CHAPTER ONE

INTRODUCTION
1.0 Background
In many ways the raising of tax revenue is the most central activity of any government. Most
fundamentally, revenue from taxation is what literally sustains the existence of the state,
providing the funding of everything from social programmes to infrastructural investment.
In the words of Richard Bird the tax system constitutes one of the most important instruments
of development policy in any country (Bird 1992, pg 6). Setting up an efficient and fair tax
system however is far from simple, particularly developing countries that want to be integrated
in the international economy. The ideal tax system of these countries should raise excessive
revenue without government borrowing and should do so without discouraging economic
activity. Revenue should therefore be adequate to finance basic services such as security,
education, health and permit the government to help finance public investments.
Funds for government expenditure come from others; taxes, domestic and foreign borrowing,
investment incomes, grants et cetera. Among all these sources of government revenue, the
government receives the bulk of its revenue from taxation. In Ghana total tax revenue is 22.36%
of Gross Domestic Product (ISSER, 2009).
In years gone by, the Ghanaian tax system has been in deep crises. The government therefore
relied on heavy exactions from the agricultural sector and the cocoa producers particularly
through pricing policy in order to raise enough revenue to maintain the most basic functions of
1

government (Osei, 2006). However, there has been a dramatic reversal of this trend and now
between the years 2004 and 2009 tax revenue averaged greater than 20% of Gross Domestic
Product.
Bold changes in Ghanas tax administration have played a key role in improving the countrys
revenue mobilization and overall fiscal health. Policies such as the provision of enhanced
operational administrative and financial autonomy for revenue collection institution as well as
the introduction of more stringent performance monitoring and supervision has all contributed to
this feat.
Despite the dramatic improvement in tax collections and the success of Ghanas tax revenue
there is little doubt that tax remains subject to very large leakages. There are still concerns about
tax avoidance and evasion by large firms as well as the inability to tax effectively the informal
sector. Tax administration in the country has also not been the best and there appears to be a
substantial tax gap between the tax that is theoretically collectable from economically active
people and the tax that is actually collected. The Internal Revenue Service (IRS) in recent times
has been exceeding their targets. The Internal Revenue Service (IRS) exceeded their target of
7.2 trillion in 2006 and exceeded another target of 8.8 trillion in 2007. Ghana Statistical
Service, 2006 however stated that it could be that there is underestimation of the Internal
Revenue Service (IRS) target or there is efficient tax administration in recent times.
One sector in Ghana which has a great potential for necessary domestic revenue mobilization
and to reduce huge budget deficits is the informal sector. A large number of the countrys active
labor force is employed in the informal sector and accordingly generates significant amount of
income that is subject to income tax. The effective and efficient imposition of income tax in the

informal sector holds a great prospect of closing the yawning gap in the domestic revenue
generation.
One defining feature of tax systems across the developing world is their inability to collect a
significant share of revenue from individuals and corporations in the formal sector. Ghana is
generally no different from this overall story with reasonable amounts of corporate and income
tax being subject to tax abuse and evasion. The potential source of abuse is the use of false
invoicing and transfer mispricing to shift profit out of the country and thus lower tax liabilities. It
was estimated that low income countries loose $22.4 billion in tax revenue annually through
false invoicing and transfer mispricing which are comparable to the total amount of foreign aid
received by these countries (Christian Aid, 2008).
The tax system is often identified as one of the most powerful levers available to governments to
make their economies grow from the present deplorable state to a distinctly happier state
(Newbury and Sterri, 1987). There is therefore the need to ensure an effective and efficient
revenue administration to enable the government achieves greater financial reliance and
facilitating the pursuit of growth-oriented programmes and the provision of infrastructure for
economic growth.

1.1 Statement of problem

Taxation has been and continues to be the main source of revenue in the economic development
of a country. It is also a major avenue to the government to enable it finance its numerous
economic and social projects. The role played by taxation in Ghana therefore cannot be
overemphasized. It is for this reason that any problem facing tax collection agencies in Ghana
3

must be researched into for lasting and concrete solutions to ensure maximum revenue
mobilization.
In Ghana, tax administration is divided among three principal agencies. These are the Internal
Revenue Service (IRS), Customs Excise and Preventive Services (CEPS) and Value Added Tax
Services (VATS). The activities of these agencies have gone through various reforms and
structural adjustments in a quest to improve revenue mobilization in Ghana. Despite the major
reforms by successive governments on tax administration, tax collection in the country has not
been the best (Terkper, 1994).
Tax revenue has not been as effective as desired. Too often, the growth in tax revenue has failed
to catch up with government spending pressures. One reason for this phenomenon is the
structural weaknesses in the Ghanaian economy that places limits on the possibilities of revenue
expansion. In particular, low level of formal employment, poverty, low wages and a high
dependence ratio means that there are strong constraints on the states ability to increase income
tax revenue.
The government of Ghana also mobilizes some of her funds from external sources. These
external sources include grants and loans from the World Bank, International Monetary Fund
(IMF) and other donor countries. These external sources introduce a dependence syndrome in
government revenue mobilization capacity.
Among the major challenges confronting the government of third world countries and their
forward march to socio-economic development is how to manage the phenomena of the fledging
informal economy and the minimization of tax evasion and tax avoidance (Prichard, 2009). Over
the years, the government has made desperate effort to effectively rope the participants into the
4

tax net but very little have been achieved in that direction. These strategies and methods include;
standard assessment (a scheme in which a fixed lump sum is levied) on individuals and
businesses; occupational (identifiable) grouping taxation and very recently tax stamp (where
informal sector participants pay tax on quarterly basis).
The named methods of taxing the informal sector are replete with insurmountable challenges
and short comings hence there remains the singular question as to how to tax the informal sector
to raise the needed revenue for national development . Huge losses in domestic revenue
mobilization have halted the countrys march to economic development. It is possible to point
four general areas of significant revenue loss. The first is a general inability to tax the large
informal sector that has recently been estimated to be 30% to 60% of total economic activity in
most developing countries. The second is the huge amount of revenue loss through tax evasion
and avoidance by individuals and corporate bodies. The third is the inability to tax professionals
who provide services which are difficult to monitor such as consultancy or legal advice. The
final issue is the difficulty of taxing capital income. This is particularly true when capital income
is held overseas as it is hugely unlikely that such income will be reported, whiles the tax
administration generally lacks the capacity to pursue such cases effectively.
The difficulty in realizing increases in domestic tax revenue is concerning because tax revenue is
one of the necessary conditions for rapid, equitable and sustainable economic growth as well as a
healthy system of public finance. Solutions to the problems of taxation are hard to find but it is
clear that there is the need to target investments in the short term in order for a long term
expansion of the tax base and hence tax revenue to be realized. The challenge therefore is to
work towards reducing the tax gap. What this means in practice is to improve taxation of the

informal sector, reducing the high incidence of tax evasion and using information technology in
support of tax administration.
It is in light of these issues raised that this research work is set out to assess the problems of tax
collection in Ghana and how the situation can be improved.

1.2 Objectives
The principal objective of this work is to assess the problems of tax collection in Ghana, with
particular reference to Kumasi Metropolis. The specific aims include the following:

To identify the administrative problems facing tax officials in the performance of their

duties.
To examine the targets set by the Internal Revenue Services (IRS) and why they deviate

from it.
To find out why individuals and corporate bodies evade tax.
To analyse the challenges of taxing the informal sector in Ghana.

1.3 Scope of study

In an attempt to identify the problems of tax collection in Ghana, this research focused on the
problems encountered by the Internal Revenue Services (IRS) in Kumasi Metropolis.
The research considered both formal and informal sectors in the Kumasi Metropolis. The
informal sector in the Kumasi metropolis reveals a wide range of operations that can be grouped
under services (traders, hairdressers, barbers and repairers) ; construction ( masons, carpenters,
steel benders, small-scale plumbers, house-wiring electricians, and carpenters) and
manufacturing (food processing, textile and garments, wood processing and metal works).
6

This has become necessary because Internal Revenue Services (IRS) is the sole agency
responsible for collecting income tax and other forms of revenue to government and therefore the
research sought to find out the problems this agency face while discharging its duties.

1.4 Methodology
This section consists of the method for data collection, presentation and analysis of the data for
the study.

