THE IMPACT OF TAX EVASION AND AVOIDANCE ON GHANAIAN ECONOMY

                                                              DEDICATION

We dedicate this piece of work to our parents, friends and families who supported us throughout our course.

We also dedicate this research work to the Staffs and Management of Internal Revenue Service Weija branch for making this research work a success.

ACKNOWLEDGEMENT

First of all, we wish to thank the Almighty God for the knowledge and strengths He granted us to carry out this research work.

We also wish to express our heartfelt gratitude to our supervisor, Mrs. Hellena Aryee, who in spite of her tight schedule guided us to bring this research to a successful end.

We are highly indebted to our parents who supported and encouraged us through out this course.

We wish to say a big thank you to all our friends who helped us to proof read the whole long essay.

Finally, we wish to acknowledge the staffs of Internal Revenue Service Weija branch for their patience, support, and all your help that has made this project a success.

ABSTRACT

This study sought to examine the impact tax avoidance and tax evasion has on Ghanaian economy using internal revenue service Weija’s branch as a case study. Ghana loses billions of tax revenue every year due to unreformed tax regimes and ineffective legislation that has aided tax avoidance and tax evasion. A wide range of reforms have been introduced by the Internal Revenue Service with the aim of curbing the menace of tax avoidance and tax evasion. This immoral act has continued to strife due to poverty, corruption, lack of patriotism and inadequate manpower to aid the collection of tax revenue.

A non experimental research was carried out to give implicit assumption on the impact of tax avoidance and tax evasion on Ghanaian economy. A primary and secondary source of data collection is used for this research work. Structured questionnaire were randomly administered to tax payers, tax officials and tax consultants.

Table 9 was observed to test hypothesis at a 50% level of significance using chi-square (x²) distribution method. It was revealed that tax avoidance and tax evasion significantly reduce collectible tax revenue in Ghana.

Therefore it is important to establish an effective tax legislation to improve the treatment of tax payers and tax officials in other to motivate them. There should also be judicious use of tax payers’ money in other to encourage compliance with payment of tax.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Taxation is the commonest and oldest source of government revenue in the world. It is an instrument of public policy. Taxation in Ghana dates back to 1943. It began with the collection of income tax. The income tax ordinance of 1943 was introduced as a law to tax income earners. Income tax is a direct form of taxation levied directly on income.

Taxation can be said to be a means by which government finance their expenditure by imposing charges on citizens and corporate entities. It can also be said to be a pecuniary burden laid upon individuals or property owners to support the government of a nation. Basically, there are two types of taxation and they are direct tax and indirect tax. ‘Direct taxes may be adjusted to the individual characteristics of the tax payer whereas; indirect taxes are levied on transactions irrespective of the circumstance of buyer or seller (Atkinson 1977). Direct taxes include income tax, corporate tax, transfer tax and capital gain tax. While indirect taxes include sales tax, value added tax and goods and services tax (GST).

Throughout history, taxation has always been one of the most important policies for every government, regarding the raising of revenues for developmental projects. Taxation was introduced in Ghana in 1943 to create more avenues for government source of income in order to fund variety of public services. ‘Taxation is a necessity for any nation seeking civilization since there is no civilized state in the world where some form of taxation is not a necessity’ (Lugard 1918). However, taxation has always been one of the most important policies for every government, regarding the raising of revenues for developmental projects. Like all other policies, taxation also includes a problem within itself, although it was established on the objectives of equity, efficiency, positive economic growth and proper administrative costs. Certain lapses in tax policies, coupled with various schemes adopted by taxpayers, have led to the problem of tax evasion and tax avoidance. It is a very serious societal problem, that is causing much concern and major setback on revenue collection in Ghana.

Tax avoidance arises in a situation where the tax payer arranges his financial affairs in a way that will make him pay the least possible amount of tax, without infringing on the legal rules. It is paying the minimum amount of tax using all available legal methods. The tax laws are so complicated because accountants can be hired to ensure a company pays the smallest amount possible. In some cases, giant multinational firms pay no taxes at all due to manipulation of records leading to limited tax liability. Tax avoidance is using legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. On the contrary tax evasion is not the same as tax avoidance. It is completely illegal and subject to fines and penalties. This usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability.

Tax evasion is planned  and takes different forms which include evasion of custom duty through under invoicing and no declaration of quantities, smuggling of goods through unauthorized borders, evasion of value added tax among many others.

Many researches have been undertaken in many jurisdictions to identify the underlining motivation for this immoral practice of evading taxes.   

It is well noted that people who evade tax have reasons for such actions. It must be known that the average human abhors the payment of tax. People see taxation as a discredited imposition and evidently obnoxious. This stems mainly from the absence of a "quid pro quo" which means something of value given in return (by the government) for the taxes they pay. That is, if taxpayers do not see the good use of their taxes by government, then they will adopt a means of not paying taxes or reduce their tax liability. Again, some also evade tax because they perceive inequitable distribution of amenities in the country.         

Others evade taxes due to misuse or mismanagement of collections made and also due to remoteness of tax payers from government and absence of spirit of civic responsibility on the part of tax payers. At the corporate level, businesses commit tax evasion if the government is relaxed in enforcing tax laws and there are significant lapses in the tax system. Corruptions by tax officials and under -resourced tax administration are also some of the notable reasons for evading taxes. Over the past few years, many entities have been reported of evading taxes in Ghana, notably multinational companies. Many companies, especially those in the telecommunication and mining sector, have been blacklisted for consistent tax evasion in Ghana. International tax havens seem to have made it possible for these companies to dupe the Ghanaian coffers by increasing tax evasion.          

This is a threat to Ghana's economic development most especially as oil production has commenced. Ghana has had a stern warning from the Organization for Economic Co-operation and Development to ensure that its emergence as a tax haven does not fuel corruption and crime in West Africa. A tax haven is a country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or very low taxation levy.   

This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and or companies. Aside from the general social costs associated with the operation of tax havens globally, in the absence of a very strong regulatory framework and very strong standards of transparency there is a particularly high risk that a tax haven in West Africa which is home to major oil wealth and high levels of corruption, could facilitate large-scale corruption and tax evasion, and pose a correspondingly large risk to good governance and economic growth in the region.    

For each tax administration in the world, taxing informal businesses is a hard job that is a major problem for Ghana. Cumbersome registration procedures and sluggish official institution discourage even conscientious entrepreneurs from registering and formalizing their business. Other entrepreneurs may take advantage of the lacking administrative capacity and remain purposely unregistered and unknown to the revenue agencies. The economy of Ghana is dominated by the activities of enterprises in the informal sector.        

It is estimated that, in terms of economic activity, about 86.3% is carried out by the self-employed sector mostly operating informal structures. Out of the total self-employed registered in the informal sector less than 30% have been registered and are being assessed to tax.       

Most predominantly the issue of bridging the gap between the formal and informal sectors to reduce tax evasion engineered the present administration to establish the Ghana Revenue Authority (GRA).

This step is expected to promote efficiency in the tax administration. Although this reform, just like previous ones, has outlined specific action areas, less has been heard about the issue of tax evasion which if granted pastures will sink the economy in no time.

Today in Ghana, where the greater majority of people disregard and abuse countless public laws and policies, taxation is not an exception. The population in Ghana so far is 24,500,000 (Bediako, 2010) people but less than half of this great number respond favorably to this civil responsibility of paying their taxes. A report in 2008 by Christian Aid drawing on a research by Raymond Baker estimates that low-income countries, like Ghana, lose over $22.4 billion in tax revenue annually to tax evasion, which was comparable to the total amount of foreign aid received by these countries.

Though tax avoidance is legal in Ghana, it is not to the advantage of the Ghanaian economy in the sense that, it brings about reduction in government revenue which would have been used; to improve the lives of its citizens, provide better infrastructure and basic utilities, aided poverty reduction, provide a higher standard of educational system and provide meaningful programmes in the development of the country.

This problem is eminent because proper measures have not been put in place to eradicate tax avoidance and tax evasion. However unreformed tax laws, ineffective legislation, poverty, corruption, illiteracy also contributes to the problem of tax avoidance and tax evasion. More emphasis can be placed on illiteracy due to lack of public education to create awareness in order for those who lack formal education and are ignorant of the law and the importance of taxation to the Ghanaian economy. Just like any national and economic issue, tax evasion in the country must be given the appropriate attention and adequate resources must be directed to address it. First of all, in order to be able to collect taxes and reduce evasion, the government must educate the masses about the need for taxes. The average person must be made to understand that tax evasion is a threat to national development as the government cannot undertake projects the citizen’s demand without money.       

