New survey reveals high tax burden on Ghana’s formal businesses

A new survey of

firms in Ghana shows that the tax burden and levels of compliance are disproportionately higher among formal businesses than informal ones. Formal businesses also consider the tax system to be unfair to a greater extent than informal ones. These inequities reflect broader challenges across African economies, where informality dominates. To encourage investment and job creation,
the government must build more transparent and fair
tax systems that foster trust.

Jörgen Levin and Emmanuel Orkoh, Nordic Africa Institute

African governments face significant challenges in raising tax revenue to fund development. Although tax performance varies widely across the continent, the median ratio of tax to gross domestic product (GDP) in sub-Saharan Africa stands at just 13 percent, compared with 18 percent in other emerging and developing economies, and 27 percent in developed economies. In the current context, where development financing is encountering new obstacles, such as volatile and declining aid flows, and tightening global credit conditions, pressure is growing on governments to strengthen domestic revenue, particularly through taxation.

In response, and with support from development partners, many African governments have set ambitious revenue targets. However, progress has been slow. Over the past two decades, the average annual increase in Africa’s tax-to-GDP ratio has been only 0.1 percentage points, well below the commonly held target of 0.5 percentage points. To accelerate gains, many African countries are adopting medium-term revenue strategies (MTRS), which encompass a wide range of tax reforms and ambitious revenue targets. For instance, Kenya and Ghana have set targets in their MTRS to increase their tax-to-GDP ratios by 1.5 percentage points annually – nine and six times higher, respectively, than their historic performance.

Such ambitious targets are unlikely to be met and may even prove counterproductive. Unrealistic revenue goals can incentivise coercive tax enforcement and weaken core taxation principles such as efficiency, equity and sustainability, eroding public trust in tax systems and undermining long-term revenue potential. Revenue targets must be realistic External link, opens in new window., grounded in historic performance, and align with broader governance objectives such as public service delivery, accountability, transparency and equity. For instance, public protests in Ghana and Kenya, driven by heavy tax burdens and inadequate public services, have made it harder to introduce new taxes. Ultimately, sustainable domestic revenue growth requires both inclusive economic growth and tax authorities with the capacity to exploit the tax base effectively.

A holistic view of taxation

A key reason for the weak tax performance of many African countries is the structure of their economies, which are dominated by so-called “hard-to-tax” sectors External link, opens in new window. such as agriculture and small-scale enterprises. These sectors often generate low incomes, limiting their tax potential. Consequently, tax revenues are often concentrated among a narrow base of formal businesses and their employees, where taxes are typically withheld (deducted) at source through third-party reporting by employers.

Third-party reporting External link, opens in new window., whereby for instance employers submit employees’ income tax payments directly to tax authorities, is one of the most impactful innovations in tax administration. It reduces the administrative workload and increases revenue collection. However, implementing such systems is a major challenge in many African countries. In Senegal, for instance, adult residents are subject to an annual personal income tax, with progressive rates ranging from 20 percent to 43 percent. Despite this, only 3.1 percent of the adult population, excluding civil servants, actually pay income tax, either directly or through withholding. This severely limits both the progressiveness of the tax system and the revenue potential.

Although the increased use of digital platforms has improved taxpayer registration, income tax systems still largely rely on self-reporting. This makes it difficult to identify who is liable to pay taxes and who is exempt. Furthermore, although statutory income tax rates are designed to be progressive, enforcement gaps mean the actual burden is often unevenly distributed. High-income earners have more opportunities to avoid – or evade – paying taxes, while many small businesses face disproportionately high effective tax rates.

Simplified tax regimes and thresholds

Small business activities constitute a major source of income for many households across sub-Saharan Africa. Despite their economic importance, revenue authorities have faced persistent challenges in effectively taxing them. To address this, many governments have introduced simplified tax regimes (STRs) aimed at registering large numbers of small enterprises. STRs have been adopted in 31 of 48 sub-Saharan African countries to ease tax compliance for small businesses. While aimed at simplifying procedures, boosting revenue and promoting equity, their design and implementation vary widely across the region.