1.4.1 Source of data

Data for the research comprise both primary and secondary data. Primary data was obtained
through structured interviews and the administration of questionnaires to sole proprietors, traders
among others in the Kumasi Metropolis. In addition, structured interviews and questionnaires
were also administered to departmental heads and some workers of Internal Revenue Services
(IRS). Secondary data was obtained from journals, articles, textbooks and the internet.

1.4.2 Sampling design

A total sample of 100 was used for the study due to time and financial constraint. Out of a total
number of thirteen (13) tax districts in the metropolis, the simple random sampling method was

used to select eight (8) tax districts for the research. The purposive sampling technique was used
to select staff of thirty (30) members who could answer the questionnaire.
The informal sector in the Kumasi metropolis with a total population of 3202 according to
Kumasi Metropolis Assembly as at 12 th January, 2011 reveals a wide range of operations that can
be grouped under services; construction and manufacturing. Out of these three categories thirty
(30) respondents were from the service sector, whiles twenty (20) respondents were used for both
the construction and manufacturing sectors respectively.

1.4.3 Data analysis

Statistical Packages especially Statistical Package for Social Sciences (SPSS) was employed for
the analysis of the data collected. Descriptive statistics in the form of tables and charts were used
to present and analyze the data extensively. Combinations of both qualitative and quantitative
approaches were applied in the presentation and analysis of the data.

1.5 Significance of study

The purpose of this study is to sensitize the Ghanaian government about the problems of tax
collections in the country. The relevance of this study is self evident as it is aimed at addressing
the actual issue of problems of tax collection in Ghana.
8

The main objective of any government budget is to continue the progress of fiscal consolidation
to ensure macro-economic stability. This target is achieved by improving expenditure
rationalization

and

management

while

enhancing

revenue

mobilization.

However, the country is being troubled with huge budget deficit since government revenue has
not been able to cater for the high levels of government expenditure. It has further been revealed
that Ghanas tax revenue - Gross Domestic Product ratio is among the lowest in a group of
Africans countries requiring adjustments in the existing tax rates, and or introducing new tax
rates to generate more revenue to finance our growth and development needs.
This research work will therefore identify the problem and make recommendations to the
government to ensure that there is maximum tax revenue to overcome the countrys fiscal
imbalances.
This study is also a useful source of reference to government generally and to the Internal
Revenue Service (IRS) and the Ministry of Finance and Economic Planning significantly in
policy decision concerning problems of tax collection in the country. In addition the study hopes
to help the officials of the Internal Revenue Service to reduce compliance and administrative
costs, improve tax administration, enhance audit surveillance, strengthen taxpayer education,
enhance the institutional capacity to manage tax policy and have access to an outsiders
assessment and perception of the people with regard to the problems they face as a result changes
in tax reforms and various types of taxation.

1.6 Organization of study

This study comprises five chapters. Chapter one deals with the general introduction of the study.
Chapter two reviews various literature works on the topic. Chapter three explains the design of
the method by which data and all other relevant information was collected. Chapter four delves
9

into the case study of the research and data analysis. Chapter five presents the summary of
findings, conclusions and recommendation of the study.

CHAPTER TWO

LITERATURE REVIEW
2.0 Introduction
This section reviews the various research works on the topic under study. Basically, it considers
works that have been done by researchers as well as other international, national bodies and
governments in relation to the problems of tax collections in Ghana; its contributions and adverse
impact on development of Ghana.

10

2.1 Historical background of taxation.

The Department of Customs in the Gold Coast now Ghana dates back to 1839 when a Principal
Collector of Customs was posted to the former British Colony. On 19th April 1852, the Governor
of the Gold Coast convened a general meeting of Chiefs to form the first Legislative Assembly in
the Gold Coast. The Assembly passed the Poll Tax Law which imposed a tax of one shilling
payable by every man, woman and child resident under British Protection. Thereafter, there were
series of tax reforms aimed at widening the tax base and by 1966, the Customs Ordinance of
1855 had been replaced by the Customs and Excise Tariff Act of 1966 (Act 318) for the
administration of indirect taxes.
As part of the measures aimed at expanding the tax base, the Governor of the Gold Coast tried to
introduce the payment of Income Tax in September 1931. This was fiercely resisted because the
chiefs and opinion leaders were not consulted. Besides, in their opinion, the Income and Poll Tax
were duplications. However, in August 1943, the Commissioner of Income Tax for West Africa
who was stationed in Nigeria introduced the Income Tax Bill in the Gold Coast Legislative
Council which was passed into law, Income Tax Ordinance No. 27, 1943. Assessments were
successfully raised on companies, the self-employed and high ranking Civil Servants in April
1944. In 1961, Ghana faced some economic difficulties as a result of a fall in the prices of
Ghana's exports. A study of the tax system revealed that personal reliefs on employment and selfemployed incomes were too high and therefore recommended a reduction in the levels. The
current year basis of assessment was introduced for all employees. However, companies and the
self-employed continued to be assessed on the preceding year basis. In 1983, the current year
basis of assessment was introduced for companies and the self-employed and the year of
assessment was changed from January to December to coincide with the Government Fiscal

11

Year. It was realized later that the current year basis of assessment for companies and the selfemployed resulted in delays in the finalization of assessment and therefore the accounting year
basis of assessment was introduced in 1988.

2.2 Institutional reforms

There was a major shake-up in Ghana's tax administration after launching the Structural
Adjustment Program in 1983. In 1986, the Central Revenue Department and the Customs and
Excise Department which administer direct and indirect taxes respectively were restructured and
made semi-autonomous public service organizations. The names of these organizations were
changed to the Internal Revenue Service (IRS) and the Customs, Excise and Preventive Service
(CEPS). A new ministry, National Revenue Secretariat which had cabinet status was created to
oversee the performance of the tax revenue agencies.
The main features of the structural changes were:

There was a considerable degree of independence from the Civil Service bureaucracy.
The revenue institutions reported to separate Board of Directors who formulated policies

and monitored their implementation.

Departments were created to handle specific functions such as assessment and collection,
legal, audit, finance and administration, and research, planning and monitoring. This

brought about specialization and increased efficiency.

Improved conditions of service and authority to engage labor. The levels of
remunerations were higher than those of the Civil Servants but lower than what the

private sector could offer employees with similar qualifications.

The tax institutions were supported by more effective tax laws with provisions such as
attachment and garnishment to strengthen collection.

12

Results of the institutional reforms which started in 1986 were very encouraging. From an annual
tax revenue of 33.265 billion in 1985, total tax revenue increased to 60.997 billion in 1986
(83.83%) after only six months work under the new structure. In 1992 however, the National
Revenue Secretariat was merged with the Ministry of Finance. The semi-autonomy and other
conditions that favored the tax collection agencies were systematically whittled away.
Unable to face competition from the private sector, skilled personnel were lost to the private
enterprises.

2.3.0 The Internal Revenue Service (IRS)

Income Tax Administration in Ghana started in September 1943 with the passing into law of the
Income Tax Bill on 22nd September, 1943 as the Income Tax Ordinance No.27 of 1943. Initially,
the Department collected tax from only a few limited liability companies and a very small
number of individuals. Over the years other taxes and duties were added to the income tax. These
include minerals duty which was introduced in 1952, betting tax was also introduced in the same
year. In 1995, the casino revenue tax was included as the other taxes to increase revenue base for
the country. Between 1961 and 1963, additional taxes and duties were introduced. Among these
are property tax (1961), entertainment duty tax (1962), airport tax, hotel customers tax, standard
assessment

and

excess

profits

tax,

all

in

1963.

Pay As You Earn (PAYE) was introduced with effect from l st July, 1961. In July 1963, the
13

Income Tax Department was renamed Central Revenue Department to reflect the broad scope of
taxes to be collected. All these years (1943 -1985) the Department was a civil service
department.

However, in July 1986, the Provisional National Defence Council (PNDC)

government took a decision on structural changes in the organization and legislation The
Internal Revenue Service (IRS) law 1986 (PNDCL.143) was passed. This law transformed
the hitherto Central Revenue Department into a public service organization. Prior to the
promulgation of PNDCL.143) in 1986 the government in 1985 established the National Revenue
Secretariat (NRS) with a ministerial status to supervise the Revenue Agencies. This role was
performed

with

virtual

autonomy

from

the

Ministry

of

Finance.

