The Incidence of Rent Tax in Ghana: Landlords or Tenants?

Tax the world over is the major source of revenue to Governments. It is really not a bad thing if tax payers get value for money (vfm) regarding what their taxes are used for, especially in respect of the state’s provision of services to promote the welfare of tax payers. Taxes are therefore one of the means by which the state ensures the welfare of its people; but how can these two roles of the state exist if not a contradiction? Taxes reduce the incomes of tax payers and their standard of living or welfare subsequently; yet it is by these same taxes that Government seeks to promote welfare. This paradox is possibly meaningful if and only if taxes are used in the interest of tax payers. Is this guaranteed in Ghana?

The “spirit of the age” in Ghana in the absence of innovation with regards to the sources from which the Government can raise revenue for its projects is the activation of the “last resort” right; whereby the Government has been criticized to be taxing “everything and anything”; even condoms, bathroom slippers, cutlasses, outboard motors, fishing nets and many others. In a pure technical sense, the Government is efficient in taxing goods for which people have inelastic demand for; in other words, goods for which tax payers cannot do without. Interestingly, these are goods patronized by the very poor people whose welfare the Government seeks to promote. The question that lingers on in my mind is two prompt: does the “type of goods” and the “calibre of people” who consume them matter to the tax masters? It was just six days after the Minority Leader in Parliament had advocated for the enforcement of the Rent Act; merely a political rhetoric in the absence of economic solutions, that the Ghana Revenue Authority (GRA) re-launched the 8% tax on rents; as a way of “reminding landlords and landladies to perform their civic duties”. Rent tax is not a new tax; it is a withholding tax payable on every income that accrues to someone as a result of letting or leasing a property to another person either for residential or commercial purposes. 

Two mutually exclusive outcomes are likely.  In my candid professional opinion, this is a connotative reminder to tenants rather than landlords to buckle their belt for hash economic times; or tenants must accept to connive with landlords to understate or under-report rents. The latter is however is likely but not rational to landlords as they will still lose money to the GRA; so landlords would rather opt for the former. In this article, I seek to conceptually argue that the Rent Tax targeted at landlords will rather be a punishment to tenants, due to the nature of the housing market in Ghana which will affect the transferability and incidence of tax. The Rent Tax will inevitably miss the target, but may not result in policy failure; because after all “Caesar” – the Government will still get its money irrespective of its source. It is this occurrence that will perpetuate the paradox of whether the Rent tax would maximize or jeopardize the welfare of the majority of Ghanaians. On the slight side, I am sure some tenants are happy that landlords are going to pay tax on the huge “arbitrary” rents they “extort” from them; just like some parents vehemently support the taxing of private universities; oblivious of the reality of the consequences to them.

Real estate in any form, commercial, residential, industrial beside others has a derived demand; that is, we demand the structure not per se but the benefits that may accrue to its ownership. To the landlord, rent is the reward for owning real estate whiles a tenant gets the benefit of accommodation or business premise, having paid this remunerative “consideration” under a binding, valid and enforceable contract to the landlord. One point I doubt the tax masters considered was the “transferability” of the Rent Tax; which is directly linked with the incidence of tax. This indeed is determined by the nature of the commodity in question, market conditions and regulation in terms of mechanisms for collection. The underdeveloped nature and the shortage of real estate in Ghana means that tenants have to cough-up high rents lest they lose their accommodation or business premises to the highest bidders. Obviously, tenants have an inelastic demand for their existing accommodations and business premises, as there is none available that is cheaper. In fact, the majority of Ghanaians cannot do without rented accommodation because shelter is a basic necessity; hence, will do anything to keep them – even paying high outrageous rents. This is worsened by the ineffectiveness of the Rent Act which could have accounted for fair determination and records keeping of rents; to facilitate the efficient collection of the Rent Tax.

Now, given this adverse market condition and the fact that most tenancy agreements are not binding, valid and enforceable, landlords potentially stand to gain. First, the lack of an evidence-based (contracts which will contain the rents payable) mean that landlords can underestimate their Rent Tax obligations in connivance with tenants or the latter pays the tax by way of rent increments.  This is possible because the Rent Tax is a withholding tax which requires an intermediary probably tenants to withheld and file subsequently in the absence of an effective formal institution. Hence, the accuracy of the total Rent Tax revenue would depend on the landlord and tenant. Rationally, tenants would rather “aid and abet” landlords in order to pay lower rents by under-reporting their rent payables to the so-called unwarranted task force to be set up; and not act in the interest of the GRA as is expected.  However, since, landlords would still pay some amount in rent tax, no matter how small it is, my best bet is that, landlords would rather opt to increase rents as a way of transferring the full tax to tenants rather than sharing the burden of tax by losing a penny.

How then can the Government guarantee that the Rent Tax would not be transferred to tenants by way of rent increments by landlords? The implication of these adverse composite factors means that tenants would inadvertently bear the incidence of tax given current market conditions. Distinctively, while tenants of residential real estate would bear this tax directly, tenants of commercial real estate would be indirectly affected as they can also transfer it to the ordinary Ghanaian through service-charge or commodity-price inflation. The dynamics would have been different if supply of real estate exceeded demand; thus, making it elastic such that the existence of surpluses would push rents down and even put landlords at the mercy of tenants. In that case, any excessive rent increments could cause tenants to vacate such premises for cheaper ones in the abundance of alternatives. This is however not the case and would not be in the remotest of time if real estate finance and investments are not taken seriously by the state; that is not to say the state should provide them directly.

How could this inevitably hardship be welfare maximizing? Does the tax masters understand the dynamics of this Rent Tax or singing the chorus, they are just taxing “everything and anything” in desperation to raise revenue and waste away on unjustifiable “nepotic” and “cronic” expenditures? Does the Government understand the nature of the market which generates rents and the people who would be affected? This is definitely not welfare maximizing as the poor who normally rent accommodation or business premises would be bearing the brunt of the Rent Tax.

Now, to effectively ensure that landlords who are the targets of this tax; unless tenants are, is not a matter of setting up a task force as the Chief Revenue Officer at GRA, Kwasi Bobie-Ansah has communicated publicly. At best it can only be an unsustainable temporary measure as per the annals of experience in Ghana. We need to go back to the basis; first things first. The Rent Act and the Contract Act are potential tools in this regard. It is indispensable for the nation to look into the ineffectiveness of the Rent Act and set up the necessary mechanisms that will ensure fair rental valuation and the provision of an evidence-based for Rent Tax assessment and collection – which I will address in my next article. Again, attaining a cashless economy is not a panacea to effective Rent tax collection; it is undoubtedly an overly simplistic suggestion without going back to the fundamentals of economic structures. This cannot be left to the whims and caprices of day-dreaming authorities; but requires a holistic approach to tackle market failures consensually with all related institutions.

Kenneth A. Donkor-Hyiaman

Kenneth A. Donkor-Hyiaman

Dr Kenneth A. Donkor-Hyiaman is a Real Estate and Urban Economist and a Lecturer in Real Estate Finance and Real Estate Development at the Department of Land Economy, Kwame Nkrumah University of Science and Technology, Kumasi. kwakuhyiaman2@gmail.com +233(0)508043011

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