Secondly, the government must build a data base to collect information about citizens and expatriate in the country which can inform the revenue agencies about whom and who have not paid tax. We also need the technical infrastructure to track the population in the country. Again, one sure way of reducing tax evasion is to change the perception of people with respect to corruption in the government and the revenue agencies. It is perceived that if tax levels are high then tax evasion will also be high. If the need to pay tax can be appropriately justified to the populace then it will also go a long way to reduce tax evasion in the country. Furthermore, tax evaders do not disclose their real assets and properties in order to also reduce their tax liabilities.

Government authorities do not implement the law set to eradicate tax evasion effectively. Tax avoidance and tax evasion have not been completely eliminated on the Ghanaian economy despite the efforts of the IRS and their reform programmes.

The government and the entire board of the Ghana Revenue Authority will have to adopt the necessary measures over the short and long term to alleviate this economic pandemic, which is fast draining our national coffers.

1.2       STATEMENT OF THE PROBLEM

The prosperity of a nation depends on available resources and revenues. The tax revenues have never assumed a strong role in the country’s management fiscal policy.

This is partly due to the weight tax avoidance and evasion placed on collectible revenue in Ghana. It has been estimated that, in terms of economic activity, about 86.3% is carried out by the self-employed sector mostly operating informal structures. Out of the total self-employed registered in the informal sector less than 30% have been registered and are being assessed to tax.

Unreformed tax laws, inefficient legislation, lack of patriotism, poverty, corruption and ineptitude on the side of successive government to pay sufficient attention to the necessity to generate adequate revenue from taxation has been evident in Ghana.

Tax avoidance and tax evasion are anti-social and unpatriotic; they continue to shrink government revenue, thereby hindering any meaningful development in the country. Tax avoidance and evasion have continued to strife despite various reform programmes aimed at reducing or totally eliminating the problem by the Internal Revenue Service of Ghana (IRS).

Tax avoidance and tax evasion have continued to reduce tax revenue to the government. For the country to meet up with its aspiration of a better economy by 2020, the tax avoidance and evasion should not be allowed to continue to strangle revenue to the nation.

1.3 RESEARCH QUESTION

To arrive at a rational conclusion and constructive suggestion on the impact of tax avoidance and evasion on the Ghanaian economy, the research work will attempt to find answers to the following questions;

          I.    Why and how do individuals and multi-national corporations in Ghana avoid or evade taxes.

        II.    What efforts has the IRS put in place to reduce tax avoidance and tax evasion?

       III.    What are the effects of tax avoidance and the tax evasion on the Ghanaian economy?

      IV.    What are the challenges of tax collection?

       V.    How can the method of tax avoidance and tax evasion be defeated and eliminated.

1.4  OBJECTIVE OF THE STUDY

Tax revenue is very essential for any developing economy. But the Ghanaian tax revenue has suffered diminution in the hands of tax avoiders and tax evaders despite the various efforts of the IRS.

Generally this research work is aimed at indicating how tax avoidance and tax evasion can be completely eliminated in the interest of Ghanaian economy and to explain why tax avoidance and tax evasion should not exist in the economy.

The following are specific objective that are to be considered;

·         To understand the reasons for tax evasion and avoidance.

·         To distinguish between tax avoidance and tax evasion

·         To measure and evaluate some of the reform programmes of the IRS that aimed at reducing or eliminating Tax avoidance and tax evasion

·         To identify some methods used in tax avoidance and tax evasion

·         To highlight on the consequent penalties for evading tax

·         To uncover some of the resultant effect or impact of tax avoidance and tax evasion in the Ghanaian economy

·         To examine some of the obstacles militating against effective tax collection in Ghana

·         To suggest some of the civil ways to remedying the increasing rate of tax avoidance and tax evasion.

1.5  METHODOLOGY

This section is aimed at describing and explaining the methods that will be used in collecting and analyzing data. It comprises of the research design, quantitative research, qualitative research, study area, sampling technique, sources of data and instrument used data analysis and presentation, and descriptive research.

It will also try to explain the procedures that will be used to gather information for this study. It will explain how primary and secondary data will be used to get information that will be relevant for the success of this research work. Most of the information will be gotten from IRS Weija branch.

1.5.1     Research Design

A non – experimental research design will be used to collect and analyze data. A simple questionnaire will be designed to get significant information from tax payers, tax officials, and tax consultants. A qualitative and quantitative research will be used in other to gather an in-dept understanding of the tax payer’s behavior towards taxation. It also tries to find out about the working condition of the tax officials and the opinion of tax consultants regarding tax avoidance and tax evasion in Ghana.

The questionnaire will be structured in a way that it will reflect the critical issues that will aid the success of this project work. The interview will be properly structured to get relevant information. Researches carried out by scholars will be referred to and other sources will be used to gather information.

1.5.2     Quantitative method

Quantitative research is a formal, objective, systematic process in which numerical data are used to obtain information about the world. This research method is used to describe variables, to examine relationships among variables and to determine the caused and effects of different issues (Burn and Glove, 2005).

The quantitative aspect of this research involves administration of questionnaires to get relevant information regarding the impact of tax avoidance and tax evasion has on Ghanaian economy. The questionnaire will help to arrive at an objective conclusion. It will be properly structured to derive reliable information regarding tax avoidance and tax evasion.

1.5.3     Qualitative method

Qualitative research is aimed at studying things in their Natural settings, attempting to make sense of it, or to interpret phenomenal terms of the meaning people bring to them (Denzin, 1994). Qualitative research is intended to penetrate to the deeper significance that the subject of the research ascribes to the topic being researched. It involves the interpretative, naturalistic approach to its subject matter and gives priority to what the data contribute to important reaserch question or existing information.

The opinion of the respondent based on your own beliefs will be used to arrive at decisions that will reflect the impact of tax avoidance and tax evasion. This will be done by conducting interviews with tax payers, tax officials and tax consultants. This enables them to talk more about the research subjects in their own language and their own terms. This will enhance proper expression of their opinions regarding issues raised.

1.5.4     study area

The study area will be the staff of IRS Weija branch, as well as the staffs of Methodist university college Ghana who will fall in the class of the tax payers. It will also include other tax payers from different organizations.

1.5.5     Research population

The population of this research work will consist of the staff of IRS Weija branch, the tax consultants and the tax payers. About 60 respondents will be selected.

A sampling technique will be adopted, due to the large size of the population and cost constraint.

1.5.6     Sample size and sampling techniques

Sampling is concerned with the selection of a subset of individual from within a population to estimate characteristics of the whole population. The entire population in Ghana will not be surveyed because the cost of a census is too high.

In using sampling techniques, cost is lower, data collection is faster and since the data set is smaller, it is possible to ensure homogeneity and improves the accuracy and quality of the data. There will be a total sample size of 60, the sampling will be random and it is assumed that most of them will have knowledge of tax avoidance and tax evasion.

1.5.7     Source of data and instrument used

This will explain the devices used to collect data. Different devices such as questionnaires, internet and interview will be used to collect data. The data that will be used for this research work will mainly come from the IRS Weija branch. This research work will rely more on the responses gotten from the questionnaires administered and most of our conclusion will be drawn from them. The question will focus on getting information regarding tax avoidance and tax evasion in Ghanaian economy.

1.5.8     Procedure

The series of action that will be carried out in other to obtain information regarding tax avoidance and tax evasion will be from IRS Weija branch. This will be carried out officially. The steps are enumerated below:

·         First of all we will seek permission from the IRS Weija branch to conduct the study.

·         After we have been granted permission, we will determine the sample size.

·         Each member of the sample will be given a questionnaire and allowed a period of one week to complete.

·         We will go back after one week to collect the questionnaires that has been completed. Other tax payers outside the organization will also be given the questionnaire to fill. We assume that not all the questionnaires will be returned to us but we assume that 90% will be filled and returned.

·         After the questionnaires have been collected, they will be coded and analyzed.

·         The results would be discussed and a research report will be prepared.

Although information will also be derived from other sources like the internet, text books, interviews and past research works.  

1.5.9     Data analysis and presentation   

This will show the statistical procedure that will be applied to analyze specific facts from the study. Data will be interpreted using statistical formulas. Descriptive statistics like percentages and averages would be the statistical instruments that would be used for the analysis.

The data will be interpreted and the significance of the findings will be established. The results will be presented in the form of tables, graphs, and charts. A chi-square technique will also be employed to test the hypothesis which will be formulated. The analysis will be made at 50% level of significance.      