In 1991, the National Revenue Secretariat was relocated under the Ministry of Finance and
Economic Planning (MFEP). With the coming into force of the Constitution of the Fourth
Republic, the NRS lost its ministerial status and was placed strategically between the Sector
Ministry and the Revenue Institutions.
Further restructuring led to the promulgation of the Revenue Agencies (Governing) Board Act,
1998 (Act.558) to establish a Central governing body in place of the existing governing boards of
Internal Revenue Service (IRS), Customs Exercise and Preventive Services (CEPS) and Value
Added Tax (VAT). However, the Revenue Agencies Governing Board was constituted in the year
2001 to ensure supervision and co-ordination of the activities of the three Revenue Agencies. The
Mission Statement of the Internal Revenue service is to effectively and efficiently administer the
tax laws through a well-trained and motivated staff in order to promote voluntary compliance for
the maximization of tax revenue. The functions of the IRS includes; identifying the taxpayer,
assessing the taxpayer to tax, collecting the tax and penalties and paying all amounts collected
into the Consolidated Fund to aid in national development.
14

2.3.1 Vat service

Another major institutional reform aimed at widening the tax base was initiated in 1995. The
Government of Ghana established the Value Added Tax (VAT) Service to administer Value
Added Tax. In a manner similar to what happened when Income Tax was first introduced in
1931, the VAT was fiercely resisted and government was forced to suspend its implementation
after only three months.
Reasons for the resistance included the following:

The VAT rate of 17% was considered too harsh. For instance, the VAT was among others, to

replace the sales tax, which was at 15% and covered fewer transactions.
Public education on the new tax type was not sufficient.
Personnel of the VAT Service and persons who were to act as agents of the VAT Service
were not sufficiently trained to handle all aspects of the new tax efficiently. For example,

there was lack of uniformity in assessment to tax.

The threshold was too low (annual turnover of 25 million) and therefore persons who were

not capable of administering the VAT became vat able persons.

The introduction of the VAT worsened the already high inflation that existed by then as
prices of goods and services shot up and there were agitations from the general public.

The Value Added Tax (VAT) Service was successfully reintroduced in 1999 after the above
complaints and other precautions had been addressed.

2.4.0 Theoretical literature review

The process of state building is slow and complex but it is now increasingly recognized as the
necessary condition for effective social and economic development (Everest-Philips, 2008). An
effective state requires a social contract between a ruling elite and its population based on a
15

political settlement that allows the elite to collect tax without excessive coersion in return for
delivering basic freedoms and essential public goods (Bravtigam, Fjeldstad and Moore, 2005)
The state building approach to taxation therefore recognizes tax as one of the few core
capabilities any state needs to function. Further, the more effective the tax system, the stronger
the capability, prosperity and legitimacy of the state, (Bird, Martinez-Vasquez and Torgler, 2006).
This insight is not new. Aristotle (315BC) noted that a prosperous and politically stable society
needs a political leadership and administration founded through fair and effective tax system. In
a lecture in 1755, Adam Smith famously observed that little else was required to carry a state to
the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable
administration of justice.
This is easily said but the details of how to deliver all that result in practice remains a major
obstacle to international development.

2.4.1 What is taxation?

Taxation is the legal demand made by any level of government of the taxable citizens of that
country, to pay a compulsory levy or money on income, goods or services into the coffers of the
government for the benefits of the citizens of that country.
A tax is therefore a compulsory levy imposed by an organ of government for public purposes
(Davies, 1994). To tax is to impose financial charge or other levy upon a tax payer (an individual
or legal entity) by a state such that failure to pay is punishable by law. Money provided by
taxation is used by state to carry out many functions. Some of these include expenditures on war,

16

the enforcement of law and public order, protection of property, economic infrastructure, welfare
and public services and many more.

2.4.2 Structure of tax

The structure of taxation may vary from one framework to the other based on the government
policies and of objectives. The various types of tax are analyzed below;

2.4.3 Direct taxes

A direct tax is a tax paid directly to the government by the persons on whom it is imposed. One
defining feature of direct tax is that the tax burden cannot be shifted by the tax payer to someone
else. Examples of direct tax include income tax, corporate tax, capital gain tax, additional profit
tax and mineral royalties.

Income tax: an income tax is a tax levied on the income of individuals and businesses
(corporations or other legal entities). In this type of tax, the taxable income is arrived
after deductions have been made. The incidence of tax is on the people who bear the

direct money burden of the tax.

Corporate tax: this type of tax is levied on companies. It is calculated on their profits after

interest payments have been made.

Capital gain tax: it is tax levied on profits resulting from investments into a capital asset

such as bonds, stocks or real estate.

Mineral royalties: mineral royalty tax as tax paid to land owners or property owners for
usage of land where mining activities take place.
17

2.4.4 Indirect tax

An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who
bears the ultimate of economic burden of the tax (such as the customer). Indirect taxes are
divided into two main categories which are custom duties imposed on imported goods and
services and exercise duties imposed on locally produced goods and services. Other taxes include
sales tax, value added tax (VAT), petroleum tax among others. Indirect taxes are such that a tax
burden can be shifted or passed on other persons. The degree to which the burden of a tax is
shifted determines whether a tax is primarily direct or primarily indirect. Examples of indirect
tax include:

Customs Duties: These taxes are divided into two groups, namely import duties and
excise duties. Import duties are taxes levied on goods imported into a country while

export duties are duties on goods exported out of a country.

Vehicle importation tax: All vehicles imported into the country attract vehicle
importation tax which is payable by any person who imports a vehicle either used or

new.
Sales and Purchases tax: They are imposed on commodities irrespective of their origin.
In Ghana, sales tax has been replaced by Value Added Tax (VAT)

2.4.5 The theory of optimal taxation.

Optimal taxation theory is the study of how best to design a tax to minimize distortions and
inefficiency subject to raising set revenues through distortionary taxation. In the words of Cardes

18

(1990), theory of optimal taxation refers to a set of normative prescriptions for tax policy usually
based on maximizing social welfare for a given revenue requirement.
The theory therefore addresses such questions as; should the government use income or
commodity tax? Within commodity taxes how should tax rates vary across commodities? How
progressive should the tax system be?
Optimal tax theory encompasses a range of models that focus on particular aspects of the tax
system. These different models share three common features (Ramsey, 1999). According to
Ramsey, each model specifies a set of feasible taxes for the government such as commodity taxes
and the government revenue needs. Secondly, each model specifies how individuals and firms
respond to taxes. That is, individuals have preferences about goods and leisure; firms have a
given technology for producing goods and individuals and firms interact in a given market
structure. Thirdly, the government has an objective function for evaluating different
configurations of taxes. With optimal tax theory, the governments objective is to minimize the
excess burden generated by the tax system while raising a set amount of revenue.

2.4.6 Optimal tax theory and developing countries

What level of public spending is desirable for a developing country at a given level of national
income? Should the government spend one-tenth of national income or half of national income?
Only when these questions have been answered can the next question be addressed as to where to
set the ideal level of tax revenue. Determining the optimal tax level is conceptually equivalent to
determining the optimal level of government spending (Ramsey, 1999).

19

Developing countries face strong challenges when they attempt to establish efficient tax systems
(Tanzi, 2007). According to Tanzi, most workers in these countries are typically employed in
agriculture or in small informal enterprises. As they are seldom paid a regular, fixed wage, their
earnings fluctuate and many are paid in cash off the books. The base for an income tax is
therefore hard to calculate. As a result, modern means of raising revenue such as income taxes
and consumer taxes play a diminishing role in these economies and the possibility that
government will achieve optimal levels of tax without distortions is virtually excluded.
Secondly, it is difficult to create an efficient tax administration without a well-educated and well
trained staff. When money is lacking to pay good wages to tax officials and to compensate the
operation of revenue collection agencies, achieving optimal levels of taxation becomes a
problem. As a result, the government takes the path of least resistance, developing tax systems
that allow them to exploit whatever options available rather than establishing a rational, modern,
optional and efficient tax system.
According to Tanzi (2007), because of the informal structure of the economy in many developing
countries and because of financial limitations statistical and tax offices have difficulty in
generating reliable statistics. This lack of data prevents policy makers from assessing the
potential impact of major changes to the tax system. As a result, marginal changes are often
preferred over major structural changes. This perpetuates inefficient tax structure.
In the words of Slemrod (2002), he asserted that income tends to be unevenly distributed within
developing countries. Although raising high tax revenue in this situation ideally calls for the rich
to be tax more heavily than the poor, the economic and political power of the rich tax payers
often allows them to prevent fixed reform that would increase their tax burdens. This explains in

20

part why many developing countries have not fully exploited personal income and property taxes
as why their tax systems rarely advice satisfactory progressivity.
In conclusion, in developing countries, tax policy is often the art of possible rather than the
pursuit of the optimal. It is therefore not surprising that economic theory and especially optimal
taxation literature have had relatively little impact on the design of tax systems in these
countries.

