Broadening Ghana's tax base and improving the lending environment

A 2016 report released by the Ghana Statistical Service estimated that businesses in the informal sector make up 62% of all commercial enterprises. Although self-employed persons are required to pay income tax, the Ghana Revenue Authority (GRA) only has 200,000 informal workers registered in its files. With limited demographic records and the absence of a formal nationwide address system, it can be challenging for officials to keep track of those who neglect to pay taxes or make loan repayments. To combat these issues, in 2017 the government launched two schemes with the goals of broadening the tax base, improving the loan environment and formalising the economy.

Identity Politics

In November 2017 President Nana Akufo-Addo unveiled the country’s new national identification programme, dubbed the Ghana Card. Where previously Ghanaians were required to carry separate IDs for a number of government agencies, the new biometric card provides a single option linked to a database of institutions, including the police, the National Health Insurance Scheme, passport office, immigration, courts, the GRA, and the Driver and Vehicle Licensing Authority. Each card has a biometric chip that stores fingerprint and iris data, and is capable running multiple applications from different agencies.

Rollout of the ID cards – which have a 10-year lifespan – is set to begin in January 2018 and has been coupled with the launch of a $2.5m Digital Address System developed by local technology firm Vokacom. The app allows users to generate their own address with geocoding technology, reducing the need to navigate by reference points. As well as allowing for easier delivery of documents and parcels, the ability to identify an abode should reduce the risks associated with lending and, in turn, help bring down interest rates.

Together, the two initiatives also help the GRA identify taxpayers. “Once the national identification system is in place, it will be easier to identify those in the informal sector,” Alhassan Iddrisu, director of the Economic Research and Forecasting Division of the Ministry of Finance, told OBG. “When combined with the national Digital Address System – which identifies properties and fiscal assets – we’ll be able to know who the assets’ owners are and if they are paying taxes.”

A Formal Future

The system has gathered favourable assessments from local and international organisations. “In addition to providing benefits to the taxation system, the national identification programme improves access to finance at cheaper rates,” Natalia Koliadina, resident representative of the IMF in Ghana, told OBG. “It also shifts resources from the informal sector to the formal sector, creating job opportunities and improving productivity,” she added.

For Ghana’s many microfinance institutions, recovering loans has historically been fraught with challenges, including locating the borrower. “Often when we enter a community, we have to draw up a map of the streets and individual houses in order to identify the loan recipient,” Sheila Azuntaba, CEO of Innovative Microfinance, told OBG. “However, it’s not uncommon for them to simply move out before it’s time to repay.”

It can also help to smooth utilities provision. “One of the causes of blackouts and water shortages is the unregulated construction of houses,” Newman Kwadwo Kusi, executive director of the Institute for Fiscal Studies, told OBG. “The ID system could compliment existing property information to properly identify legal buildings and their owners.” Mortgage lending could also benefit from greater formalisation of the property market, bringing down rates.

Looking Ahead

The national identification card and the Digital Address System are examples of the government’s focus on pro-business policy mandates. For a relatively modest upfront investment, these initiatives offer a beneficial scenario for citizens, the private sector and the government. As the system is rolled out over the course of 2018, the measure of these benefits should become increasingly apparent.