Taxation of Government Bond Interest in Ghana: A Complex Debate

The taxation of government bond interest in Ghana has become a topic of discussion, with arguments on both sides of the debate. Historically, successive governments in Ghana have engaged in financial markets to fund fiscal deficits by issuing government bonds, particularly Treasury Bills (T-bills), to refinance existing or maturing debts. The government has issued T-bills 51 times between January and September 2023, with a face value exceeding GHS 98 billion.

Exemption of T-Bills from the Domestic Debt Exchange Programme (DDEP): Investors have increasingly turned to T-bills as a primary savings option, especially after T-bills were exempted from the Domestic Debt Exchange Programme (DDEP). The exemption has positioned T-bills as an attractive savings option, and analysis of the Central Securities Depository monthly bulletin for September 2023 reflects this trend.

Tax Treatment of Government Bonds: Currently, interest paid to individuals and non-resident persons on bonds issued by the government of Ghana is exempt from tax, according to section 7(p) and (r) of the Income Tax Act, 2015 (Act 896) as amended. The question arises: should interest paid on Treasury Bills be taxed at a time when the government needs to raise sufficient tax revenue?

Arguments for Taxing Government Bond Interest:

1. Economic Perspective: Some experts argue that there is no economic justification for the exemption. They believe that tax exemptions on government bonds can lead to inefficiencies due to lost income tax revenue.
2. Equitable Distribution: Tax reliefs related to government bond interest can impact the fairness of the tax system. There is a perceived inequity when comparing the tax treatment of dividends paid to shareholders (taxed at 8%) with interest paid to individuals (taxed at only 1%).
3. Fairness in Treatment: Introducing a withholding tax on interest paid on Treasury Bills could bring fairness to the treatment of interest, particularly when T-bills are exempted from the DDEP program.

Arguments Against Taxing Government Bond Interest:

1. Investor Attraction: Some argue that tax exemptions on Treasury Bills exist to make government bonds more attractive to investors. This attractiveness is crucial for encouraging investment in government bonds, essential for raising funds for public expenditures.
2. Cost of Borrowing: Tax-exempt bonds effectively lower the government’s cost of borrowing. Investors may accept lower interest rates on tax-exempt bonds, reducing the overall interest expense for the government.
3. Encouraging Savings: Tax-exempt bonds can incentivize individuals to save more, which, in the long term, can have positive effects on the economy.

Conclusion: The tax treatment of government bond interest varies globally and can change based on evolving economic conditions. While tax exemptions may be used to encourage investment and fund specific projects, there is ongoing debate in Ghana about whether to tax interest income from government bonds. The decision may hinge on broader political and economic considerations, including the government’s fiscal policy and the need to balance the budget. The debate reflects the complex interplay between encouraging investment, raising revenue, and ensuring fairness in the tax system.