2.4.7 Tax avoidance.

Tax avoidance is the legal utilization of the tax regime to ones own advantage to reduce the
amount of tax that is payable by means that are within the law. According to Stieglitz (1986) tax
avoidance is the process whereby an individual plans his or her finances so as to apply all
exemptions and deductions provided by tax laws to reduce taxable income.
Tax avoidance merely involves adjusting the extent to which one engages in a taxed activity in
response to the rate at which that activity is taxed (Hyman, 2002). Through tax avoidance, an
individual takes advantage of all legal opportunities to minimize his income tax, gift tax, or
estate tax. They do this by taking advantage of special provisions (sometimes called loopholes)
in the tax code that reduces tax liability.
For example, high taxes on labor income might induce workers to refuse overtime work. Also
according to Stieglitz (1986) an individual may avoid federal income tax by investing a large
sum of money in municipal bonds, since the interest on such bonds is not considered taxable

21

income on which federal tax is due. Interest on the same amount placed in a savings account
must be included as taxable income.
Tax avoidance must be distinguished from tax evasion which is the employment of unlawful
methods to avoid the payment of taxes. Tax evasion is illegal whereas tax avoidance is not.
However, tax avoidance is socially wasteful in that it results in distorted choices made on a basis
other than the marginal social cost and benefit of an economic activity. Hyman (1985)

2.4.8 Tax evasion

One of the greatest problems confronting most countries of the world is the problem of tax
evasion. There has been a silent agreement from many quarters that there is a tax gap between
the actual tax collected and potential collections. However, this seems to be a problem that every
tax system faces (Somorin, 2009). Tax evasion is the commission or omission of an act
knowingly with intent to deceive so that the tax reported by the tax payer is less than the tax
payable under the law, or a conspiracy to commit such offence (Martinez and Vasquez, 2005).
This may be accomplished by the deliberate omission of revenue, the fraudulent claiming of
expenses or allowances, and the deliberate misrepresentation, concealment or withholding of
material facts. Many theoretical and empirical studies examines the determinants of tax evasion,
however those models typically assumes a single mode of tax evasion, such as under-reporting of
income. In reality, tax payers can use multiple modes of tax evasion. (Martinez and Vasquez,
2005)

22

2.5.0 Tax evasion in Ghana

Tax evasion has been identified as one of the major problems confronting tax administration
especially in developing countries. Evasion of tax is more problematic with respect to the
informal sector compared to the formal sector. Agyei (1984) stated In Ghana one of the greatest
problems facing tax administration is that of income tax evasion.
Tax Evasion is the deliberate distortion of the facts relating to an assessment after the tax liability
has been incurred so as to reduce the liability. According to Otieku (1988) any deliberate
attempt by a tax payer, his agent or tax officer to reduce the ultimate tax liability of the tax payer
by the use of any unlawful means constitute tax evasion. It is the deliberate attempt by the tax
payer to distort facts relevant for an objective ascertainment of his liability.
The tax evasion is as a result of factors such as high illiteracy among the population, ignorance
of tax laws, dominance of difficult- to- identify sole proprietors, inadequate number of tax
offices and officers, complex tax laws among others (Otieku, 1988)
Evidence of tax evasion is difficult to obtain in any country particularly in the developing
countries since it is an illegal activity. However in developed countries more is known about tax
evasion. This is due to the fact that there is refinement of statistics and wealth of research
resources in developed countries. Tax evasion apart from resulting in loss of revenue to the
government also undermines the confidence in the fairness of the tax law.
Tax evasion may take on three forms: non-declaration of income; under declaration of income
and inflations of deductions from income (Smith, 1951).

23

2.5.1 Non declaration of income

Under the Internal Revenue Act, 2000(Act 592), every income earner is expected to furnish
return of income not later than four months after the end of a basic period of that person within
the year. this is used to determine the final tax liability of the income earner. The overwhelming
majority of the formal and informal operators do not furnish return of income annually. The non
declaration of income form of tax evasion which involves principally refusing to file tax returns
is by far the most glaring source of evasion by the informal sector. The request for the furnishing
of income tax return to the tax office is the first step in the process of establishing the true
income and determining the tax liability of the tax payer. In the words of Otieku, 1998 where
majority of tax payers fail to file these returns either out of ignorance or the deliberately, it
becomes very difficult to identify them, ascertain their income and assess them to tax. The
refusal to file return is ones means of keeping ones income outside the reach of tax authorities
and thus evades the tax theorem.

2.5.2 Under declaration of income

This form of tax evasion is where the tax payer although file returns of income but the income
stated on the return is understated. Under the Internal Revenue Act, the major source of income
has been identified as income from employment, businesses and investment. A good number of
people operating in the informal sector although earn income from three sources but may
disclose income from one or two sources resulting in under declaration of income.

24

It is however extremely difficult on the part of tax authorities to detect such under declaration as
the activities of the informal sector hidden from tax officials.

2.6.0 Empirical review

Prichard (2009) conducted a study on the topic Taxation and Development in Ghana. The data
on tax revenues for the study were derived from Economic Surveys and Statistical Abstracts,
both published by the Ministry of Finance and Economic Planning. The study revealed that the
major deficiency of the Ghanaian tax system arises from collecting individual income taxes from
the self employed and professionals and taxes on rental income and property. He remarked that
the absence of an effective Information Technology system for managing IRS taxation is an
important constraint to improving income and informal sector taxation. The study continued that
tax systems in Ghana have weak capacities as a result of; low income levels, large cash economy,
large informal sector and low level of awareness.

A study conducted by Asada (1994) attempted to examine the hydra-headed problem of tax
collection and administration in Nigerias tax system. The scope for the research was with regard
to income tax collection in the eastern and southern part of the country. Data for the research was
collected from secondary sources and notably among them was the annual report and statement
of account of the Nigerian National Customs and Revenue Authority. He remarked that the
problem with income taxation in Nigeria is the administration of the tax system bordering on tax
collection, assessment, wide-spread corruption and absence of competent administrators. He also

25

emphasized that inadequate logistics in the various States is one of the major problems affecting
revenue collection in Nigeria.

Roland-Holst and Haddad (1998) in their research on the problem of tax collection in developing
countries revealed that in poor countries with underdeveloped educative capacities, tax collection
is very low as a result of weak central and local addictive capacity. The study was conducted
using data from five developing countries. These countries are Ghana, Uganda, Ethiopia, Kenya
and Nigeria. Secondary data for the research was gathered from the World Bank and IMF
country report between the years 1992 and 1996. The research revealed that, estimated revenue
loss from tax exemption and tax evasion was very large reflecting in great part; a weak
administrative system. In addition, the absence of an accounting system for tax payers has
worsened the situation and therefore the underestimation of income is wide spread.

Prset (2001) in his book entitled the role of Direct Taxation in public finance in
underdeveloped countries stated that direct taxes such as personal income tax and capital tax
make small contribution to the total revenue in underdeveloped countries. The study covered
some selected countries in Africa, Asia and southern America. Prset conducted economic surveys
in these countries and used data from IMF and World Bank annual country reports for the
research. The study revealed that tax revenue does not meet the heavy and increasing spending
pattern of government. He said the reason for the difficulty in accessing income tax in
developing countries arises from the problem of defining, assessing and measuring of allowances

26

Toby (1983) sought to look at the major setbacks on revenue collection in developing countries.
He assessed that there is a reluctance to impose additional taxes on an already heavily burdened
and impoverished population and more often political and prominent taxpayers tend to use their
influence to evade property tax. Also, high levels of corruption in tax administration systems at
the collection and enforcement stages as well as chronic taxpayer non-compliance caused by a
lack of understanding and confidence in the tax system contributed to the lower levels of
domestic resource mobilization in developing countries.

