taxes on energy and fuel are, in addition, extra sensitive in Ghana as they put a big burden on poor households”, Orkoh remarks.

He argues that the government needs to harmonise taxation by merging several minor taxes. Currently, taxpayers may have to deal with up to 16 different taxes and levies.

“Simplifying compliance is key – it must be easy to do the right thing. For instance, the green emission tax was almost impossible for people to understand”, Orkoh says.

According to Orkoh, another way to improve taxation is by leveraging digital technology—specifically, by encouraging and building taxpayers' capacity to file their taxes electronically. Online platforms and mobile apps can facilitate revenue reporting, and thereby reduce the need to collect taxes in person – and the risk of bribery. In particular, the farming sector would gain from using digital systems.

“An online platform could connect buyers and sellers, and would make it easy for the farmer to disclose sales to the tax authority. Currently, farmers don’t pay official taxes. However, indirectly they do because middlemen include their market levy in the price when buying produce”, Orkoh says.

Increasing the share of the population operating in the formal economy is crucial to growing the number of people who pay taxes. One way to achieve this is actually to reduce taxation, according to Levin.

“Research shows that lower tax levels have contributed to informal businesses registering and becoming formal. It leads to a more reliable system, both for businesses and tax collecting authorities”, Levin says.

However, Levin adds, more important than tax revenues is a country’s economic growth because it leads to more production and more jobs, which in the long run produce greater revenues than increased taxation. If the cake is bigger, the state gets a bigger part of it.

Unfortunately, it is not easy for small African firms to grow as it is often very expensive to borrow money from banks. This means companies have to use their own profits to expand.

“When high taxes eat up the profits of small and middle-sized companies, they cannot hire more people to produce more. Then economic growth doesn’t happen”, Levin concludes.

TEXT: Johan Sävström