1.5.10  Descriptive research

This will describe data and characteristics about population or phenomenon being studied. The description will be factual, accurate, systematic, and try to find out what caused a situation. This will involve conducting a survey investigation. We will examine why the observation exist and what the implications of findings are.

For this study, descriptive research will precede explanation. The research will be undertaken to find out all that will be relevant in the determination of the impact of tax avoidance and tax evasion in the Ghanaian economy.          

1.6  STATEMENT OF HYPOTHESIS

Tax avoidance and tax evasion is one of the numerous means of government generating revenue and is the focus of the research work to draw a reasonable conclusion on this research work. The following assumptions and hypothesis will be made. (Ho and Hi represents the flow variables used in hypothesis)

H_o: Tax avoidance and tax evasion have a positive impact/contribution to the revenue generation for the Ghanaian government.

H_i: Tax avoidance and tax evasion do not contribute to the revenue generation for the Ghanaian government.

Data for this research work will be gathered from interviews and questionnaires and also from the library including the internet. There is a probability that there is a fifty percent (50%) likelihood that people will give answers to the questionnaires. The research work will be analyzed using a descriptive statistics and the findings will be presented in pie chart, bar chart and frequency distribution tables.

1.7  SIGNIFICANCE OF THE STUDY

This research is of vital use to any willing user group such as tax administrators, tax practitioners, revenue officers, accountants, officers of the local government revenue offices and persons who may wish to conduct research at Internal revenue service (IRS).

Apart from the tax payers, tax officials, revenue collection officers also stand to benefit from the suggestion provided by the researchers, the government also has more to achieve by picking some ideas from this work and implementing them and also lecturers and students can use this work.

1.8 SCOPE  AND LIMITATION OF THE STUDY

This study attempts to measure the effects of tax avoidance and tax evasion in the Ghanaian economy with particular reference to revenue collected by Internal Revenue Service (IRS). This study is restricted to taxes covered by the Internal Revenue service, the company income tax, the stamp duties, capital gain tax; value added tax (VAT), sales tax, personal income tax of armed forces personnel, residents in Accra and non-residence persons deriving income from Ghana.

Also, in the process work, some of the staff were reluctant to give information on some of the activities of Internal Revenue Service (IRS). Financial constraints could not be left out when it comes to touching on the limitation of this study. The cost of stationery for this research is also a limiting factor for this work.

The objective of this study can still be achieved in spite of all the limitations faced.

CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter is aimed at giving a detailed insight to the impact of tax avoidance and tax evasion on the Ghanaian economy, including all related literature which shall be reviewed under sub-headings.

This chapter will review various literatures that have bearings on the problem of tax evasion and tax avoidance on the Ghanaian economy. The research question, research objective and the research design shall be reviewed systematically and presented logically.

The following will be explained in detailed under various sub-headings.

·         The concept of tax avoidance and tax evasion

·         Reasons for evading and avoiding tax

·         Methods of tax avoidance and tax evasion on the Ghanaian economy

·         Obstacle to effective tax collection

·         Summary of literature review

2.2 AN OVERVIEW OF TAX AVOIDANCE AND TAX EVASION

The institute of charted Accountants Ghana (ICAG) Act 170 of the    1963, place on accountants and auditors the responsibility to detect and report to the regulators cases of tax avoidance and tax evasion. However some Accountants in Ghana have the tendency to pursue their own selfish interest rather than defend public interest (daily graphic, 2003). The corrupt attitude of accountants in Ghana who collude with company directors to present false statement, still has not been abated (otieku 1992).

The assistance provided by accountants to falsify statements has contributed immensely to tax evasion. The unethical practices by individuals and companies’ to devise various schemes of tax avoidance and tax evasion have also received criticisms, this is to say individuals and companies indulge in tax avoidance and tax evasion even without the assistance of an accountant .

This criticism has re-echoed in recent times. it is paradoxical that accountants who prepare the entire financial statement of a company and also quiet knowledgeable about the financial transactions contained in these financial statements would still claim that they are unaware of any financial malpractices such tax avoidance and tax evasion that may later be deleted from the financial statement by an auditor. ‘’There is no way money could be siphoned or stolen from the public accounts without the knowledge of the accountant” (Ablordepy, 2006).

The result of the audit carried out at the internal revenue service in 2006 provided additional implication of accountants in tax avoidance and tax evasion; it showed general mismanagement of tax revenue at the internal revenue service Weija branch.

Reports show that 10% of collected tax revenue by the I.R.S was embezzled directly into private accounts and generally mismanaged by accountants at the I.R.S. For instance the total sum of 98billion cedis (old currency) as at July 2006, representing tax revenue collected which was claimed remitted to the bank of Ghana by the accountants of I.R.S cannot be traced to any bank of Ghana accounts by the Auditor general (Ghana news agency,2006). Other funds which they claimed to have been paid to stamp duties accounts with bank of Ghana could not be fully traced by the auditors. This shows that not only individual income earners and companies contribute to low revenue in Ghana but also mismanagement and fraudulent activities by the internal revenue service has contributed immensely.

Commercial banks are not left out. Research reveals that banks designated for collection of tax on behalf of the internal revenue service were also included in fraudulent and corrupt practices. For example, the auditor observed that the sum of money collected on behalf of the local VAT offices were delayed up to hundred days, there by yields interest for the banks before being paid to the bank of Ghana (auditor General report 2008).

All above cases depict the various cases of tax evasion. It is the paradox that the accountant and auditor whose sole responsibility is to ensure that a reliable financial statement is prepared, collaborate with companies to increase tax avoidance and tax evasion, by facilitating this financial crime to wealthy individuals local and multi- national corporations (Bakare,2006).

Therefore the various accounting regulatory bodies try to institute discipline to every member to cure the menace in order to ensure increase in government revenue. There is no doubt that this practice has reduced government revenue over the years.

The fact that people avoid and evade tax even without the help of accounts and auditors should not be ignored. Ghanaian citizens avoid tax in various ways and this reduces government revenue for governance every year. This is a major problem because in every country, it is necessary to have an effective taxation system in order to raise adequate revenue to enable government carry out developmental projects. Therefore, taxation is an important government policy and adequate measures should be taken to erase tax avoidance and tax evasion. Tax payers should be made to understand and have adequate knowledge of the importance of taxation, thereby, making them aware of the need to avoiding tax and eliminate tax evasion.

2.3 THE CONCEPT OF TAX AVOIDANCE AND TAX EVASION

Considering the problems of tax avoidance and tax evasion and their impact on Ghanaian economy, it is necessary to fully understand the concept of taxation and to clarify some confusion as to the distinction between the two concepts. Over the years, a lot of Ghanaians have misunderstood the concept of tax avoidance and tax evasion. Most of them have little or no idea about the fact that tax avoidance is a legal way of reducing tax revenue and tax evasion an illegal way of reducing tax revenues.

Different scholars like economists and analysts have propounded different explanation for the concept of tax, tax avoidance, and tax evasion. Both scholars and economists have tried to strike a balance to distinguish between these two concepts. Some of the various definitions given by some scholars and economists are defined below:

According to Selma, F. (1951) ''Taxation is the process whereby a state or government extract contributions from its citizens for the maintenance of the state machineries.

The business dictionary also defines taxation as “a means by which government finance their expenditures by imposing charges on citizens and corporate entities”.

Government use taxation to raise revenue to finance development projects.

According to Louis (1995) ''Government uses taxation as a means of raising money for its public spending programmes'' Brewing, elk and Johnson,W.R (1979) ''Taxes are commonly described as direct and indirect taxes. Direct tax is a tax such as income tax that is levied on the incomes or rewards of workers who pay it rather than on goods and services (Google).

The true online dictionary also defines direct tax as an income or property tax, levied directly on the tax payer. Examples are earnings from employment, including benefits in kind, earnings from self-employment mostly pension income,including state, occupational and personal pensions, some social security benefits, interest on most savings, income from shares (dividends), rental income, income from a trust.

The free online dictionary defines indirect as 'a tax levied on goods or services rather than on persons or organizations'. Examples are sales tax, value added tax. Direct and indirect tax have both been avoided and evaded in Ghana, and this has reduced the revenue for the government.

The word evade and avoid are generally used interchangeably and they connote the idea that they mean the same thing. To the professional, there is a sharp and fundamental distinction between the two concepts. The distinction will be clearly emphasized for the purpose of this study, so as to apply the difference appropriately.