Nielsen (2000) in his study on The taxation of income in Europe provides an explanation of
why personal income tax has not grown into a major source of revenue in Eastern European
countries. Nielson collected data from the national revenue secretariats of five selected eastern
European countries. These countries include Czech Republic, Russia, Slovakia, Poland and
Ukraine. The main reasons according to him were that a large share of national income does not
go into wages and salaries and therefore personal income tax become minimal. Also he revealed
that the high levels of personal exemptions as well as the difficulties in estimating current
compliance rates for both individuals and businesses and obtaining data on taxable purchases is a
major hindrance to revenue collection in these countries. Also the fear that higher taxes on
incomes from capital sources could lead to capital flight, especially towards the western
European countries and the United States has also contributed to the low levels of revenue from
personal income taxes.

27

CHARPTER THREE

METHODOLGY
3.0 Introduction
This chapter seeks to present an overview of the studys methodology. It is made up of research
design, population, sampling procedure, tools used for data collection and the procedures
adopted for processing and analyzing of results.

28

3.1 Methodology
Methodology refers to the theory of how research should be undertaken (Saunders et al, 2007).
The research took an inductive approach where data was collected and a theory developed as a
result of the data analysis. The researchers were able to make their conclusions and devise a
theory on the problems of tax collection in Ghana (case study Kumasi Metropolis) after an
analysis of the data had been made.
The research was based on a case study because the researchers wanted to know how the impact
of the problems that militate against tax collection agencies in Kumasi. According to Saunders et
al (2007), the case study strategy has considerable ability to generate answers to the question
why? as well as the what? and how? The use of case study provided an in-depth knowledge
about the institutions being studied. It was adopted for the study because case studies are based
on the premise that locating one case is enough to make a conclusion for other cases since a case
can be typified for other similar cases.

3.2 Research design

The research design was based on exploratory and descriptive studies. The exploratory study
brought to light what Internal Revenue Service (IRS) is made up of their historical developments
and achievements and the challenges they encounter in discharging their duties. A descriptive
study was also used for the field study.
In this research, a set of questionnaire was personally administered to sole proprietors, traders,
landlords and corporate institutions as well as departmental heads and some workers of Internal
Revenue Services (IRS). An interview was conducted with employees in charge of operations,

29

products or services of the Internal Revenue Service to look for information on the challenges
they face during the performance of their duties.

3.3 Population
A total sample of 100 was used for the study due to time and financial constraint. Out of a total
number of thirteen (13) tax districts in the metropolis, the simple random sampling method was
used to select eight (8) tax districts for the research. The purposive sampling technique was used
to select staff of thirty (30) members who could answer the questionnaire.
The informal sector in the Kumasi metropolis with a total population of 3202 according to
Kumasi Metropolis Assembly as at 12 th January, 2011 reveals a wide range of operations that can
be grouped under services; construction and manufacturing. Out of these three categories thirty
(30) respondents were from the service sector, whiles twenty (20) respondents were used for both
the construction and manufacturing sectors respectively.

3.4 Source of data

Qualitative as well as quantitative data was collected for the study. Data was obtained from both
primary and secondary sources.
Documentary secondary data which include written materials were obtained from journals,
articles, textbooks and the internet. Primary source of data were obtained from the field and
obtained from sole proprietors, traders. These were mainly obtained from questionnaires to
solicit the necessary responses from staff respondents in charge of the tax collection.

30

3.5 Sampling techniques

The sample for this research was taken from a population of sole proprietors, traders as well as
employees of the Internal Revenue Service in the Kumasi Metropolis. The purposive sampling
technique was used to select staff members who could answer the questionnaire. In order to
achieve the objective of the research, staff members who had knowledge in tax collection and the
problems they face in their operations were selected. As such the questionnaires were given to
departmental heads in the various departments of the Internal Revenue Service.
The informal sector population was made up of traders (second hand cloth dealers, shoe sellers,
phone sellers, dealers of hard ware, cosmetics and provision storekeepers, etc). For the purpose
of the study, individuals involved in the study were the real owners of the various shops and
business and not sale agents or sale attendants.
In order to give each member of the population an equal chance of being selected and to ensure
accuracy, the simple random sampling techniques was employed in the selection of respondents
to be interviewed.
The primary data was gathered by means of a field survey using instruments such as interview
guides and questionnaires. The structured interview was used to collect data. The researchers
used questionnaires based on predetermined and standardized set of questions to conduct the
interview.
The semi-structured interview was used to collect data. The researchers had a list of questions to
be covered.

Some of the questions were omitted in particular interviews given specific

organizational context that was encountered. The order of questions varied in some interviews

31

due to the flow of the conversation. Additional questions were required as follow-up questions
to explore the research objectives given the nature of events within some organizations.
The researchers employed self-administered questionnaires to staff and customers to complete
themselves.

For customers who did not want to complete the questionnaires themselves,

interviewer-administered questions were employed where the researchers completed the

questionnaire based on the answers provided by the respondent.
Both open and closed questions were used in the questionnaire.
respondents to give answers in their own way.

Open questions required

Closed questions provided a number of

alternatives for respondents to choose from and included listing, categorizing, quantity and rating
questions.

3.6 Data analysis techniques

Qualitative as well as quantitative methods were used in the analysis of the primary and
secondary data collected. The quantitative data were analyzed using Statistical Package for
Social Scientists (SPSS). This was presented in the form of tables, pie charts, bar graphs, line
graphs.

32

CHAPTER FOUR

DATA ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction
This chapter deals with the analysis of data collected during the research using the instruments
described in chapter three. There were two set of questionnaires, one for the officials of the IRS
and the other for workers and entrepreneurs in the informal sector. The questionnaire for the IRS
officials was divided into three parts. The first part looked at the general information about the
respondents; the second part looked into the factors militating against tax officers and the final
part assessed the viability of the targets set by the IRS. The second set of questionnaires was
33

administered in the informal sector and it sought to look into the challenges of taxing the
informal sector in the metropolis.

4.1 General information about staff of IRS

The number of years that one works in an organization helps him or her gain experience which
facilitate the effectiveness in which one accomplish the work at hand. To access adequate
information about the problems the staff of IRS face while discharging their duties, the study
sought to find out if they have had enough working experience as tax officers in the agency. The
results are shown in Table 4.1

Table 4.1: Number of years worked with IRS

No of
years
Frequency

Percentage

1-5

16.7

6-10

12

40.0

11-15

16.7

16-20

3.3

20-above

23.3

TOTAL

30

100.0

Source: field survey data, March 2011.

Information gathered from respondents on the number of years they have been working with the
IRS revealed that most of them have been working for the Internal Revenue Service for not less
34

than five years. From table 4.1, 16.7% of respondents revealed that they have been working with
the IRS for less than five years whiles 83.3% revealed working with the IRS for more than five
years.

4.2.0 Factors Militating Against Tax Officers

Tax revenues in the country have not been encouraging. The study inquired from the tax officials
of IRS if they face some problems which does not help them to carry out their duties effectively
as expected of them. The responses are presented in Figure 4.1

Figure 4.1.0-Major problems of tax collection in the metropolis

Major problems of tax collection

14
12
10
major problems of tax
collection

8
13

6
4

2
0
large size of informal sector

3
capacity constraint

35

Source: field survey data, March 2011

All the 30 respondents interviewed representing (100%) revealed that they face problems while
discharging their duties. The major problems recognized by respondents included capacity
constraints, large size of the tax district, large size of informal sector and inadequate logistics.
From figure 4.1.0, it can be noticed that the major challenge facing the tax districts in the Kumasi
metropolis is the lack of adequate logistics. From the chart, 13 out of the 30 respondents
interviewed representing 43.3% revealed that inadequate logistics is their major problem. 26.7%
of the respondents revealed that the large size of the informal sector was the major problem of
tax collection in the metropolis. 20% attributed the problem to capacity constraint whiles 10%
saw the large size of their tax district as their problem.
For logistical problems, all the respondents (100%) revealed that there is inadequate logistics in
their tax districts. Among the challenges they face with respect to logistics includes lack of
computers and information technology systems, inadequate telephone and stationery as well as
inadequate transportation systems. For example, it was revealed that four (4) out of the eight (8)
districts visited were without computers and those who had were just for the district managers.
This growing trend has gone a long way to affect revenue mobilization in the metropolis. For
instance, tax education which is supposed to be one of the core functions of the Internal Revenue
Service is virtually not carried out due to lack of transportation systems to carry these officers to
the various communities and business centers. Again, due to lack of information technology and
accounting systems these tax officers keep tax records manually and this makes it difficult in
assessing the tax liability of the populace, Also, the absence of data on potential taxpayers most
especially those in the informal sector has made it very difficult to know those who are evading
36

tax and even determining how much one must pay as tax. This has resulted in constant scuffle
between the potential taxpayers and tax officers on how much tax to be paid.
As to whether it is the responsibility of the tax district to solve the problems mentioned above
eleven (11) of the respondent representing 36.7% said no and eight (8) of them representing
26.7% said yes. Eleven (11) of the respondents representing 36.7% stated that they do not know
whether it is the responsibility of their district or the region to solve this problems or not. This
indicates that the tax officers do have divergent views as to who should solve their problems.
Should it be the government as minority of the respondent is purporting or the management of
the various tax districts?

