Tax the world over is the major source of revenue to Governments.
It is really not a bad thing if tax payers get value for money (vfm) regarding
what their taxes are used for, especially in respect of the state’s provision
of services to promote the welfare of tax payers. Taxes are therefore one of
the means by which the state ensures the welfare of its people; but how can
these two roles of the state exist if not a contradiction? Taxes reduce the
incomes of tax payers and their standard of living or welfare subsequently; yet
it is by these same taxes that Government seeks to promote welfare. This
paradox is possibly meaningful if and only if taxes are used in the interest of
tax payers. Is this guaranteed in Ghana?
The “spirit of the age” in Ghana in the absence of innovation with
regards to the sources from which the Government can raise revenue for its
projects is the activation of the “last resort” right; whereby the Government
has been criticized to be taxing “everything and anything”; even condoms,
bathroom slippers, cutlasses, outboard motors, fishing nets and many others. In
a pure technical sense, the Government is efficient in taxing goods for which
people have inelastic demand for; in other words, goods for which tax payers
cannot do without. Interestingly, these are goods patronized by the very poor
people whose welfare the Government seeks to promote. The question that lingers
on in my mind is two prompt: does the “type
of goods” and the “calibre of people” who consume them matter to the tax
masters? It was just six days after the Minority Leader in Parliament had
advocated for the enforcement of the Rent Act; merely a political rhetoric in
the absence of economic solutions, that the Ghana Revenue Authority (GRA)
re-launched the 8% tax on rents; as a way of “reminding landlords and landladies to perform their civic duties”.
Rent tax is not a new tax; it is a withholding tax payable on every income that
accrues to someone as a result of letting or leasing a property to another
person either for residential or commercial purposes.
Two mutually exclusive outcomes are likely. In my candid professional opinion, this is a
connotative reminder to tenants rather than landlords to buckle their belt for
hash economic times; or tenants must accept to connive with landlords to
understate or under-report rents. The latter is however is likely but not
rational to landlords as they will still lose money to the GRA; so landlords
would rather opt for the former. In this article, I seek to conceptually argue that the Rent Tax
targeted at landlords will rather be a punishment to tenants, due to the nature
of the housing market in Ghana which will affect the transferability and incidence
of tax. The Rent Tax will inevitably miss the target, but may not result in
policy failure; because after all “Caesar”
- the Government will still get its money irrespective of its source. It is
this occurrence that will perpetuate the paradox of whether the Rent tax would
maximize or jeopardize the welfare of the majority of Ghanaians. On the slight
side, I am sure some tenants are happy that landlords are going to pay tax on
the huge “arbitrary” rents they “extort” from them; just like some
parents vehemently support the taxing of private universities; oblivious of the
reality of the consequences to them.
Real estate in any form, commercial, residential, industrial
beside others has a derived demand; that is, we demand the structure not per se
but the benefits that may accrue to its ownership. To the landlord, rent is the
reward for owning real estate whiles a tenant gets the benefit of accommodation
or business premise, having paid this remunerative “consideration” under a binding, valid and enforceable contract to
the landlord. One point I doubt the tax masters considered was the “transferability” of the Rent Tax; which
is directly linked with the incidence of tax. This indeed is determined by the
nature of the commodity in question, market conditions and regulation in terms
of mechanisms for collection. The underdeveloped nature and the shortage of real estate in Ghana
means that tenants have to cough-up high rents lest they lose their
accommodation or business premises to the highest bidders. Obviously, tenants
have an inelastic demand for their existing accommodations and business
premises, as there is none available that is cheaper. In fact, the majority of
Ghanaians cannot do without rented accommodation because shelter is a basic
necessity; hence, will do anything to keep them – even paying high outrageous
rents. This is worsened by the ineffectiveness of the Rent Act which could have
accounted for fair determination and records keeping of rents; to facilitate
the efficient collection of the Rent Tax.
Now, given this adverse market condition and the fact that most
tenancy agreements are not binding, valid and enforceable, landlords
potentially stand to gain. First, the lack of an evidence-based (contracts
which will contain the rents payable) mean that landlords can underestimate
their Rent Tax obligations in connivance with tenants or the latter pays the
tax by way of rent increments. This is
possible because the Rent Tax is a withholding tax which requires an
intermediary probably tenants to withheld and file subsequently in the absence
of an effective formal institution. Hence, the accuracy of the total Rent Tax
revenue would depend on the landlord and tenant. Rationally, tenants would rather “aid and abet” landlords in order to pay lower rents by
under-reporting their rent payables to the so-called unwarranted task force to
be set up; and not act in the interest of the GRA as is expected. However, since, landlords would still pay some
amount in rent tax, no matter how small it is, my best bet is that, landlords
would rather opt to increase rents as a way of transferring the full tax to
tenants rather than sharing the burden of tax by losing a penny.
How then can the Government guarantee that the Rent Tax would not
be transferred to tenants by way of rent increments by landlords? The implication of these adverse composite factors means that tenants
would inadvertently bear the incidence of tax given current market conditions. Distinctively,
while tenants of residential real estate would bear this tax directly, tenants
of commercial real estate would be indirectly affected as they can also
transfer it to the ordinary Ghanaian through service-charge or commodity-price
inflation. The dynamics would have been different if supply of real estate
exceeded demand; thus, making it elastic such that the existence of surpluses
would push rents down and even put landlords at the mercy of tenants. In that
case, any excessive rent increments could cause tenants to vacate such premises
for cheaper ones in the abundance of alternatives. This is however not the case
and would not be in the remotest of time if real estate finance and investments
are not taken seriously by the state; that is not to say the state should
provide them directly.
How could this inevitably hardship be welfare maximizing? Does the
tax masters understand the dynamics of this Rent Tax or singing the chorus,
they are just taxing “everything and
anything” in desperation to raise revenue and waste away on unjustifiable “nepotic” and “cronic” expenditures? Does the Government understand the nature of
the market which generates rents and the people who would be affected? This is
definitely not welfare maximizing as the poor who normally rent accommodation
or business premises would be bearing the brunt of the Rent Tax.
Now, to effectively ensure that landlords who are the targets of
this tax; unless tenants are, is not a matter of setting up a task force as the
Chief Revenue Officer at GRA, Kwasi Bobie-Ansah has communicated publicly. At
best it can only be an unsustainable temporary measure as per the annals of
experience in Ghana. We need to go back to the basis; first things first. The
Rent Act and the Contract Act are potential tools in this regard. It is
indispensable for the nation to look into the ineffectiveness of the Rent Act
and set up the necessary mechanisms that will ensure fair rental valuation and
the provision of an evidence-based for Rent Tax assessment and collection – which I will address in my next article. Again, attaining a cashless economy is not a panacea to effective
Rent tax collection; it is undoubtedly an overly simplistic suggestion without
going back to the fundamentals of economic structures. This cannot be left to
the whims and caprices of day-dreaming authorities; but requires a holistic
approach to tackle market failures consensually with all related institutions.
Kenneth
A. Donkor-Hyiaman
MPhil
Planning Growth and Regeneration
University
of Cambridge
United
Kingdom
kwakuhyiaman@gmail.com
No comments:
Post a Comment