Wikipedia describes tax avoidance as 'the legal utilization of the tax regime to One’s own advantage, to reduce the amount of tax that is payable by means that are within the law'. Otieku, 1992 also describes tax as 'the legal arrangement of tax payers affairs so as to reduce his liability'.

The legal dictionary describes tax avoidance as ‘a process whereby individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income'.

On the other hand, the international glossary (1996) describes tax evasion as 'a term used to describe illegal arrangement where liability to tax is hidden or ignored'. For instance the tax payer pays less than he is legally obliged to pay. According to Abdallah, (2008) ''Tax evasion is using illegal means to reduce tax’’. Browing, (1979) also describes tax evasion as ‘’the failure to pay taxes that are legally due.

Tax evasion is the employment of unlawful methods to circumvent the payment of taxes (Legal dictionary). The legality distinguishes tax evasion from tax avoidance. Avoidance can be evasion except the act taken to avoid tax are through sincere means and within laid down laws.

The tax avoider is any one who arranges his affairs in such a way that he pays little or no tax at all, and takes advantage of all legal opportunities to minimize his or her state of affairs while the tax evader is one who for a number of reasons refuses to fulfill his civil responsibility under the law, and he is for all intended purpose, a criminal.

A clear distinction between thess two concepts is necessary and important to note that tax avoidance is an act of winning games without cheating, thereby beating the Internal Revenue Service but tax evasion should be condemn because it is the wrong side of the line. Hoffman, W., Willis, Phillips, L.C et al, (2002) gave some clear distinction between the two concepts and they are listed below:

• Tax avoidance is an action within the law while Tax evasion is an illegal act.
• Tax avoidance is not criminal but tax evasion is criminal.
•  Tax avoidance involves critical study of the tax Acts and taking the best advantage of all reliefs, exemptions and allowance available to the loopholes in tax laws while tax evasion could be due to fraud or willful default in payment.
• Under tax avoidance, the tax payer will show up and present all necessary papers to the tax authority and the subsequent assessment will be settled while under tax evasion, the tax payer may not show up at all to the tax authorities.

2.3.1   Reasons for Tax Avoidance and Tax Evasion

In order to tackle the problem of tax avoidance and tax evasion properly, it is important to understand some of the factors underlying the decision to pay tax or not to pay taxes. (Kaldor, 1993) is of the opinion that a positive relationship exist between tax evasion and perceived inequality of the tax system.

Spicer (1974) in his dissertation, behavioral model of income evasion concluded that evasion by an individual was also found to be positively related to the number of his friends or colleagues who they believe are evading taxes.

Beattie (1982) is of the opinion that, the desire to own more wealth is one of the reasons for evading taxes. This is because ultimate benefit of the sales of a businessman is the amount of money remaining after he has paid all expenses including taxes. His goal is to reduce cost, reduce his price to obtain a bigger share of the market and thus increase the cash available to the business at the end of the financial year.

Studies have shown that the tax payer attitude and decision to evade tax is based on different reasons. They include excessive corruption on the part of government officials, problems of assessment, collective and enforcement of tax administrators’ incompetence on the part of tax authorities, general dishonesty among Ghanaians, political culture, ignorance, unfairness of the tax system and lack of regard for equity, law and justice, unpatriotic Ghanaian citizen. (Ablordepy, 2006).

From the above, it can be deduced that certain factors have been responsible for increased tax avoidance and tax evasion in Ghana. Basically ignorance is a major factor because tax payers think that the money is for the tax collectors and government, and they also do not believe they will benefit from the money they pay.

According to Clayton and Brown (1993) ''In the first place, people who benefit from government service should be the ones to pay for them and secondly, people should pay according to the benefit they receive''.

Myles (2005) also said that, 'the importance of developing a theoretical understanding of tax evasion can only be assessed by estimating the actual extent of evasion’. Apart from ignorance, other reasons some Ghanaians avoid and or evade tax include the following:

• Inadequate Tax Incentive By Government;

According to Ablordepy (2006) ''the tax incentives offered by government have neither hind up to the expectation or motivating investors into the country nor influencing the location of business’’. If the incentives given by government are promising enough, investors and tax payers would be willing to pay the taxes due the government instead of avoiding and/or evading it.

• Poverty Or Shortage Of Funds

There is a wide spread of tax avoidance and evasion which can be attributed to high standard of living that has left many individuals in poverty. In view of this, Poor individuals who enter into sole proprietorship will always want to evade or avoid tax in order to meet their pressing needs.

Also it is believed that, only rich people drive nice cars and in expensive houses thus, some people avoid and evade tax to enable them get these desires and other necessities of life, like food, shelter and clothing.

• Loose and Weak  Tax Law

Where the tax laws are loose and full of loop holes, it will tempt avoiders and evaders. Punishment for tax evasion is very mild in Ghana, and people may be tempted to evade taxes. The multi-nationals operating within the country may capitalize on this loop holes and also lack of effective tax legislation to reduce their tax liabilities.

• Inadequate Personnel

The relevant tax boards and offices are grossly under-staffed. The amounts of work exceed manpower and the tendency has always been to rush up work in an attempt to live up to the tasks. This leads to mistake of assessment or complete omission of some tax payers name from the tax list (Ntim, 2007)

• Inadequate Tax Education

Where a tax payer who is not criminally minded is aware of massive tax evasion by other tax payers, he may feel that the least he could do is avoid tax by planning in order not to bear more than his fair share of tax burden (Nightingle, 1979). This is because adequate measures have not been carried out by government to educate citizens about the importance and benefits of taxation to the Ghanaian economy.

2.3.2 Challenges of Tax Avoidance and Evasion on the Ghanaian Economy

The avoidance and tax evasion are some of the major challenges faced by Internal Revenue Service. In discharging his Duties (Ablorh-ouarcoo, 2010), tax avoidance is very common and persistent such that no matter what legislation is put in place to curb it, some tax payers always find a way around it. Ghana loses millions of United States Dollars in tax revenue every year due to tax avoidance and tax evasion (Senanu, 2OO5). In effect, the end result of tax avoidance and tax evasion reduce revenue to the government through the tax authorities. Multi-national corporations operating in Ghana have been using empirical and exploitative trade liberalization to gain financial advantage such as taking advantage of tax incentives.

As a result, government has not been able to adequately tax or collect the appropriate taxes from the multi-nationals, local corporations and the elite (Otieku, 1992). The result and effect is a serious economic crisis that has led to extreme poverty.

Some of the impact of tax avoidance and tax evasion on the Ghanaian economy are these:

1. Decrease in Tax Revenue

The main implication of tax evasion and avoidance is that, it reduces the amount that government receives as revenue from taxation; therefore the amount needed by the government to improve the economy is inadequate.

A large percentage of revenue for the government comes from taxation. Almost fifty percent (50%) of tax revenue is lost every year as a result of tax avoidance and tax evasion. (Abler-Quarcoo, 2010).

 Tax avoidance and its impact is a global phenomenon that even the in the world's developed nations are not spared. For example, the United States of America senate parliament sub-committee on investigation examined the actions taken by professor Finns, to promote abusive tax shelters were being mass marketed by major accounting firms and as a consequence, the government was losing billions of the U.S dollars.

 2. Inadequate Supply of Basic Amenities

Tax avoidance and evasion affect the extent to which the government can provide basic need of the population. The result and effect is deplorable infrastructure condition (Lyons, 1996), disarrayed educational system and sub-standard health system, water supply, road and power supply. Above all achievement of the economy ‘better Ghana agenda’ is hardly realizable with the low revenue yield.

3. Income Inequality

One of the functions of taxation is to redistribute income, but illegal accumulation of wealth through tax avoidance and evasion has further widened the gap between the low income earners and the high income earners (Clayton and Brown, 1983) in U.S for instance, more than 60% of the largest and profitable U.S companies boasting of pre-tax profit of 1.1 trillion US dollars did not pay any federal taxes from 1996 through 2000 (U.S General Accountability Office, 2004) reports show that because of this tax avoidance, contractors had a great advantage over their domestic competitors thus there is no possibility of fair competition used.

4. Increase in International Tax Planning

This has also caused a decline in tax revenue. It is greed and the fear of seeing their deep pockets depleted that drives their frenzied attacks against off-shore havens and not a fight against international crime as we are made to believe. It is the increase use of off-shore tax-free companies by the general populace that a major headache for the government because it reduces their tax revenues.