4.2.1 Tax Evasion

Tax evasion which is the noncompliance with tax laws by failing to pay tax that is due has been a
major problem in collection of taxes in the Kumasi metropolis.
Figure 4.2- Why people evade tax.

37

Why people evade tax

3%
47%

lack of tax education

infrastructure
development in their area
small income of taxpayers /
lack of tax education
lack of tax education / lack
of infrastructure
development in their area

20%
30%

Source: field data March, 2011

All the respondents (100%) revealed that there is a problem of tax evasion in the metropolis. The
problem of tax evasion according to respondents was minimal in the formal sector but very
common in the informal sector. This was attributed to the fact that there is little data on the
potential tax payers since most of them has refused to register their businesses.
From figure 4.2, it can be deduced that 47% of the respondents attributed the problem to both
lack of tax education and lack of infrastructure development in the area. 30% of the respondents
attributed the problem to small income tax payers and lack of education. 20% of the respondents
believed the lack of infrastructural development in their area contribute to the problem while 3%
believed the problem arises as a result of lack of tax education alone.
With respect to lack of tax education, most people fail to declare their incomes on gifts received,
capital gains on property sold and many other items and earnings they are suppose to pay tax on
to the tax authorities. All the thirty (30) respondents affirmed that there are punitive measures for
38

those who evade tax in Ghana. The punishments mentioned included among other things
imprisonment, ceasing a property of the defaulters, locking shops and offices and payment of a
penalty. The last two measures were said to be regular as far as its application is concerned but
the others are existing in the tax laws but not applied. This is because there are no stringent
measures in place to enforce the tax laws in Ghana to its fullest. Also there is a school of thought
that people in developing countries should rather be encouraged to pay tax on their meager
incomes rather than enforcing strict tax law on them (Adom, 2000).
Again, it was affirmed by all the respondents that in their respective districts they have applied
the punitive measures especially paying a penalty on individuals and corporate bodies who evade
tax.

4.2.2 Curbing tax evasion

On a question as to what should be done to avoid tax evasion, 6.7% of the respondents pointed
out that taxes should be reduced to attract more people to pay. 66.7% of the respondents
suggested that there should be more tax education for people to understand the need to honour
their tax obligations. This could be done by bringing tax to the doorstep of the taxpayer by
visiting them more frequently. This means employing more hand to do the job.
Also, there must be an audit for the taxpayers to really know how much they get so that the right
amount could be collected from both individuals and corporate bodies. This has become
necessary, because most of the taxpayers in the informal sector do not pay right amount of tax
because they under declare their profit and have not been disclosing gifts and capital gains they

39

receive at all to those revenue agencies. 26.7% of the respondents believed that a stiffer for
offenders will go a long way to reduce the incidence of tax evasion.

4.3.0 Targets set by the agency to be achieve with a period

Every year the IRS officials have a set target to be achieved. This target is set by the research
unit of Internal Revenue Service in consultation with Ministry of Finance and Economic
Planning. The value for the target is mostly based on the previous years figures and sometimes
when the ministry of finance introduces new tax they bring estimated figures expected to be
collected within a given period.
All the thirty (30) respondents said that they have a target to achieve. Unfortunately, the tax
officers do not participate in the setting of the target which to them it has been the culture so
there is little they could do about it. The target is evaluated weekly, monthly, quarterly, half
annually and annually by the management of each district and each districts accountant will feed
the regional head office with returns. It was also revealed that districts are not penalized for not
being able to achieve the set target for the period in question. This situation is of concern because
the lack of punishment may lead to a situation where these tax officers may not attach
seriousness to their job. All the respondents (100%) affirm that they are rewarded when they are
able to achieve the target at the end of the period. The incentive packages for meeting the targets
are mostly bonuses and letters of recommendation that the head office will write to commend the
management and staff for good work done and will be asked to keep it up. These rewards could
be promotions, job rotation, salary increment and other end of year packages for outstanding
workers in the various districts.

40

4.3.1 Capacity building for the Staff

This question was asked to find out how often the tax officers are taken through training to
improve on their skills in order to discharge their duties efficiently. It was revealed that there was
a training programme for the officers. Nineteen (19) of the respondents representing 63.3%
revealed that the training programme is organized occasionally when officers reach Assistant
Inspector of Taxes level. This means that not all the officers have had the opportunity to attend
training programmes to enhance their skills. This is because the budget for the agency is not
enough to organize these training for all of them regularly. Some of the respondents have had the
training before but for a long while because the training is organized annually but for very few
officers. This means that training programmes are not regularly organized for the staff, therefore
one can be with Internal Revenue Service and will never be updated in modern ways of tracking
potential taxpayers even though training programmes are admittedly the best way to update
workers on modern tax practices.

41

4.3.2 Maximizing Tax Revenue

Opinions were solicited from respondents on what should be done for them to maximize tax
revenue for the state. Most of the respondents suggested that the number of employees or staff in
the tax districts must be increased in order to reduce the work load of the available few staff.
Creation of more tax districts also factored prominently. Most respondents believe that the large
size of their tax districts is seriously affecting the work of the tax officers. This situation
seriously affects tax revenue since it becomes difficult for the few tax collectors and assessors to
reach all the potential taxpayers. Therefore creating more tax districts and employing more hands
will help solve these problems.
Twenty (20) of the respondents representing 66.67% reiterated that there should be an increase in
cash flow to the various districts to acquire necessary logistics and improvement in
computerization of the service. By increasing the cash flow the various districts will be able to
procure basic materials which affect their daily activities like stationery. Computerizing the
service will help keep the database of taxpayers and potential tax payers which will in turn
reduce tax evasion.
Twenty-seven (27) of the respondents representing (90%) attested to the fact that tax education to
the public will go a long way to improve revenue mobilization in the metropolis. It is believed
that most people especially those in the informal sector are ignorant about their tax
responsibilities and therefore sensitizing them will generate enough revenue for the state. Tax
education is one of the core functions of the Internal Revenue Service but unfortunately this
laudable function is performed only one week in a year. This tax education can take many forms
like radio and television advertisements, posters and mobile vans and also door to door visit by

42

the collectors. This according to respondents will go a long way to create the awareness and
boost tax revenue in the long run.

4.4.0 ANALYSIS OF RESPONDENTS FROM THE INFORMAL SECTOR

4.4.1 Informal sector business location.

A permanent business location can be a prerequisite for easy tax collection. The study sought to
find out if respondents in the informal sector have permanent business location.
Table 4.2: The business location of respondents
Response

Number of respondents

Percentage

Permanent

54

77.1

Roaming

13

18.6

4.3

70

1 00

Both
TOTAL

Source: field survey data, March 2011.

Table 4.2 indicates that 77.1% of the entrepreneurs surveyed have a permanent place from where
they carried out their business, while 18.6% do not operate from a permanent location. 4.3%
indicated that they have a permanent business location but roam around at times when trading
activities are slow.
From the perspective of the IRS and for the purpose of effectively taxing an income earner, he or
she should have a permanent and visible place of business where tax authorities can easily locate
the tax payer. As the survey results indicate, this essential condition for taxation is present in the
informal sector hence tax revenue can be maximized in that sector. The few informal sector

43

operators who do not have a permanent place of business must also be integrated into the tax net.
A number of reasons were provided for not having a permanent place of business. These reasons
included affordability, nature of business and attraction of clients.

4.4.2 Record keeping practices

Most businesses in the informal sector do not keep proper records.

