Fiscal policy to some extent if not large is influenced by political ideology. The previous government led by the social democrats – NDC Party – was famous for excessively taxing Ghanaians. During their regime, two real estate taxes – the rent tax and real estate VAT – were introduced. The Ghana Real Estate Developers Association (GREDA) indicated at various functions how these taxes hurt the market, but to no avail. However, they caught the attention of the property-owning democrats – NPP party – who characterized these taxes as nuisance taxes. They therefore proceeded to campaign on the promise to remove these taxes conditional should they win the election. They supported their promise with the economic reason that those taxes hurt the real sector and slows economic growth holding that housing has the highest multiplier effect in the economy. At his vetting, the Senior Minister designate, Mr. Osafo Maafo reiterated the plan of the new government to remove the so–called “nuisance taxes”. The common characteristic of both the previous and the current government is that neither of them provides a factual evidence-base to support the decision to tax or not to tax real estate. As usual, extreme political ideology appears to be driving these decisions, where the efficiency of the tax is often not studied well.
I wish to point out that there is a fundamentally common problem with the positions of the previous and the current governments. The common problem is that they assume that the real estate market is homogenous, hence the application of the “flat rate of tax” or the “entire removal” of same. On the contrary, the real estate market is heterogeneous often segmented by need and demand. On this basis, a flat rate of VAT could not be considered as progressive in principle as may be required. This is because a flat rate of VAT would have different effects on different people given inequalities in income levels. So, for example, certain types of housing which are only affordable to low and middle-income households before the tax may no longer be affordable after applying the tax. For the same property, the effect of the tax on affordability may not be felt if the buyer earns more. Therefore, income inequality is an important factor to consider when imposing a flat tax. This notwithstanding, removing the tax altogether may also result in loss of substantial revenue to the state if the people affected are those who can actually afford it. The optimal decision therefore depends on the nature of the formal housing market and income levels. For instance, the type of houses supplied and their prices as well as the incomes of buyers are important considerations.
In this article, I argue that the VAT on real estate sales should be maintained (at least until a comprehensive cost-benefit analysis shows otherwise) against the backdrop of calls by the GREDA and the promise of the government to scrap it. Two principal arguments could be advanced in this regard. First and most factual, most houses constructed by the GREDA are already out of the reach of the median income household, below which we find the masses, even most middle-income households. With average prices around US$100,000, and priced in dollars in the face of an incessant depreciation of the cedi, their clientele is cut in high-income households, expatriates, foreigners and residents living abroad, who earn superior incomes and currencies. A survey shows that more than 50 per cent of the clients of GREDA are foreigners and residents living abroad. Thus, this tax has little to no adverse effect on the ability of low and middle-income households (who constitute the majority of the populace) to afford their houses. It will serve government well to continue with this tax. In other words, the target clientele of GREDA are more likely to afford the additional 8% VAT on real estate. Thus, the government would benefit if it maintains the tax.
Should there be a need to review the VAT on real estate, it should not be an exemption for all real estate developers. Policy provides an indispensable avenue to promote affordable housing development to reduce the huge housing deficit. In this regard, affordable housing developers should be exempted from the VAT, but not luxury home developers. I must say that implementing such a policy requires a proper definition of affordable housing in Ghana and mechanisms put in place to monitor delivery. In Ghana, almost all real estate developers claim to be developing affordable homes although their prices are way above the median house price. The new Housing Policy defines affordable housing as:
“The ability of a household to spend up to thirty percent (30%) of its gross annual income on the rent or purchase price of housing where the rent or purchase price includes applicable taxes and insurances and utilities. When the annual carrying cost of a home exceeds thirty percent (30%) of household income, then it is considered unaffordable for that household” (Ministry of Water Resources, Works and Housing, 2015).
However, this definition only measures the “housing affordability” concept in affordable housing. It therefore says little about the definition of affordable housing and it is fraught with challenges especially because it contradicts the practice in the banking and finance industry, where 40% (maximum) of household income is considered a measure of affordability. Lets consider this situation for instance; would houses priced at US$100,000 be considered affordable housing (given the income levels in Ghana) just because someone can afford it? Certainly no!
The old Planning Policy Statement 3 of the United Kingdom (UK) acknowledging the conceptual difference between “affordable housing” and “housing affordability” defines the former as particular products outside the main housing market; and the latter as a measure of whether housing may be afforded by certain groups of households. These particular housing products according to the UK National Planning Policy Framework (2012) is the sum of affordable rent, social rent, intermediate rent and affordable home ownership provided to specific eligible households whose needs are not met by the market (Woo and Mangin, 2009); subject to rent controls that require a rent of up to 80 per cent of the local market rent (including service charges, where applicable). Eligibility depends on local authority allocation policies, local incomes and local house prices depending on the type of affordable housing. Also, Peter O’Brien of the Royal Town Planning Institute (RTPI) in the UK provides a quantitative benchmark, making reference to past EU definitions that equate what is affordable as 75 to 80% of the market price or rent.
Notwithstanding that affordable housing is priced below the market house price, the material quality and quantity of rooms and services are specified. According to the National Affordable Housing Summit Group in Australia, two main concepts in this regard: (1) “reasonable adequacy” in standard and location, and (2) “sustainability” are worth considering. The KPMG (2010) reveals that reasonable adequacy means a 300 – 1200 Sq. Ft. house in India, which varies in other countries. There is also the agreement on quality design standards as one of the chief measuring tools, although it makes affordable housing expensive (Quigley and Raphael, 2004). What then is the value of design in so basic the need as housing? A common view is that good design costs more, and that while architects add value and quality to buildings, they rarely add economy (Davis, n.d). Housing is not merely shelter, or basic protection from the elements; it must also bestow on its inhabitants a sense of dignity. To ignore this aspect of housing or to consider it a perquisite for those who can afford market-based rate housing is to invite both social and financial disaster.
The second reason why the real estate sales tax should be maintained is that those who can afford these skyrocketing house prices are those who finance them with mortgages. They then enjoy the tax deductions on the repayment of their mortgage interests, which can be considered as government subsidizing housing for the rich and high-income households, rather than the low and middle-income households, who need it the most. Therefore, the VAT on real estate somehow offsets the interest deductions allowed if they use a mortgage. Again, this interest rate subsidy provides an avenue for government to use policy to promote mortgage financing for the burgeoning middle-income class in particular and raking in some more revenue if properly targeted and aligned.
In summary, I wish to propose to the incoming government that a comprehensive study of the fiscal policy on real estate investment and development be done for efficient taxation and efficient delivery of real estate in Ghana. On the surface, maintaining the VAT on real estate sales would be prudent policy. I also propose for a review of the definition of affordable housing in the National Housing Policy so as to ensure that standards are met and delivery easily monitored.