2.4 TAX EVASION, TAX AVOIDANCE AND TAX EXPENDITURE IN DEVELOPING COUNTRIES

The provision of public service and infrastructure is the key factor for economic development and growth. Many developing countries fail to raise tax revenue required to finance their public sectors. In 2005, the average tax revenue to GDP ratio in the developed countries was approximately 35%. In the developing countries, it was equal to 15% and in the poorest of these countries, the group of low income countries tax revenue was just 12% of GDP.

Tax avoidance and tax evasion are widely believed to be important factors limiting revenue mobilization. This study reviews existing empirical estimates of tax gaps, that is, tax revenue loses due to tax avoidance and tax evasion in developing countries, the role of tax expenditures and other determinants of revenue mobilization.

 Governments in most developing countries do not consider the principles of economy (Smith, 1978) in collecting tax revenues. This concept means that the cost of collecting tax such as labour cost, machinery, stationery and other tax instruments must be abridged drastically. That is, it should not be anywhere close to the tax revenue. Evidence has proven that most developing countries have high rate of tax expenditure and this reduces tax revenue immensely. The structure for tax collection must be reviewed so that tax expenditure can merely be minimized.

Existing empirical studies on tax revenue loses due to tax avoidance and evasion in developing countries distinguishes between a domestic component and an international component. The domestic component includes tax evasion which occurs due to the domestic shadowed economy. The international component includes profit shifting by corporations and off-shore holdings of financial assets by private individuals.

The most widely cited study of the domestic component of tax evasion is Cobham (2005), who estimates that developing countries lose $286 billion USD per year due to tax evasion in the domestic shadow economy. Cobham's calculation of the tax evasion is based on estimates of the size of domestic shadow economy by Schneider (2005). This approach has a number of limitations. Most importantly, the number derived by Cobham (2005) should not be interpreted as an increase in tax revenue which could possibly be achieved by better tax enforcement or other policy measures.

This is not only due to the fact that it is practically impossible to tax all economic activity in the shadow economy. In addition, the measured size of the shadow economy may be the result of deliberate policy choices made by developing countries like Ghana. This would imply that paradoxically, crowding back the shadow economy may neither increase tax revenue nor be in the interest of national welfare. Secondly, shadow economy activities as quantified in Schneider estimates include illegal activities which would be stopped if detected and thus would not generate tax revenue. Thirdly, measures of the shadow economy as those provided by Schneider have to be interpreted with caution. Due to estimation method used, the charge of these measures over time is likely to be more informative than the change the levels of these estimates.

If estimates of level of tax evasion are based on measurement of the size of the shadow economy, the accuracy of this measure is of key importance. Cobham (2005) relies on shadow economy estimates based on macro indicators. The approach has the advantage that the data is publicly available. We compare to other methods to quantify the (domestic) tax gap. These approaches can be broadly divided into:

i. Macro approaches: this uses data from national accounts.

ii. Macro indicators to quantify the tax gap.

iii. Macro approaches: this uses household or firm level data retrieved from surveys and audits.

 iv. In general macro approaches based on information from tax audits of randomly selected tax payers are most likely to deliver reliable tax gap estimates. In contrast, methods to quantify the domestic tax gap based on r macro indicators are less reliable and informative. However data to implement micro method is seldom available for developing countries.

2.4.1 Relevance of Macro and Micro Approaches in Quantifying Tax Gap

One existing tax gap estimates for developing countries of macro indicator approach, a possible starting point to improve the information on tax gaps in developing world would be to use macro methods based on the identification of discrepancies in national accounting data. But in the long run, an appropriate quantification of the tax gap in developing countries is required. Research based on micro approaches in particular methods which rely on tax audit information collected by the national tax authorities. Firstly, this would deliver relatively a reliable tax gap estimates. Secondly, it would allow calculation of individual components of the tax group according to tax payers groups (example is corporations vs. individuals in different income classes and sectors of activities) and the type of income which is evaded (example is income earned from international and national transactions).

The latter provides important and valuable guidance for reforms of the tax administration and the tax system in a developing country.

2.4.2 Other Studies Used To Quantify the International Components of Tax Gap

Two groups of studies can be distinguished. The first group focuses on shifting of corporate profits out of developing countries. This activity may include both (legal but desirable) tax avoidance and tax evasion (illegal). The most influential studies in this area try to identify profit shifting by analyzing international trade policies.

The basic idea is that prices charge for goods exposed to developing countries are distorted upwards whereas prices of goods imported from developing countries are set artificially at low levels, so that income effectively generated in developing countries is shifted to the developed world. According to the studies, trade price distortion may arise with trade between both unrelated parties (where exporters and importers collide) and related parties (within multinational firms) to quantify the tax revenue which developing countries lose due to these price distortions,  many studies rely on subjective evidence or non representative survey data.

More sophisticated work in this area based on macro data for trade transactions find some evidence on systematic price distortions. These are interpreted as reflecting shift in income from developing countries to industrialize countries like the US and the United Kingdom. Estimate of revenue losses suffered by developing countries due to the corporate profit shifting range between approximately USD $35 billion and USD $160 billion per year.

The methodological weakness of the mispricing approach is that it is unclear to which extent that price differences simply reflect the quantified differences within the product group. The price pattern observed in the data may just reflect differences in the quality structure of goods produced by countries in different stages of economic development. As long as it is not possible to disentangle quality difference and income shifting, the interpretation of numbers generated by the misplacing approach is difficult.

A key short-coming of many existing studies based on mispricing is that they only take into consideration overpriced imports into developing countries and underpriced exports of the developed countries. This shifts income into developing countries. Estimate of tax revenue calculations have to take into account income shifting in both directions. If only one direction is considered, the results will be highly misleading thus; tax revenue losses due to mispricing will be overestimated drastically.

Another issues is the way in which the existing studies of profit shifting translate their estimate of mispricing into tax revenue losses simply multiplying results for income shifted out of developing countries with statutory corporate tax rate, neglects the existence of investment incentive, for example tax holidays, free enterprise zone and to mention but a few. Investment tax incentives are widely used in developing countries. For this concern, less income shifting would not necessarily increase corporate tax revenue; part of this income would simply be tax exempt or taxable at very low rate. This aspect implies that existing studies overestimate tax revenue losses due to profit shifting.

In other to better understand the issue of price distortion and corporate income shifting, it is necessary to investigate in greater detail whether prices observed reflect quality difference or income shifting. Clearly, income shifting in both directions has to be taken into account, it takes place either through misplacing or other instruments like debt financing, it is important to investigate why income is shifted out of the developing countries. In order to use this, it would be possible to use micro data for multi-national firms operating in developing countries. Such an approach would allow investigating whether and to what extent taxation, business regulation and institutions like government  structures, property rights and to name but a few, contributes to the level of tax a revenue levied from taxing firms.

A second group of international studies focuses on tax evasion by wealthy individuals residing in developing countries that own financial assets abroad and do not report this income in their country of fiscal residence. Estimate of tax revenue losses in developing countries caused by this type of evasion ranges between USD $15 billion per year (this estimate refers to the 199Os) and for more recent year US $124 billion. This estimate usually starts with rough estimate of worldwide financial assets held off-shore and then makes some adhoc assumptions on taxable returns, tax rate, and the share of overall assets owned by individuals residing in developing countries. It is difficult to interpret the results of these calculations. In this area, there is even less data available than for the corporate sectors. So far, the scope for more informative research seems to be limited.

2.4.3 Relationship between Tax Avoidance, Tax Evasion and Tax Expenditure

In addition to tax avoidance and tax evasion, the existence of tax expenditure in particular tax incentive for investments, is widely seen as a reason for tax. revenue losses in developing countries. Unfortunately, internationally recognized similar data for this extent of existing tax expenditure is not available. Existing numbers on the volume of tax expenditure reported by various countries are not comparable because they are based on different measurement concept. While there is some evidence that the use of some of investment incentives has increased in the last decade, little is known about the impact of this expenditure on tax revenue and revenue mobilization.

 As an overall assessment of literature on tax gap estimate for the developing world, we conclude that the available knowledge on tax revenue loses in developing countries caused by tax avoidance and tax evasion is very limited.

This is partly due to the lack of data and partly due to methodological shortcomings of existing studies. Some of the existing estimate of tax revenue losses due to tax avoidance and evasion by firms systematically over estimate the losses. Overall, it is fair to conclude that most existing estimate of tax revenue losses in developing countries due to evasion and avoidance are not based on methods of collecting data.

Moreover, it seems that too much emphasis is put on producing aggregate estimate for tax revenue losses for developing countries. Research on tax avoidance and tax evasion as well as policies to achieve more revenue mobilization should take heterogeneity into account. More research is needed to improve our understanding of tax avoidance and tax evasion and the implication of these activities for revenue mobilization in developing countries.