Table 4.3: Informal sector bookkeeping practices
Response

Frequency

Percentage

Yes

24

34.3

No

46

65.7

TOTAL
70
Source: field survey data, March 2011

100.0

The data gathered for this study on the level of accounting and record-keeping practices in the
informal sector confirmed the view in existing literature of very poor level of record keeping
practice in the sector.
As indicated in table 4.3, 34.3% of the sampled informal sector businesses indicated they follow
proper accounting practices. However, 65.7% of the respondents indicated they do not keep
accounting records.
With the majority of informal sector businesses maintaining poor or no accounting record, it
becomes extremely difficult for an objective assessment of income tax in that sector. Accounting
records serve as the basis for the computation of taxable income and the absence of such
accounting information makes it practically impossible to tax an income earner. This is so
44

because the accounting net profit which the IRS adjust to determine taxable income is not
determinable. One of the major reasons identified for the poor accounting practices in the
informal sector is the inability or unwillingness on the part of entrepreneurs to hire accountants
to take charge of their accounting functions.

4.4.3 Tax noncompliance

The response of respondents as to whether they comply with tax procedures is summarized in the
diagram below:
Figure 4.3: Tax noncompliance
Tax compliance

22%

NO
YES
78%

Figure 2-informal sector operators and compliance with tax procedures.

Information gathered from respondents on the level of tax compliance revealed that there is a
high level of tax non-compliance in the informal sector. From figure 4.3, 22% of the respondents
revealed that they do comply with tax procedures whiles a majority of informal sector
entrepreneurs representing 78% responded that they do not comply with income tax procedures.
45

Among the reasons given by respondents for tax non -compliance includes ignorance, poor or no
accounting records and complex tax procedures. The high level of tax non-compliance is an
indication of the fact that there is a low level of tax awareness in the informal sector which
should be a major concern to the Internal Revenue Service.

46

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction
This chapter presents the conclusion and observations drawn from the analysis of the data
collected and response obtained from the questionnaires administered. Appropriate
recommendations are made based on the outcome from the data analysis.

5.1 Summary of Findings

The

following

conclusions

were

made

based

on

the

findings

from

the

study.

The study revealed that there is capacity constraint within the service. It was revealed that the
various tax districts were understaffed relative to the large size of the tax districts. This situation
has resulted in fewer officials having to engage in revenue collection from densely populated tax
districts full of informal sector workers. This situation has made tax collection difficult resulting
in tax evasion and inefficiency.
It also came to light that inadequate supply of logistics is a major hindrance to revenue collection
in the metropolis. Among the challenges they face with respect to logistics includes lack of
computers and information technology systems, inadequate telephone and stationery as well as
inadequate transportation system. The study found out that there are inadequate funds to the
districts to purchase stationary and other logistics for their daily operations. It was revealed that
the bureaucratic nature of the organizational structure of the Internal Revenue Service has led to
cash flow problems which in turn affect procurement of materials for the various districts.
47

Another major logistical problem that came into light was the failure of the government to make
available a computerized system which could help improve the systems network. This could
also contribute to delays in filing the returns to respective quarters.
Moreover, the study also exposed that tax evasion is one major economic problem affecting
effective revenue mobilization in the metropolis. The study saw the lack of tax education, small
income of taxpayers and unenforced tax evasion punishments as the major contributing factors to
this economic problem. For instance most Ghanaians do not know that they are supposed to file
income tax returns. Also most of them are ignorant of the fact that they are supposed to pay a tax
on rental income, capital gains as well as gifts of amount exceeding GH50.00. These factors
have in the long run led to huge revenue losses to the nation.
Finally, the large size of the informal sector was identified as a major hindrance to revenue
mobilization in the metropolis. The study revealed a lot of factors accounting for the hard- to tax nature of the informal sector. The major factors identified as responsible include the
peripatetic nature of the informal sector businesses, poor accounting and record keeping
practices and high illiteracy among the informal sector entrepreneurs. For instance it was
identified that out of the sample, 34.3% of the respondents keep accounting records of
transaction whiles 65.7% did not keep books of record. This situation makes the calculation of
ones tax liability difficult since the taxable income is undeterminable.

48

5.2 Recommendations
5.2.1 Taxpayer Information and Computerization

Taxpayer information gathering, collation and dissemination are very important to ensure better
assessment of tax and equitable distribution of the tax burden. Efficient collation and
dissemination of tax payer information are pre-requites for effective tax audits and for
calculating tax liability. This should be done in collaboration with the registrar generals
department which mandates the corporate bodies especially to prepare and publish final account.
With respect to the informal sector, The IRS must embark on a nationwide exercise to establish a
master list of all the informal sector businesses that are easily identifiable.

5.2.2 Human Resource Capacity Building

If tax revenue collection can be maximized in the country, then human resource capacity
building should be one of the primary concerns of the IRS. The various tax districts in the
country should therefore have adequate qualified and trained staff to ensure the smooth operation
of revenue mobilization in the country. Also the existing tax officials must be given enough
training to equip them with the necessary skills in the ever changing tax collection techniques.
Also the conditions of service of these tax officials must be improved to attract and maintain the
right caliber of staff.

49

5.2.3 Taxpayer Education

Tax revenue institutions have the arduous responsibility of marketing an unpopular social source.
Ghanas experience in 1931 when income tax was first introduced and again in 1995 when Value
Added Tax (VAT) was first introduced shows that if people are not sufficiently educated about
their core responsibilities as taxpayers, they are likely to evade the payment of tax. This study
therefore suggests the IRS intensifies its taxpayer education using both print and electronic
media. With regard to the informal sector, tax information in all major Ghanaian languages
should be printed as hand bills containing information on the need to pay taxes.

5.2.4 Tax Rates

The study revealed that high tax rates do not promote tax compliance but rather it promotes tax
evasion. Government of Ghana is therefore encouraged to systematically review the tax rates for
both direct and indirect taxes so as to promote voluntary compliance by these low income
citizens. Also, tax revenue can be maximized if the government widens the tax net to compute a
lot of people into the tax brackets.

5.2.5 Simplification of filling procedures

One of the reasons identified for tax noncompliance is the complex filling procedures involved
in the payment of taxes. The study revealed that most informal sector entrepreneurs who once
used to pay taxes are no longer paying because of the complex nature of filling their tax returns
to the IRS. The IRS should therefore take steps to simplify the filling procedures to encourage
these income earners to voluntarily file their returns to the IRS.

50

5.3 Conclusion
The problems militating against tax collection is a very serious societal problem that is causing
much concern and it is a major set back on revenue collection in the country. From all indications
it is now clear that if government engages in a complete re-organization of the tax administrative
machineries, the issue of inadequate tax revenue will be reduced to a tolerable limit. It is equally
important for the various revenue collection agencies to make frantic efforts aimed at educating
the tax illiterates of their civic responsibilities. Such enlightenment on tax evasion and the need
for one to honour his tax obligations will go a long way to reduce the countrys over dependence
on foreign aid. It is hoped that if the measures prescribed in this study are implemented, it will go
some way in improving domestic revenue mobilization in the country.

51

REFERENCES
Agyei A. K. (1984) Income tax evasion the Ghanaian Experience, The Journal of
Management Studies vol 1, NO. 2, pp.40
Asada, Dominic Esq (1994), The Administration of Personal Income Tax in Nigeria: Some
Problem Areas.
Bird, Richard and Eric Zolt. (2005), The Administrative Redistribution on Taxation.
Dimensions of tax reforms on Developing countries.
Bird, M., Martinez-Vasquez J., and Torgler B. (2006), Societal Institutions and Tax effort in
Developing Countries.
Brautigam D, Fjeldstad O, and Moore M (eds), (2008), Taxation and State Building in
Developing Countries, Cambridge University Press.
Christian Aid 2008. Death and Taxes: The True Cost of Tax Dodging. London Christian Aid
Davies, F. R (1994) Introduction to Revenue Law (London) Sweet and Maxwell pp.3
Everest-Philips, Max (2008), Business Tax as State-Building in Developing Countries:
Applying Governance Principles in Private Sector Development, International Journal on
Regulation and Governance, 8 (2): 123-154
Goldsmith Selma F., Appraisal of Basic Data Available for constructing size Distribution,
Conference on Research Income and Wealth, New York, (1951), p.302.
Hyman, David N. (1985) Public Finance in Canada: A Contemporary Application of Theory
and Policy, Harcourt Canada Limited.
52

Hyman, David N. (2002) Public Finance A Contemporary Application of Theory to Policy,

South-Western Mason, 7th Edition.
Institute of Statistical and Scientific Economic Research (ISSER), 2009, The State of the
Ghanaian Economy.
Kumasi Metropolitan Assembly (KMA), 2011: List of Registered Businesses in the
Metropolis Revenue and Registry Department.
Martinez-Vazquez, Jorge (2005) Multiple Modes of Tax Evasion Working paper, Georgia
State University.
Newsbury and Steri (1987), Business Taxation as State Building in Developing countries:
Applying Governance Principles in Private Sector Development.
Osei (2006), Speech delivered by the commissioner of Internal Revenue at the Re-launch of
the Tax Stamp.
Otieku J. K. (1988), An Examination of the Problems of Income tax in Ghana and Prospect
of their solution MBA Thesis, University of Ghana, Legon, p. 158.
Prichard, Wilson (2009), The Politics of Taxation and Implications for Accounting in Ghana
1981-2008. IDS Working Paper. Brighton: Institute of Development studies.
Roland-Holst, David and Haddad, Mona (1998) Tax Evasion and Tax Reform in a LowIncome Economy, General Equilibrium Estimates for Madagascar.
Saunders et al, 2007, Research methods for Business Students. 4th Edition. London
Prentice Hall.

