Tax concessions – do they lead to increased tax revenue?
The Commissioner – General of Ghana Revenue Authority has a Herculean task of achieving the 2020 target given to him by the Finance Minister amid the COVID – 19 pandemic and must rake in potential taxpayers while encouraging existing taxpayers to be tax compliant.
Tax concessions are given to potential taxpayers so that they can be brought in into the tax net and for the existing taxpayers, they are motivated to be tax compliant when benefitting from these concessions.
Section 134 of the Income Tax Act, 2015, Act 896, seeks to encourage investors and businessmen and women to do business within the country with a view to creating employment, increasing output, and eventually promoting economic growth and development.
Section 134 of Act 896 gives the conditions that enable a person to enjoy the concessions which are of a temporary nature. They are temporary in nature because the concessions last for a period of time and after the expiry period of the concessions, the businesses are exposed to make tax payments.
The sixth schedule of Section 134 (1) of Act 896 provides for these concessions and persons that cannot benefit from the schedule are as per Section 134 (3) which stipulates that “ a person is not entitled to a concession in the sixth schedule if an associated person has benefitted or is benefitting from that concession” and as per Section 134 (4) which stipulates that “ This section does not apply as between two associated individuals who are resident”.
The implication is that if a person associated to a person has benefitted or is benefitting from the concession, then that person cannot benefit from it because his/ her associate has already benefitted from it or is benefitting from it. In addition, two associated resident individuals cannot benefit from it and the reason is that the two individuals are resident. One of them could have benefitted from it if the other person was non – resident.
The temporary concessions include the following;
1. Agriculture – Under 1 (1) of the sixth schedule, “where an individual conducts a farming business wholly within the country, the individual is subject to tax at the rate provided for in the First Schedule”:
(a) In the case of farming tree crops, income of that individual from the business for a period of 10 years of assessment commencing from the year during which the first harvest of crops occurs. This implies that until you begin harvesting the crop, the exemption period cannot be taken into account.
(b) In the case of cash crops or farming livestock, other than cattle or fish, income of that individual from the business for a period of five years of assessment commencing from the year during which the business commences; and
(c) In the case of cattle, income from the business for the period of 10 years of assessment commencing from the year during which the business commences.
Under 1 (2) of the schedule,’’ the income of a person from an agro processing business conducted wholly in the country is subject to tax at the rate provided for in the First Schedule for a period of five years of assessment commencing from the year in which commercial production commences”.
The implication is that for the first five years during which the production is done on commercial basis, the tax rate applicable is 75 percent of the rate on other income in a situation where the business is located in the regional capitals of the country and for businesses located elsewhere in the country, it is 50 per cent.
2. Rural banking
The income of a person from a rural banking business is subject to tax at the rate provided for in the First Schedule for a period of 10 years of assessment commencing from the year in which the business is established.
3. Waste processing
The income of a company from a waste processing business is subject to tax at the rate provided for in the First Schedule for a period of seven years of assessment.
4. Residential premises
The income of a certified company from a low cost housing business is subject to tax at the rate provided for in the First Schedule for a period of five years of assessment.
5. Approved unit trust scheme and mutual fund
The income of a unit trust scheme or mutual fund is subject to tax at the rate provided for in the First Schedule for a period of 10 years of assessment.
6. Venture Capital financing company
The income of a qualifying venture capital financing company is subject to tax at the rate provided for in the First Schedule for a period of 10 years of assessment.
A loss incurred by a qualifying venture capital financing company may be carried forward for five years of assessment following the end of the period specified in the paragraph above.
7. Employment of graduate
In calculating the income of a company from conducting a business for a year of assessment, the company is entitled to an additional deduction as provided in subparagraph (2) for salary and wages paid during the year to a fresh graduate from a recognised Ghanaian tertiary institution.
8. Free Zone company
A Free Zone developer or an enterprise granted a licence under the Free Zones Act, 1995 (Act 504) is exempt from the payment of income tax on profits for the first 10 years and the chargeable income of a Free Zone Enterprise after the concessionary period from the export of goods and services outside of the national customs territory for a year of assessment is taxed at the rate of 15 per cent.
This implies that for the first 10 years the enterprise is exempted from the payment of corporate taxes but will pay taxes at the rate of 15 per cent from the 11th year.
Effects of the tax concessions
a. Employment opportunities – Tax concessions have led to the establishment of businesses and subsequently led to creation of employment. For example, many foreign and Ghanaian businessmen have set up various kinds of businesses in the free zones enclave and have employed many Ghanaians.
b. Increased productivity – The output of the businesses has increased over the years and led to an increase in productivity and therefore, Ghana’s gross domestic product.
c. Increase in taxes – Even though the companies are granted tax exemptions and holidays, the salaries of their staff or employees are taxed which helps in mobilising domestic tax revenue. In addition, they are required to withhold taxes on transactions conducted with other parties and these help to mobilise domestic tax revenue.
Challenges
a. Monitoring of the businesses
It is expected that tax concessions will lead to a widening of the tax net and the question is whether that has been achieved or not.
Unfortunately, some of the shareholders of the companies fold up when the concessionary period is about to end or ends and register new businesses and it is not detected because we are unable to monitor their operations.
With the tax identification numbers, it will now be easy to track these companies and know exactly what they do.
b. Non – filing of financial statements
Even though these companies are given tax concessions, they are required to file their financial statements with the appropriate institutions including Ghana Revenue Authority. Unfortunately, most of them do not file their returns including withholding taxes and employee taxes (PAYE) and the state loses tax revenue.
c. Localisation of Industries – Tax concessions are given to attract investors to set up businesses evenly across the country but in practical terms, this does not happen. This is because most investors prefer setting up businesses at places where certain infrastructure and other facilities have been provided. For example, accessible roads, provision of water and electricity, and cheap labour are found in major cities and therefore the probability that businesses will be set up there is higher.
The availability of these facilities and cheap labour at these areas do not help to evenly spread these companies across the country to promote economic growth and development.
d. High cost of operation – One major problem which discourages investors to set up businesses in Ghana is the cost of doing business. High interest rates on loans, high utility bills, high import duties, high cost of raw materials etc. make doing business in Ghana unattractive and renders the tax concessions irrelevant.
To conclude, there should be a conscious effort to ensure that the challenges that have been mentioned above are dealt with so that Ghana can take benefit fully from the tax concessions that are expected to help in the growth and development of the country.
The writer is a Tax consultant
eriboat@hotmail.co.uk