Rev. Dr Ammishadai Owusu-Amoah, Commissioner-General, GRA

Navigating austerity: A tax practitioner's perspective

Gilbert Yirenkyi Addo, Deborah Moitsoo Addo & Emmanuel Kundo Business News Apr - 04 - 2023 , 04:58

Since the COVID-19 pandemic, Ghana's economy has been marked by low growth, high inflation and a weak currency, all of which have created a difficult environment for businesses.

As the country's economy continues to face challenges, businesses are adjusting to the new realities of austerity and must develop and adapt to respond to the government’s proposals to rationalise public spending in a bid to manage the public debt.

Tax considerations become important for businesses when navigating through such a demanding economic climate.

As such, this article provides a tax practitioner's perspective on ways for Ghanaian businesses to support themselves against the economic challenges, as well as some proposals for the government’s consideration.

Challenges faced by businesses in Ghana’s austerity economy

High inflation is one of the most significant difficulties for businesses in Ghana as it erodes customers' purchasing power, thus reducing the real value of income.

This means that customers must pay more for purchases and businesses must incur higher production costs. High inflation also leads to high cost of capital for businesses.

Investors, in their attempt to manage the erosion of their funds, may request a higher return on capital which could lead to an increase in cost of doing business in the country.

This may hinder competition, as some foreign-owned companies operating in Ghana may have access to cheaper sources of capital.

Currency depreciation is an issue for businesses, especially those that rely heavily on imports.

The depreciation of the cedi has led to an increase in cost of doing business. It also contributes to increase in inflation due to the rising cost of imported goods.

Also, strict tax policies have created an environment that discourages business growth.

One of the biggest challenges for businesses in Ghana is navigating the complex tax and regulatory environment.

The government has imposed a variety of tax policies aimed at increasing revenue,however, these have unintended consequences that ultimately could harm the business environment.

Navigating the challenges

Businesses may wish to reevaluate their operational plans, set out clear goals, cost-cutting measures, diversification initiatives and plans for technological investment.

Careful planning may assist businesses in identifying potential growth opportunities.

Businesses should also consider effective tax compliance, as well as any tax incentives that may be available. Some of these are discussed below.

Tax compliance

Managing a business’s tax compliance is key to its success and a strong tax compliance programme can help businesses achieve compliance, while preventing the creation of tax gaps that can lead to additional tax costs.

With the increase in tax audits by the Ghana Revenue Authority (GRA), businesses must maintain sufficient documentation to minimise tax exposure and prevent avoidable surcharges in penalties and interest.

Bad debts

In this challenging environment, there may be an increase in bad debts. The Income Tax Act of 2015 (Act 896) allows businesses to deduct bad debt (subject to certain conditions) when determining the chargeable income to be taxed.

Businesses should have sufficient documentation (in accordance with the tax laws) to support bad debts expensed.

Failure to do so may result in bad debts being disallowed, increasing the company’s tax burden.

For indirect taxes, after a taxpayer has demonstrated that a debt could not be recovered, VAT previously paid on that taxable supply can be claimed through VAT input deduction when the debt is written off.

Withholding tax exemption

Many businesses experience significant cashflow challenges arising the obligation to withhold when making payments in relation to goods, works or services.

However, the tax law allows companies to apply for withholding tax exemptions where the GRA may, in writing, exempt a supplier from being subject to withholding taxes based on a good tax compliance record among other requirements.

Withholding tax exemptions may provide significant benefits as they reduce cashflow pressures on businesses.

Group registration for VAT

An effective way to ensure efficient VAT compliance, as well as manage cashflow, is for corporate bodies that are members of a group and their holding companies, to consider registering for VAT as a group.

This becomes necessary when members of a group carry on intra-group transactions on which they would otherwise be required to issue VAT invoices and pay VAT.

In that regard, the VAT Act, 2013 (Act 870), allows a group of companies to be treated as one taxable entity if they obtain approval (subject to certain conditions and requirements) from the GRA.

This can be beneficial for the group because it simplifies the tax reporting and compliance obligations and may result in tax savings.

Proposed tax policy changes

The government's reliance on taxes to generate revenue can create additional burden on businesses, and, therefore, the government may wish to consider policies that provide some relief to businesses while also generating revenue.

To accomplish this, it may be necessary to reconsider certain tax policies such as extending the period for carrying forward tax losses and ensuring unified VAT for all retailers.