A recent review External link, opens in new window. of tax systems affecting small firms in 31 African countries found that 60 percent of them do not apply a minimum turnover threshold for taxation. This means businesses are liable for taxation as soon as they generate revenue, regardless of scale. Among the countries that apply a minimum threshold, there is wide variation. For instance, Cameroon, Eswatini and South Africa have relatively high entry thresholds, requiring an annual turnover of over USD 15,000 before tax obligations apply. In contrast, countries such as the Central African Republic, Ghana, Malawi, Rwanda, Tanzania and Uganda set much lower thresholds, typically between USD 1,500 and USD 3,000.

The concept of a simplified tax system, based on turnover or other easily observable characteristics of a firm (such as location, floor-space, etc.), aims to make compliance easier compared to more complex corporate or personal income tax frameworks. However, it also creates opportunities for a “fluid” tax system, where both tax authorities and taxpayers may exercise a certain degree of discretion. For instance, in Ghana, officials from the Ghana Revenue Authority (GRA) often visit businesses to collect taxes, even if they are not formally registered. As a result, it is likely these taxes are not reflected in official tax revenue statistics.

Higher tax burdens for formal firms

The tax burden for SMEs in Ghana varies considerably across sectors and types of firms. This finding is based on a survey conducted by NAI researchers in November and December 2024, involving 600 firms in the Greater Accra and Ashanti regions. The tax burden was calculated as the ratio of reported tax payments to income.

Our preliminary findings reveal that the average tax burden tends to be higher for firms in the services sector compared to those in the manufacturing sector. Additionally, formal firms bear a higher tax burden than their semi-formal and informal counterparts. Within the manufacturing sector, the tax burden is disproportionately heavier for small formal firms than for micro- and medium-to-large enterprises. Similarly, in the services sector, micro- and small firms face a relatively higher tax burden compared to medium-to-large firms.

A high tax burden can have a detrimental effect on other key development objectives, such as job creation, by limiting funds available for investment. Furthermore, uneven tax treatment among similar firms, such as those of comparable size, can erode the sense of fairness and weaken the willingness to comply with tax obligations. In essence, this risks undermining the fiscal social contract.

Our survey also included questions about firms’ perception of tax system fairness and their willingness to pay tax. Consistent with the tax burden indicators, Ghanaian firms generally view the tax system as inequitable. On a scale ranging from 0 (completely unfair) to 100 (completely fair), the tax system’s average perceived fairness score is 51 percent. Perceived fairness is higher among formal (52 percent) and semi-formal (53 percent) firms compared to informal firms (45 percent). Variations based on firm size are minimal. Additionally, manufacturing firms report a higher perceived fairness score (56 percent) than firms in the service sector (51 percent).

Despite the relatively low perception of fairness, firms exhibit a comparatively strong commitment to tax compliance, with an average compliance rate of 66 percent. Micro- and medium-to-large firms show a higher willingness to pay taxes (68 percent) compared to small firms, which report an average willingness score of 63 percent. It is also higher among formal and semi-formal firms (69 percent) than informal firms (51 percent). This pattern is further substantiated by a correlation analysis of tax burden, fairness of the tax system and firms’ willingness to pay taxes. Specifically, the fairness of the tax system negatively correlates with tax burden indicators, yet positively correlates with willingness to pay taxes. These findings underscore the importance of transparency and accountability in tax administration. Furthermore, they highlight the need to broaden the tax base to ensure fair distribution of the tax burden among enterprises.

