Project Materials

THE IMPACT OF TAX REFORMS ON INVESTMENT DECISIONS IN GHANA.

Abstract

If governments wish to accomplish economic growth and raise living standards, they must increase their efforts to attract investors through tax reforms. The study looked at some of the factors that influence an investor’s decision on where to invest. These included the location, type of activity, and time variables, which were critical because the regulations governing each of them about the tax rate to be paid, incentives, exemptions, relief, and holidays to be enjoyed differed. The data for the study were gathered from both primary and secondary sources. The study used questionnaires and interviews to gather firsthand information on whether or not investors in the country considered the tax structure when making investment decisions. The researcher developed 22 questions for taxpayers, which were delivered to 30 companies and people. The study revealed that tax rules influence investment and location decisions, and are therefore a significant instrument in luring investors to the country. Again, the tax incentive with the biggest impact on investment was the lowering in corporation tax rate. However, certain constraints, such as interest rate levels and economic uncertainty, were observed. The study proposed that the general tax system be reformed to improve efficiency and transparency in tax collection, as well as the elimination of needless taxes and levies that increase transaction costs.

Chapter one

INTRODUCTION

Every administration, particularly in developing economies, is concerned about their country’s economic progress. As a result, they make significant efforts to attain higher rates of economic growth and increase the standard of living for their inhabitants.

The main challenge has been how to attract investors and develop the necessary domestic resources while employing tax tools that are least detrimental to both the government and the investors.

This will undoubtedly entail revamping the tax system to ensure efficiency by broadening the revenue base without necessarily raising the tax rate. Governments continue to promote foreign investment as a vital aspect of their economic policies. Ghana launched a privatisation drive in the early 1990s.

The government once controlled more than 350 state-owned firms, but over 300 were privatised by the end of 2000, and 351 by December 31st, 2005, leaving only a handful of state-owned enterprises.

The government’s stated priorities for privatisation in the 2007 budget included Ghana Telecom, Western Wireless (Westel), Tema Oil Refinery, Ghana Oil Company, and State Insurance Company. They also pushed privatisation by selling state-owned shares on the Ghana Stock Exchange (GSE).

The government recognises that encouraging foreign direct investment necessitates an advantageous legislative framework, and it has introduced legislation to stimulate foreign investment while also repeating measures that have historically impeded it.

In the United States, for example, investment fell several years ago. In order to encourage investment, a new tax act was enacted in 2002 and 2003.

This helped the economy regain its footing by late 2003, when investment returned to pre-recession levels and the economy expanded at a robust pace of 3.9%, despite the disruptions caused by storms and a sharp jump in oil prices.

A study conducted in the United States by the Joint Economic Committee showed evidence that “lowering the cost of capital through tax legislation can be both timely and effective in stimulating economic growth”.

If governments wish to accomplish economic growth and raise living standards, they must increase their efforts to attract investors through tax reforms.