It is also a fact that the inappropriate use of tax expenditure reduces government revenue. Tax expenditures are widely criticized as policy instrument which lack transparency and which are difficult to control. They are thought to be vulnerable lobbying by special interest groups and even corrupt practices. Therefore strategies to control tax expenditure may be an important element in a broader strategy for improving revenue mobilization in developing countries.

Reports have provided a survey of existing studies on tax avoidance and tax evasion as well as tax expenditures in developing countries. The existing studies are divided into two groups. The first group of studies focuses on tax evasion and tax avoidance related to domestic economic activity. The second group of studies focus on tax evasion and tax avoidance related to international economic activity.

2.5 THEORITICAL FRAMEWORK

The theoretical framework focuses on the main variable to the studies, the factor of the variable, the gathering of data, how solutions are arrived at and also the presumed relationship between them. In other words, something that explains graphically or in narrative form, the main things to be studied. The main aim of this part is to reveal the summary of the relevant concept that will be employed to conduct this research. It is also to build an appropriate framework to study the 1 effect of tax avoidance and tax evasion on the Ghanaian economy. For the purpose of this study, emphasis is laid on the tow variables.

2.5.1 Tax Avoidance and Tax Evasion and Productivity

Since independence many multinational corporation including oil companies (like shell Ghana limited, Benso oil palm plantation limited, star oil company limited, etc) have been in operation in different part of Ghana where they make huge profit every year.

These companies have their head offices in developed countries which are their country of origin, these companies may be deriving their main revenue from their respective branch offices but the governments of their country require them to file and pay personal and corporate taxes at the end of every trading period (CNN News, 2005). This leads to double taxation, therefore they try to avoid and evade tax liabilities in Ghana by taking advantage of the tax system. This had a devastating consequence on Ghanaian economy and created unnecessary poverty, hunger, and dispossession among Ghanaian masses.

Studies have shown that domestic, multi-national and private business has reduced government revenue in various ways by avoiding and evading tax.

Some of the common ways are as follows:

• Keeping two set of records for business transaction, one records the actual business and the other contain false records.
• Barter trades where payments are made in kind instead of money is not accounted for.
• Nondisclosure of major sources of income and vital information about their earnings.
•  Working an extra job for cash, the income is paid in cash other than cheque which has no legal record and it is not reported to the IRS.
• Submitting false statements on returns to IRS and other revenue agencies with sole aim of reducing tax liability.

2.5.2 Tax Avoidance and Tax Evasion Performance

Tax avoidance and tax evasion affect the extent to which the government can provide basic needs of the population and the obvious effect is deplorable infrastructure condition (Bakare, 2006). The education sector in Ghana has performed poorly in most rural areas who cannot afford conducive environment for teaching the pupils. According to viasat news (2011) the pupil of some villages in the Central, Northern and Volta region receive their lectures under trees. There is no adequate educational facility. The health sector also suffers a lot because there is no adequate facility to aid the health sector. This is because the less privileged do not have adequate access to health facilities.

The above poor performance in these sectors is caused by persistent and continuous avoidance and evasion of tax. The ‘better Ghana agenda' has suffered a lot of criticism and it has not yet revenue which can be traced to contributions made by tax avoiders been achieved because of look and evaders, leading to low yield of revenue in Ghana.

2.5.3 Frame of Reference

Due to relevant selected literatures and the research question, this study was conducted in tow hypothesis test, the relationship between tax avoidance and evasion on the Ghanaian economy is tested using a hypothesis.

There is a large body of literature devoted on the analysis of economic performance in Ghana. In the first phase, a multiple regression analysis is used with the tax avoidance and evasion on Ghana economy and the performance of economic issue.

A multiple regression analysis is used because it is a popular and valid model of investigation used to test performance of macro economic issues on parameters such as money payers and benefit from taxes.

The second phase of the research question adopted the use of chi-square (x²) analysis to collect data. In this phase, chi-square was used to determine the relationship between tax avoidance and tax evasion and related problems with the tax avoidance and tax evasion on the Ghanaian economy.

CHAPTER THREE

PROFILE OF INTERNAL REVENUE SERVICE WEIJA BRANCH

3.1 INTRODUCTION

Internal Revenue Service as a revenue agency is very strategic in the achievement of national goals. It has therefore embarked on a mission of improving the quality of service delivery to taxpayers and the general public through simplifying processes and clarifying rules and procedures. This chapter therefore aims at the history, mission, vision, objectives, structure, achievements and challenges of IRS. The Internal Revenue Service always aims at improving the quality of service through the Ministry of Public Sector Reform.

3.2 BRIEF HISTORY OF INTERNAL REVENUE SERVICE WEIJA BRANCH

Income tax administration started in the then gold coast in September, 1943 with the passing into law of the income tax ordinance n0.27 of 1943 on 22nd September 1943. Initially, the department collected tax from only a few limited liability companies and a very small number of individuals. Then the year assessment was 1st April to 31 March but now it is from 1st January to 31St December of the same year.

Personal income tax in Ghana has always been progressive, that is tax rate based on what you earn, higher income earners paying higher tax. Over the years, other taxes and duties are added to the income tax. These are mineral duties of 1952, and betting tax of 1952. Between 1961 and 1963, additional taxes and duties were introduced. Among these are property tax (1961), Entertainment duty tax (1962), Airport tax, hotel customer's tax, Standard Assessment and excess profit tax, all in 1963.

On the 1st July, 1963 the tax year was changed to 1^st July -30^th June. The P.A.Y.E system was introduced in July 1963. With the addition of more taxes, the income tax department was changed to central revenue department to reflect the broad scope of taxes collected. All these years, (1943-1985) the department was a civil service department.

In July 1986, government took a decision on structural changes in the department. The IRS law, 1986 (PNDCL 1243) was passed. This law transformed the hitherto central revenue department onto a ' public service organization, the internal revenue service, with its own board of directors. The service is now able to recruit a pool of professionals to ensure effective tax administration.

The Promulgations of the revenue agencies governing board Act, 1998 (Act 558) established central governing body to replace the existing governing board of IRS, CEPS and VAT. Consequently the agencies governing board was constituted in 2001 to ensure supervision and co-ordination of the activities of all three revenue agencies.

3.3 MISSION OF INTERNAL REVENUE SERVICE WEIJA BRANCH

The internal revenue service is under the ministry of finance and economic planning of the republic of Ghana. It is a public service administration that takes charge of direct tax administration with the aim of ensuring an effective tax administration agency that applies the tax laws fairly, effectively and with integrity in order to collect revenue for the national development.

Internal revenue service as a revenue agency is very strategic in the achievement of national goals. It has therefore embarked on the mission of ' improving the quality of service delivery to tax payers and the general public l through simplifying processes and clarify rules and procedures. It has set time frame for completion of tasks in order to render them more transparent to the public. The objective is to create a more customer oriented revenue collection organization focused on quality service to enhance revenue tax compliance The mission of the I.R.S is also to optimize tax revenue through the fair application of tax laws to promote voluntary compliance through improved customer service and tax payer's education, and to effectively and efficiently administer the tax laws through well-trained and motivated staff.

3.4 ORGANISATIONAL STRUCTURE OF INTERNAL REVENUE SERVICE WEIJA BRANCH

The Internal Revenue Service has five (5) main departments with different functions in order to ensure the effective and efficient management of IRS. These departments are;

i. Operations

ii. Research, Planning and Monitoring

iii. Finance a

iv. Administration

v. Legal Service

Each of these departments above is headed by a deputy commissioner. The functions of each department complement the others and help in achieving the goals of the service by carrying out their various functions.

CHAPTER FOUR

 PRESENTATION OF RESULT, ANALYSIS AND DISCUSSION

4.1         INTRODUCTIO

This chapter will explain in a nutshell the methods used to gather data and present all the information collected through validated questions from the staff of IRS Weija branch, tax payers, and tax consultants. All tailored towards the examination of the impact of tax avoidance and tax evasion on the Ghanaian economy.

However, the number of people who responded to the questionnaires and the series of interviews conducted served as the basis for our views which are considered of great importance to this study.

The total number of questionnaires produced is 60 (sixty), only 50 (fifty) were completed and returned, 16 (sixteen) from the tax payer category, 20 (twenty) from the tax officials whiles 14 (fourteen) were returned from the tax consultant category. The presentation and analysis of data will be in tables, graphs, and statement form respectively.

