Cedi woes may erode tax gains - PwC report

The depreciation of the local currency against major trading currencies, particularly the US dollar, may erode gains to be made by the proposed abolishing of the 1% Special Import Levy on specified goods and duties on spare parts, a PwC analysis of the 2017 budget has shown.

The Finance Minister, Ken Ofori-Atta, presenting government’s 2017 budget and economic policy to the 275-member Parliament, announced proposals to abolish duty on the importation of spare parts and a host of other ”nuisance taxes” to spur growth.

However, a wobbly local currency that has lost more than 5 percent of its value (year-to-date), which is more than double the 2.1 percent recorded within the same period last year, threatens to erode any gains businesses may make if the budget and the requisite Legislative Instrument are passed by Parliament.

Vish Ashiagbor, Country Senior Partner, PwC Ghana said: “As part of our commitment to reenergize the private sector, Government has decided to review these taxes to provide relief for businesses. The one measure that has already sparked debate is the elimination of duty imposed on spare parts imports. Our view is that, while dismantling this duty could lead to a lowering of operational cost and an abatement of cash flow pressures, spare parts dealers would benefit more from a stabilized Ghana Cedi.

This is because their costs are foreign currency denominated, while their sales are in local currency. It is our view, therefore, that the Government must act quickly, through its fiscal

management, to restore the confidence of the market and help stabilise the Ghana Cedi. Failing to achieve stability in the currency value could mean that the removal of import duties would do

little to improve the lot of spare parts dealers. Indeed, most businesses will continue to hurt, if the Ghana Cedi continues to slide at the current rate.”

An amount of Gh?49million was mooted by officials of the Finance Ministry, at a post-budget briefing with journalists, as the amount government stands to lose as a result of the tax cut on the importation of spare parts. But the multiplier effect of the tax cut, Mr. Ofori-Atta argues, will offset any loses and lead to additional revenue gains.

In order to bring in a large number of informal sector businesses into the tax net, government has announced plans to re-launch the national identification scheme and implement a national digital address system. The project seeks to improve taxpayer identification and capture the untaxed sector.

The PwC analysis notes that: “We expect other initiatives, such as the proposed National Identification Programme and National Digital Address System, to help establish a good foundation for building a business-friendly environment, one that lends itself to achieving improved tax compliance.

A major complaint of the financial services/ banking industry and foreign investors who seek local partners has been the absence of a reliable address system that allows them to track persons and organisations that do business with them. This has been cited among the reasons for high payment default rates. Indeed, some banks have admitted that their expectations of elevated default rates cause them to price interest rates on their loan facilities high.”

The Central Bank reports that average lending to individuals and businesses peaked at 32percent per annum by November, 2016, with Non-Bank Financial Institutions, especially microfinance companies, lending at rates as high as 100percent per annum.

Non-Performing Loans (NPLs), on the other hand, peaked at 19.3percent in May 2016, before dropping to 17.4percent in December, 2016. The National Identification Programme and National Digital Address System, according to the PwC report, are the key initiatives to tackle the phenomenon.

“We envisage that, with a functioning digital address system in place, a plethora of innovative technology-enabled services could be deployed across different economic segments, leading to enterprise and job creation, especially by the youth. Indeed, these two policy initiatives are fundamental to our socio-economic development and should be executed to an appropriate level of detail over the medium term, if it cannot be completed in the short term,” the report said.