Ghana: 2017 National Budget Tax Incentives: A burden or a benefit to the taxpayer

On the 2nd of March, 2017, the Minister of Finance on behalf of the president of the republic of Ghana read the national budget announcing copious tax cut. My interest is here because of the profession I practice. About 12 tax types were reviewed down or scraped in their entirety.

1.      Excise duty of 2.7 Ghana pesewas is abolished on petroleum products. Also, special petroleum tax of 17.5% on petroleum products excluding premix is reduced to 15%. It is important to quantify the impact of these taxes on the tax payer( petroleum consumers) within the context of other economic indicators. Assuming this tax takes effect today, the impact of these two taxes on the final retail price of petroleum will be about 3%. That means that retail fuel price ought to be reduced by 3% if the taxes are to take effect today using the current price. However the implementation of these tax impossible within the environment of petroleum price deregulation policy in force in the downstream petroleum sector. As a result implementation period for the new pricing is somewhere 16th March ,2016 when the next window of pricing begins and when parliament approves the budget. Unfortunately, these tax incentives in petroleum product may not be realized. Fuel prices are basically determined on the strength of exchange rate and world crude oil price. The current rate of the cedi depreciation couple with upsurge in world crude oil price may not allow the incentive provided in the budget to be realized by the time the next window of pricing begins.

2.      Introduction of 3% VAT flat rate for traders. It is worthy to note that application of this tax system is simple as the trader does not need to jungle himself with the complexity involves in computation of output and input tax under the standard rate ( 17.5%). 3% VAT is simply applied on the sales revenue. The trader does not take credit for input VAT and has to bear the input VAT of 17.5% s part of operational cost unlike the standard rate of 17.5%. Lets look at the tax application using some figures and compare it to the standard rate of 17.5%. Assume that trader “A” buys goods at Ghc 100 ex of VAT. He pays Ghc 17.5 on the purchases. The trader sell the goods at Ghc 120 and charged VAT of Ghc 21 using 17.5% standard rate. He pays for electricity for Ghc 5 cedis and write of Ghc 4 as bad debt. Input tax on electricity and bad debt is Ghc 1.58 bringing total input VAT to Ghc 19.08. VAT tax liability for trader “A” is Ghc 1.92 ( Output tax of 21 – Input tax 19.08). Using the same number for Trade “B” for the flat rate of 3%. Trade “B”’s VAT liability will be Ghc 3.6 ( 3% multiply by Ghc 120). You notice that trade “A” pays lower tax under the 17.5% standard rate compared to the flat rate of 3% that trader “B” pays.

3.      Corporate tax to be reduced from 25% to 20% from 2018. Aside the uncertainty surrounding the implementation of the new corporate tax rate, I want to throw some light on the its impact on the taxpayer. I always inform my tax class that a company which hires services of a good tax consultant can minimize its tax liability and sometimes accrue a tax credit which must be refunded by the government. It would have been a great relief to taxpayers if withholding tax on services 7.5% and work and goods ( 5% and 3%) is rather reduced than the 20% tax on profit. Withholding tax can translate to more than 40% of company’s profit and individual chargeable income. Alternatively, individual income tax which is taxed at 25% ( maximum bracket) could have been looked at instead as this tax affect sole proprietors including small traders and kayayei and the working class.

4.        Tax on Kayayei to be abolished. There is no tax type called Kayayei tax under the tax law ( Act 896). #