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An in-depth look at how Ghana’s tax structure fuels national development
Ghana's tax system is a varied and dynamic engine whose role goes beyond the mere generation of revenues for the state into driving national development. As a developing nation, the tax system of Ghana faces the daunting role of generating revenues and framing a business climate that will fund economic development, innovation, and expansion.
Whereas the traditional taxation systems are concerned with the matter of tax rates of businesses and individuals, the Ghanaian taxation system has evolved in line with the unique character of the economy, which is characterized by a preponderance of an informal economy with a need for compliance policy improvement.
But while tax systems in other countries usually stipulate tax rates for businesses and individuals, Ghana's tax burden is determined by the particular state of her economy, in which a large informal sector provides tax revenues. Policy on compliance should be adjusted to suit this picture.
This article aims to outline the key taxes in Ghana's tax system. Secondly, it puts forward a new concept of diagnosis of the Informal Sector Influence Loop, which can be taken as a theoretical framework for comprehending why the informal sector is so potent an influence on tax policy and tax compliance behavior.
The Ghana tax system is designed in such a way that at any given time there will always be some room for a wide range of financial and development objectives. These terms used are technical, and some examples are provided.
: This includes taxes on income and wealth. E.g., personal salary tax, corporate income tax, and property tax.
Taxes on the consumption of goods and services, such as value-added tax (VAT) and excise duties.
We are primarily discussing the Health Care and Covid-19 Recovery, Municipal Levy, Communication Service Tax, and Environmental Tax.
Another widely recognized aspect of informal businesses is they contribute immensely to Ghana's fiscal system. One that is glaringly underappreciated in the case of the Ghana tax regime is that there is a huge role that the informal sector plays. There is a very noble contribution to economic life in Ghana played by the informal enterprise, but none of such enterprises appear to be registered to pay taxes.
The informal sector influence loop describes informal businesses, most times operating beyond the boundaries of tax administrators' observation, influencing the actuality of creating tax policy in this way. It is just a matter of informants within the informal economy enjoying a very intense level of interface with real-world economic activity and thus having some influence over compliance with taxation at the grassroots level.
For example, informal sector businesses are thoroughly inspected for VAT, whereas interpersonal relations of informal sector businesses with tax authorities form the basis for it
Personal income tax in Ghana is progressive, with rates ranging from 0% to 35% depending on taxable income levels. The tax is paid by employees, self-employed individuals, and freelancers.
The 15% rate of VAT, an increase from the previous rate, is being levied on most goods and services bought in Ghana. Only a few in some industries are eligible to be issued a 3% flat rate VAT.
The flat-rate VAT targets small businesses and wholesale and retail businesses particularly to simplify tax returns. The flat rate is levied on turnover to allow small businesses to continue fulfilling the criteria of VAT but without the hassle of normal VAT procedures.
VAT returns will be submitted by enterprises on a monthly and not quarterly basis. This gives the government an earlier and more frequent flow of revenue. Defaults will incur penalties, and it is thus crucial that enterprises keep proper records and pay on time. The Ghana Revenue Authority (GRA) introduced the E-VAT system, and VAT reporting was simple and transparent.
: General businesses/companies are taxed at 25%. In addition, special provisions are made to relieve the burden of repair on various industries. The corporate income tax rates by various sectors of the economy are as shown below:
| Sector | Tax Rate | Legal Reference | Notes |
|---|---|---|---|
| General Businesses | 25% | Section 1 & First Schedule, Act 896 | Standard corporate tax rate. |
| Oil & Gas (Upstream Petroleum Operations) | 35% | First Schedule, Act 896 | Applies to upstream petroleum companies. |
| Mining Sector | 35% | First Schedule, Act 896 | Applies to companies engaged in mineral operations. |
| Hotel Industry | 22% | First Schedule, Act 896 | For companies principally engaged in the hotel industry. |
| Non-Traditional Exports | 8% | First Schedule, Act 896 | For companies engaged in the export of non-traditional goods. |
| Financial Institutions (Loans to Farming Enterprises or Leasing Companies) | 20% | First Schedule, Act 896 | Applies to income from loans granted to farming enterprises or leasing companies. |