Lessons learned from the emissions levy

In February 2024, Ghana’s parliament introduced a new levy on carbon dioxide equivalent emissions, with taxes targeting motor vehicles and firms in specific sectors such as construction, manufacturing, mining, oil and gas, electricity and heating. Our survey reveals markedly low compliance and acceptance by firms of the new emissions levy. The overall compliance rate among the sampled firms was only 15 percent, with higher rates observed among medium-to-large firms (27 percent) compared to small (17 percent) and micro (4 percent) enterprises. Compliance rates were 18 percent for formal firms, 13 percent for semi-formal firms, and only 5 percent for informal firms. With nearly 60 percent of firms rejecting the levy, the acceptance rate was just 11 percent, while a quarter of firms were neutral.
In April 2025, newly elected President John Dramani Mahama removed the emissions levy as part of measures to streamline the tax system, support business activities and enhance tax compliance. One lesson to be learned from the short-lived levy is that the introduction of new taxes erodes businesses’ willingness to comply with them. The risk of reduced willingness to pay tax increases when reporting and payment routines are complex, as was the case with the emissions levy, which required businesses to install systems to accurately measure and report greenhouse gas emissions, placing a significant burden on them as taxpayers.

These findings suggests that the introduction of an emissions tax should involve reforming existing taxes rather than adding new ones. Many African countries currently apply excise taxes on fuel that generate revenue but do little to incentivise economy-wide emissions reductions. Replacing these taxes with an emissions-based tax could broaden coverage to include other carbon-intensive activities, such as air conditioning. To enhance public acceptance, carbon taxes should be part of revenue-neutral reforms that do not increase the overall tax burden. One approach could be to reduce taxes on formal businesses, thereby lowering the incentive to operate informally.

Finally, the Ghanaian emissions levy appears to have been unnecessarily complicated for both administration and compliance. Vehicle owners were required to pay the tax during their annual roadworthiness inspection, with the Driver and Vehicle Licensing Authority responsible for remitting the funds to the Ministry of Finance. A more efficient approach to carbon taxation could involve taxing emissions at source, specifically targeting fossil fuel producers or a select group of authorised importers and distributors of energy products. Tracking a limited number of firms is far simpler than monitoring millions of vehicle owners. While emissions taxes may not generate substantial revenue in many African countries at present, they still play a critical role in supporting a green transition. More importantly, they serve as a clear demonstration of the government's commitment to reducing greenhouse gas emissions and addressing climate change. Such taxes can provide incentives for creating economic value and livelihoods within the domestic economy, while also contributing to global decarbonisation efforts.

Policy recommendations

• Quick-fix solutions are unlikely to lead to meaningful improvements in tax revenue performance, which must be closely aligned with broader economic development. Efforts to enhance taxation and build the capacity of revenue authorities will only yield substantial revenue gains if supported by sustained high economic growth. Setting overly ambitious revenue targets risks driving further informalisation of the economy, ultimately undermining future revenue collection.
• The discretionary nature of Ghana’s tax system creates inconsistencies, particularly in collecting taxes from informal firms. Informal businesses, despite their unregistered status, still pay taxes to municipal authorities or directly to GRA officials. This unregulated tax collection undermines transparency, encourages corruption and distorts tax equity. The GRA should work towards creating a more structured and predictable tax framework, reducing informal and discretionary practices.
• Formal firms face a disproportionately higher tax burden than informal firms, discouraging formalisation and fostering perceptions of unfairness. Small firms in the manufacturing sector have a high tax burden, despite their potential role to grow and absorb a growing labour force. The GRA must ensure a more balanced tax structure, with progressive enforcement and equitable burden sharing to improve compliance and business sustainability.
• Instead of introducing new levies, the GRA could replace existing taxes – such as fuel excise duties – with a carbon tax. To boost acceptance and compliance, these changes must be revenue-neutral, with any new environmental taxes offset by lower taxes on formal businesses. This will reduce the incentive to operate informally, ease the tax burden, and strengthen Ghana’s climate commitments.
• GRA should also shift carbon taxation upstream by targeting a small number of fuel producers and licensed importers, rather than millions of end-users. This approach streamlines administration, lowers compliance costs, and ensures greater transparency. Simpler, source-based systems are more effective, easier to enforce, and more likely to gain public and business support while advancing both fiscal and environmental goals.