53

Slemrod, J. (2002): The Compliance Cost of US Individual Income Tax System. National Tax
Journal, ro. 37, prosinec, s. 461-474
Smith, P (1994) Assesing the size of the Underground Economy; The Canadian Statistical
Perspectives, Canadian Economic Observer Gt, NO 11-010
Stieglitz, Joseph. (2001). The General Theory of Tax Avoidance. In Economic Theory and
the Welfare State, Vol. 3. Northampton: Elgar, pp. 354-71.
Tanzi, Vito (2007), Quantitative Characteristics of the Tax System in Developing Countries;
Oxford University Press.
Terkper, Seth (1994). Ghana: Tax Administration Reforms (1985-1993) Advisor to the
National Revenue Secretariat, Ghana and a Research Fellow at the International Tax
Program, Harvard University.
Toby, R. (1983), The Theory and Practice of Income Tax Macmillan Press Ltd.

54

APPENDIX I
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ARTS AND SOCIAL SCIENCE
DEPARTMENT OF ECONOMICS

QUESTIONNAIRE TO BE ADMINISTERED TO ELICIT DATA ON THE PROBLEMS OF

TAX COLLECTION IN GHANA
NOTE:
THESE QUESTIONS ARE PART OF DISSERTATION TO BE SUBMITTED IN PARTIAL
FULFILLMENT OF THE REQUIREMENT FOR BACHELOR OF ARTS DEGREE IN
ECONOMICS. THE CONFIDENTIALITY OF ANY INFORMATION GIVEN IS ADHERE
TO.
A: GENERAL INFORMATION
1. Functional position of respondent ....
2. Number of years you been working with Internal Revenue Service (IRS)
a. 1 5 years
[ ]
b. 6 10 years
[ ]
c. 11 15 years
[ ]
d. 16 20 years
[ ]
e. 20 years or more
[ ]

B: FACTORS MILITATING AGAINST TAX OFFICERS.

3. Do you face problems while discharging your duties?
4. What are some of the problems? Tick more than one.
a. Capacity constraint
[ ]
55

Yes [

No [

b.
c.
d.
e.
5.

Large size of tax district

[ ]
Large size of informal sector
[ ]
Inadequate logistics
[ ]
Any other, please specify
Is it the responsibility of your district to solve the problems stated in question 4?

Yes [ ]
No [ ]
6. How do you think these problems mentioned could be solved?
a. Increase the number of employees
[ ]
b. Creating more tax districts
[ ]
c. Mechanisms to identify informal sector
[ ]
d. Any other, please specify
7. Do you have a computer in your office?
Yes [ ]
No [ ]
8. Do you have vehicles for your operations?
Yes [ ]
No [ ]
9. Do you have telephone in your office?
Yes [ ]
No [ ]
10. Do you have more regular supply of stationary?
Yes [ ]
No [ ]
11. Is it difficult to calculate how much one should pay as tax? Yes [ ]
No [ ]
12. Why do you think people evade tax? Tick more than one.
a. Small income of taxpayers
[ ]
b. Lack of tax education
[ ]
c. Lack of infrastructural development in their area
[ ]
d. Any other, please specify
13. Is there any punishment for those who evade tax?
Yes [ ]
No [ ]
14. If yes, what is the punishment for not paying tax? Tick more than one.
a. Imprisonment
[ ]
b. Paying a penalty
[ ]
c. Ceasing property
[ ]
d. Any other, please specify
15. Have your district punished individuals and corporate bodies for not honoring their
tax obligations before?
Yes [ ]
No [ ]
16. What do you think should be done to avoid tax evasion?
a. Reduce taxes to be paid
[ ]
b. More tax education
[ ]
c. More stiffer punishment
[ ]
d. Any other, please specify
17. Do your outfit offer education to public as to why they should pay tax?
Yes [ ]
No [ ]
18. If yes how often do you offer the education?
a. Monthly
b. Quarterly
c. Half-annually
d. Annually
e. Any other, please specify
19. If no, why? Tick more than one.
a. Lack of funds
[ ]
b. Lack of facilitators
[ ]
56

c. Difficult in reaching potential taxpayers

[ ]
d. Any other, please specify
20. What do you think should be done for Internal Revenue Service (IRS) as a tax
collection agency to be able to collect more taxes for the state?

C: TARGETS
21. Do you have a set target to achieve as a district?
Yes [ ]
No [
22. Who sets this target?
23. Do you face problems in collecting tax from your target group? Yes [ ]

]
No [

]
24. If yes, what are some of the challenges?

25. Did you achieve the set target for the previous year?
Yes [ ]
No [ ]
26. How often do you report performance related to set target?
a. Monthly
b. Quarterly
c. Half-annually
d. Annually
e. Any other, please specify
27. Are you penalized for not able to achieve the stated target?
Yes [ ]
No
[ ]
28. What are some of the managerial sanctions for not meeting targets?
a. Transfer
b. Demotion
c. New assignment
d. Any other, please specify
29. Are you rewarded for achieving set targets?
Yes [ ]
No [ ]
30. If yes, what are some of the incentive packages for meeting targets? Tick more than
a.
b.
c.
d.
e.

one.
Bonuses
Promotion
Salary increment
New assignment
Any other, please specify

57

31. Do you attend training programs on how to do the work?

Yes [

No

[ ]
32. If yes, how often do you have the training?
a. Monthly
b. Quarterly
c. Half-annually
d. Annually
e. Any other, please specify

THANK YOU.

58

APPENDIX II
KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ARTS AND SOCIAL SCIENCE
DEPARTMENT OF ECONOMICS

QUESTIONNAIRE TO BE ADMINISTERED TO ELICIT DATA ON THE PROBLEMS OF

TAX COLLECTION IN GHANA
NOTE:
THESE QUESTIONS ARE PART OF DISSERTATION TO BE SUBMITTED IN PARTIAL
FULFILLMENT OF THE REQUIREMENT FOR BACHELOR OF ARTS DEGREE IN
ECONOMICS. THE CONFIDENTIALITY OF ANY INFORMATION GIVEN IS ADHERE
TO.
1. Type of economic activity engaged in
a. Manufacturing
[ ]
b. Service
[ ]
c. Construction
[ ]
2. What is the size of your capital?
a. Below GH 1,000.00
b. Between GH 1,000.00 and GH 1,500.00
c. Above GH 1,500.00

59

[
[
[

]
]
]

3. Do you have a permanent business location?

a. Permanent
[ ]
b. Roaming
[ ]
c. Both
[ ]
4. What is normally the mode of payment for your goods or services?
a. Cash only
[ ]
b. Credit only
[ ]
c. Both cash and credit
[ ]
5. Do you know you have to declare your total income to the Internal Revenue Service
(IRS)?
Yes
[
]
No
[
]
6. Do you keep books?
Yes
[
]
No
[
7. Do you pay tax?
Yes
[
]
No
[
]
8. If yes, what are some of the challenges you face in paying tax?

9. If no, why dont you pay tax?

10. Do you comply with tax procedures?

Yes
[ ]
No
[
]
11. If Yes, how often?
Regular

Sometimes

12. Do you take advice from colleagues not to comply?

Yes

] No

13. Do you think it is necessary to pay tax at all?

Yes

] No

14. What benefits do you derive from paying tax?

60

15. What suggestions, if any do you have to overcome the problem of non-compliance.

THANK YOU.

61