| Manufacturing (Regional Capitals, excluding Accra & Tema) | 18.75% | First Schedule, Act 896 | Concessionary rate for manufacturers located in regional capitals (except Accra and Tema). |
| Manufacturing (Outside Regional Capitals) | 12.50% | First Schedule, Act 896 | 50% of the standard rate for manufacturers outside regional capitals. |
| Free Zone Enterprises (After 10-Year Tax Holiday) | 15% (Exports), 25% (Domestic Sales) | First Schedule, Act 896 | Applicable after initial 10-year tax holiday. |
| Agro-Processing Businesses (First 5 Years) | 1% | Sixth Schedule, Act 896 | Applies to agro-processing businesses conducted wholly in Ghana during the first five years. |
| NGOs (Non-Governmental Organizations) | Exempt | Section 97, Act 896 | Must meet specific requirements to qualify for exemption. |
| Real Estate Development | 25% | Section 1 & First Schedule, Act 896 | Standard corporate tax rate. |
Withholding tax is withheld at source by companies and employers who pay for services rendered by consultants or contractors. Taxation is conducted as a percentage of the payment made and, in most views, is seen as a means of streamlining collection procedures. Below are some withholding taxes:
| Nature of Payment | WHT Rate | Legal Reference |
|---|---|---|
| Dividends | 8% | Section 115(1)(a), First Schedule, Act 896 |
| Interest (excluding individuals and resident financial institutions) | 8% | Section 115(1)(a), First Schedule, Act 896 |
| Rent on residential properties | 8% | Section 115(1)(a), First Schedule, Act 896 |
| Rent on non-residential properties | 15% | Section 115(1)(a), First Schedule, Act 896 |
| Fees to invigilators, examiners, part-time teachers, lecturers, endorsement fees (individuals) | 10% | Section 116(1)(a), First Schedule, Act 896 |
| Directors, managers, trustees allowances (individuals) | 20% | Section 116(1)(a), First Schedule, Act 896 |
| Commissions to agents (insurance, sales, lotto - individuals) | 10% | Section 116(1)(a), First Schedule, Act 896 |
| Service supply by entity (annual total > GHS 2,000) | 7.50% | Section 116(2)(c), First Schedule, Act 896 |
| Service supply by individual | 7.50% | Section 116(2)(c), First Schedule, Act 896 |
| Goods supply (annual total > GHS 2,000) | 3% | Section 116(2)(a), First Schedule, Act 896 |
| Works supply (annual total > GHS 2,000) | 5% | Section 116(2)(b), First Schedule, Act 896 |
| Payments to petroleum subcontractors | 7.50% | Practice Note - Petroleum Sector, First Schedule, Act 896 |
| Payments for unprocessed precious minerals | 3% | Practice Note - Minerals Commission, First Schedule, Act 896 |
| Royalty and natural resource payments | 15% | Section 115(1)(a), First Schedule, Act 896 |
| Nature of Payment | WHT Rate | Legal Reference |
|---|---|---|
| Dividends | 8% | Section 115(1)(a), First Schedule, Act 896 |
| Management and technical service fees | 20% | Section 116(9), First Schedule, Act 896 |
| Goods, works, or any services | 20% | Section 116(10), First Schedule, Act 896 |
| Royalties, natural resource payments, and rents | 15% | Section 115(1)(a), First Schedule, Act 896 |
| Income from telecom & transportation business | 15% | Section 105(g)(h), First Schedule, Act 896 |
| Payments to petroleum subcontractors | 15% | Practice Note - Petroleum Sector, First Schedule, Act 896 |
| Repatriated branch after-tax profits | 8% | Practice Note - Withholding of tax, First Schedule, Act 896 |
| Interest income (excluding individuals) | 8% | Section 115(1)(a), First Schedule, Act 896 |
| General insurance premiums | 5% | Section 116(1)(b), First Schedule, Act 896 |
While the tax policy of Ghana is as wide in scope as is practicable to desire, there are extremely serious problems, mainly non-compliance. There is defaulting in the informal sector, under-declaring, and even evasion, all traditional problems.
The GRA has also introduced a series of reforms aimed at enhancing compliance with tax, as well as revenue efficiency in collection. Digitization is particularly at the forefront of these reforms. Leading the charge in this push to digitalize is the introduction of the E-VAT and MyTax Ghana platforms (Tax Payers Portal), whose purpose is to make payment of tax as easy, convenient, and precise as possible.
But despite all this innovation, there remains so much to be tackled in Ghana's enormous informal sector.
Typically, the tax regime of Ghana is being redefined by global and domestic actors. From computerized regimes of taxation to relief by industry, Ghana is being redefined as a rational, open, and efficient tax regime.
Yet the interface between taxation and the informal economy is the central challenge. More comprehension of this nexus, based on design-specific technological innovation, will be critical to tax compliance culture growth in Ghana and national enhancement consolidation over the next few years.
Managing Partner at BSTS & ASSOCIATES (Chartered Accountants)
Lawyer | Chartered Accountant | Chartered Tax Practitioner
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