4.2         PRESENTATION OF SOCIO-DEMOGRAPHIC DATA

This consists of the sources of data collection, population and sampling, research design, the questionnaires, observation and interview, secondary sources, data gathering process and data analysis technique. All these will be discussed in nutshell.

4.2.1   Research Design

A non-experimental research design is adopted in the collection and analysis of the data in this project work.

In this study, the researchers employed the non-experimental research design as a frame work for adequate test of relationship amongst the variables of the question understudy. This was chosen due to cost and time effectiveness, and more taxation research variables that are not quite controllable to be tested with non-experimental research design.

4.2.2     Population And Sampling

The population of this work is made up of the staff of IRS (Weija Branch), especially these in the operation department, the tax consultants and tax payers including staffs of Methodist University College Ghana.

Due to the large size of the population for a study of this nature, taking cognizance of time and money constraints, the researchers decided to employ the use of sampling techniques, selecting a limited number of elements from the population which is the representative of the entire population. The samples that will be taken from this population as mentioned above are the officials of IRS Ghana (Weija Branch), a few tax payers and some tax consultants.

4.2.3     Sources Of Data Collection

Data collected for the study comes mainly from the tax officials of IRS Ghana (Weija Branch). The tow sources of data used in this study were primary and secondary data.

The use of questionnaires is considered because it is believed that it grants the desired and accurate response, likewise observations and interviews and secondary sources.

4.2.3.1 The Questionnaire

The questionnaire is one of the techniques used for this research work. This covers many areas especially reasons for tax avoidance and tax evasion.

The questionnaire was given to the staff of IRS Weija branch staffs of Methodist university College Ghana and other tax payers. The questionnaire was used because it permits a wide coverage at a minimum expense, both in money and efforts.

4.2.3.2 Observation/Interview

It is used as a tool to implement and test the gravity of the information gathered from one on one verbal question by the researcher to helpful persons. Although time could not permit the researchers to have enough interviews with those concerned.

4.2.3.3 Secondary Source

This process is where information is obtained from peoples past work for use in the research work. References were made to textbooks, encyclopedia, journals, magazines, lecture notes and seminars.

4.2.4     Data Gathering Process

For the purpose this research work, the researchers used the questionnaire to gather data.

From the questionnaire, there were two (2) sections. Section A which consist of four (4) questions which seek to know some information about the respondents and their organization. The first question of section B seeks to find out the category of respondents, the other nineteen (19) questions seek to find out basic information about tax avoidance and tax evasion in Ghana.

4.2.5     Data Analysis Techniques

One of the ultimate aims of carrying out any research is to add to the existing body of knowledge. The possibility of the research work to meet this purpose largely depends on the quality of instruments used in gathering data and other valuable information.

In the lights of this, the researchers made efforts to use oral interview in gathering this information and the questions asked are tailored to achieve desired objectives.

Reliability of measuring instruments on the other hand simply refers to the extent to which information gathered or obtained from respondent represents the true position of what is sought. The researchers ensured clarity of the interviewed questions and have chosen to use simple expressions and all elementary ambiguity was minimized in order to retain clarity and understanding.

Data collected are analyzed using the simplest form of technique to ensure easy understanding and knowledge impartation by all persons or governments who will read and benefit from the final conclusion and recommendation to be made at the end of this research.

4.4 TEST OF HYPOTHESIS

The chi- square (x²) distribution method is applied here to test the hypothesis which has been formulated, and 50% level of significance assumed. It is expected to either reject or accept the null hypothesis (Ho) or, the alternative hypothesis (Hı).

DECISION

It is evident from the analysis that, tax avoidance and tax evasion have a negative impact on the Ghanaian economy. This study has shown various factors and reasons for tax evasion and tax avoidance. Despite the fact that taxation is very important to the Ghanaian economy, a lot of eligible tax payers are not willing to pay tax. The questionnaire administered proves this fact, and has also revealed several important findings about the impact of tax avoidance and tax evasion in the economy including other facts about Internal Revenue Service (IRS) of Ghana.

CHAPTER FIVE

SUMMARY, CONCLUSION, AND RECOMMENDATION

5.1       INTRODUCTION

This chapter talks about three sections which is summary, conclusion and recommendation. The summary section presents the major findings of the study while the conclusion section presents the interpretation of the findings. The recommendation section presents a set of suggested course of action resulting from this study.

5.2       SUMMARY OF FINDINGS

Having viewed all the research carried out in the form of interviews conducted, the use of documented material, and the review of related literature, it is emphatic that taxation is indispensible and essential for the continuous existence of economic growth in Ghana.

Notwithstanding this fact, majority of tax payers particularly in Ghana are yet to understand that payment of taxes is essential to their existence as individuals and as a nation. A careful analysis of the data collected and analyzed in the preceding chapters reveals the following findings:

·         Most tax payers are ignorant of the tax system.

·         The tax authorities are faced with inadequate number of trained and qualified personnel.

·         The tax collection process is characterized by corruption.

·         Most tax payers do not pay taxes because of the perception that others are evading taxes without being caught.

·         The poor attitude towards payments of taxes is partly due to the lack of patriotism by the tax payers.

·         There is a high prevalence of tax avoidance and tax evasion in Ghana.

·         The relationship between the tax payer and the tax official is not cordial.

·         The high rate of tax avoidance and tax evasion is partly due to poverty.

·         The tax payer feels he is not benefiting adequately from the tax paid.

·         There is lack of faith in the ability of government to properly use the money collected from tax.

·         The low penalties prescribed in Ghana tax laws for late payment or non-payments of tax contribute to evasion of tax.

·         Tax avoidance and tax evasion reduce collectible revenue that is due the government of Ghana.

·         Tax revenue does not contribute much to the revenue of government of Ghana as compared to the non-tax revenue.

·         Most Ghanaians are ignorant of the concept avoidance and tax evasion.

·         There is corruption in the tax collection process on the part of the tax officials by pursuing their own selfish interest.

·         Accountants collude with company directors to present false statements to tax Authority in order to reduce their tax liability.

·         Individuals and companies use various tax avoidance schemes and even evade taxes without the assistance of an accountant.

·         Audits that have been carried out in IRS show that there is general mismanagement of tax revenue at the IRS.

·         Taxes collected are embezzled by officials of IRS and also government officials.

·         Some banks that are designated for the collection on behalf of IRS are also involved in fraudulent and corrupt practices.

·         Some taxpayers are ignorant of the advantages of not avoiding and evading tax, they do not understand the tax benefits due them.

·         Some tax payers evade taxes in order to get more funds to expand their businesses.

·         Poverty is also an important reason why most Ghanaians do not pay tax.

·         Multi-nationals operating within Ghana also avoid taxes because of the loop holes in Ghana tax system.

·         Tax avoidance and tax evasion contribute to inadequate supply of basic amenities.

·         Illegal accumulation of wealth through tax avoidance and tax evasion has further widened the gap between low income earners and high income earners.

·         Barter trade also contribute to tax avoidance and tax evasion because payments are made in kind.

·         Most tax officials are not satisfied with their working conditions.

·         Some tax payers consider tax evasion as an appropriate means of enriching their businesses.

·         Most tax payers pay taxes because they are compelled to pay and not because they desire to pay taxes.

·         There are inadequate tax personnel to take part in the tax collection processes.

From the findings enumerated above, there is a general revelation that the tax system in the country need serious reform and restructure before it can contribute meaningfully to the fiscal policy of the country.

5.3       CONCLUSION

Based on all the findings, it is evident that tax avoidance and tax evasion have a negative impact on the economy of Ghana. Other conclusions drawn from the findings are enumerated below;

• The Ghana tax system is characterized by ignorance.
• There is lack of patriotism on the part of the tax payers.
• There is an inequitable tax laws in Ghana and these tax laws have limited application.
• Major problems facing taxation includes low yield in revenue, corrupt practice and the presence of multiplicity in taxes.
•  Tax payers resort to massive tax avoidance and tax evasion by using schemes with collaborative efforts of the professionals (Accountants and tax officials) and this has a serious effect on the collection of revenue that is due the government.
• The major challenges facing the tax authorities include the need to find solution to tax avoidance and tax evasion, fraud, mismanagement of collected revenues.
• There is a need to improve voluntary compliance to payment of taxes.
• The government must use tax payers’ money judiciously in order to motivate the tax payers.
• There are lots of loop holes in the tax law that serves as an opportunity for many tax payers to avoid and evade tax, therefore this should be a major challenge to the legislature.
• Ghana tax system needs reform in order to function properly and eliminate inappropriate tax avoidance.
• There is high rate of poverty in Ghana and as a result, contributed to the reduction of tax revenue for the government.
• Many multi-nationals operating within Ghana are aware of the weak tax system and loop holes; this has given them the opportunity to avoid tax.
• It is evident that not only individual income earners contribute to low revenue but fraud and mismanagement by the IRS also reduces tax revenue.
• There is lack of discipline on the part of tax payers, tax officials and even the government, regarding taxation and utilization of the revenue generated through tax collection.
• The fact that some people are evading taxes unnoticed,  is also another reason why others who would have been willing to pay the tax, also take part in tax evasion.
• Even though taxation is very important to the economy of Ghana, a lot of tax payers are not willing to pay taxes.
• There is a need to increase the rate of VAT without any protest from the labour union in order to get additional revenue to improve performance of government and ensure distribution of income.
• There is a need to improve relationship between tax payers and tax officials in order to enhance the collection of tax.
• It is important to endeavor to reduce poverty rate in Ghana by providing job opportunities and effectively utilizing the tax revenue they were able to gather.
• Measures should be taken by government to generate more revenue from taxation other than non tax revenue.
• The governments are not accountable to the tax payers and citizens of Ghana and this has contributed to evasion of taxes.
• Tax payer attitude to evade tax is based on different reasons ranging from social, economic and political reasons.

Finally, it is evident that Ghana tax system needs reform in order to function properly to eliminate inappropriate tax avoidance and tax evasion.

1.4       RECOMMENDATION

Taxation is crucial to Ghana to ensure sustainable fiscal policy. This is even more important in view of the fact that the country presently operates under a deficit budget approach. The inability of government to meet her ever increasing fiscal responsibility makes the collection of taxes vital. This can only be achieved if tax avoidance and tax evasion is curbed to the barest minimum for any meaningful tackling of the problem of tax avoidance and tax evasion. The following recommendations are worthy of consideration.

• The Ghana tax system should adhere to a simple, clear and unambiguous tax laws that will be continually reviewed to align with major economic target to promote an efficient fiscal policies and loop holes that serve as a fertile ground for avoidance scheme need to be amended.
• There is a need to provide better living condition for the tax officials. In fact, the negative attitude of most of tax officials towards tax payers is linked to poor remuneration and motivation. As a matter of fact, many staff at the professional agencies such as Internal Revenue Service (IRS) needs a better standard of living. So for the system to efficiently and effectively curb tax avoidance and tax evasion, it must produce officials that are well paid, properly motivated, adequately equipped, well-disciplined and professionals.
• Government should address the issue that makes corporate bodies and individuals avoid or evade tax. This can be done through judicious spending of tax payers money.
• Adequate legislation should also be put in place to deter people from indulging in any act of tax avoidance and tax evasion.
• Anti-avoidance provision should be of general application or refer to specific tax havens or tax avoidance devices.
• Tax payers, tax consultants and tax administrators should work together as partners to achieve progress. There should be a regular forum for discussing problems and looking for avenues for resolving thorny issues.
• The tax administrators should try and earn the confidence of tax payers. A situation where tax payers are being looked at as tax evaders should be avoided.
• Businessmen should be compelled to keep account and utilize the service of qualified accountants in the preparation of their audited accounts.
• In order to ensure compliance and reduce tax evasion, tax payments should be designed to meet the convenience of the tax payers.
• There should be strict penalties for the various offences. This will reduce evasion and discourage people who intend to evade and avoid tax.
• The uses of tax clearance certificate as a means of combating tax evasion should continue because so far, it has proven to be a success to an extent.
• The tax payer should be educated on the need to pay taxes and the benefits they will get as citizens of Ghana.
• Government should offer adequate tax incentive to encourage participation of eligible tax payers in paying taxes.
• Government should address the issue of poverty by identifying the causes of high rate of poverty and take appropriate measures to reduce poverty rate by providing job opportunities and schemes to help the less privileged.
• Government should regularly review the tax laws in order to tighten the loop holes that have been creating avenues for unnecessary avoidance of tax and tax payers taking undue advantage of the loop holes in the tax system.
• Appropriate measures should be taken to deal with understaffing of tax officials that take part in the tax collection process. In other to ensure that the amount of work does not exceed the manpower and task assigned to them can be carried out efficiently.
• Accountability on the part of government and effective use of tax revenue will instil faith in the government thereby encouraging payment of taxes.
• Income should be redistributed to avoid illegal accumulation of wealth through tax avoidance and tax evasion which has further widened the gap between the low income earners and the high income earners.
• A conducive working condition should be available to the tax officials. They should be properly rewarded in order to reduce corruption and improve their morale to work effectively and efficiently.
• The corrupt practices in IRS should be checked to prevent embezzlement of funds by the officials of IRS.

In summary, curbing the incidence of tax avoidance and tax evasion means, there should be the need for statutory and administrative actions, but all those concern (the tax payer, tax consultant and tax administrators) must work together as a team for the progress of the country and the tax payer should be properly educated on the need to pay tax.

BIBLIOGRAPHY

Abdallah, N. (2008). Taxation in Ghana, principles, practices and planning (2^nd edn.).       Accra; Black mask publications.

Ablordeppey, S.D(2005). Tax incentives have not levied up to expectation. Daily Graphics, 32, 5-7.

Amoah, N.J. (2007). Filling tax returns. Daily Graphics, 58, 27-28.

Atkinson, P.(1887). Articles on the concept of Taxation. Retrieved November 20^th 2011 from http://www.paperspast.natlib.govt.nz/cgi-bin/paperpast.

Bakare, A. (2006). Income Tax. Retrieved November 20^th 2011 from http://www.viscar.incometax.edu/aaba.

Beattie, A. (2010). Element of income and capital gain Taxation. Retrieved December 2, 2011 from http://www.nmlites.org/standards/social studies.

Clayton, E.G and Brown E.J (1983). Economics, principles and practices. Columbus; Merrill Publications.

Lyons, S.M. (1996). International Tax Glossary. Amsterdam; IBFD Publications.

Nuakoh, A. (2005). Studies on the Ghanaian Economy. Vol 1. Accra; Ghana    University Press.

Orewa, G.O. (1962). Tax avoidance and tax evasion. Great Clerendon; Oxford University Press.

Otieku, J.K (1992). A look at factors affecting efficient income tax administration          Retrieved February 10^th 2012 from   

            http://www.ghanaweb.hcom/GhanaNewsArchive/ tax.php.

Raymond, B. (2008). Reduction in Tax revenue due to evasion. Daily Graphic, 63, 5-8.

Sally, M.J and Shelly C.R. (2004). Principle of taxation, advanced strategies. New York; Mcgraw Hill Publications.

Schenk, A. (2001). Treating Financial services  under a value added tax; Conceptual issues and country practices. Maryland; Gregath Publications.

Sesanu, K.E. (2005).  Challenges of tax administration. Daily Graphic, 149, 18-22.

Sona, D.A. (2010). Structure of IRS Ghana. Retrieved November 27, 2011 from http://www.irs.gov.org.

Woffman, W.H. (1982). Tax avoidance, tax evasion, and industrial income taxes. Wisconsin; West Publishing Co.

http://www.dailygraphic.com

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http://www.gra.gov.gh

DEFINITION OF TERM

1.    ASSMUPTION: - A thing that is to be accepted as true or as certain to happen, without proof.

2.    CURB: - Restrain or keep in check.

3.    Government :- A body of people that sets and administer public policy, and exercises executive, political, and sovereign power, through customs, institutions, and laws within a state.

4.     Haven: - A place of refuge or rest.

6.    Incentives: - Inducement or supplemental reward that serves as a motivational device for a desired action or behavior.

7.    Income tax:-This is a tax levied directly on the income of individuals and companies.

8.    Loopholes: - An unintentional characteristic of a law which allows one to circumvent the law's intention without actually breaking that law. Often occurs in tax law.

9.    Menace: - A person or thing that is likely to cause harm; a threat or danger.

10. Tax: - It is a compulsory levy (on money, goods and services) made by public authorities for which nothing is received in return.

11. Tax Avoidance:-Tax avoidance is using legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.

12. Tax Evasion:- Usually defined as an illegal practice which stems from the act of concealment, dishonesty, deception, ignorance, negligible or outright escape of tax payment on the part of a tax payer and resulting in paying less or no tax at all.

13.  Tax Policy: - These are general statement of intention which guides the thinking and action of all concerned towards the realization of the set objectives with regards to tax.

14. Tow: - To pull different variables together.