“Let us not make the income tax so high that the man whose money we want to use in business prefers not to take the risk”- Wendell L. Willkie
The Finance Minister performed one of his statutory duties to the nation in front of the representatives of the people of Ghana. The Public Financial Management Act, 2016 (Act 921) requires the Finance Minister to present a mid-year review to parliament, six months after the presentation of the main budget for the year.
Section 28 of Act 921 provides as follows: “The Minister shall, not later than the 31st of July of each financial year, prepare and submit to Parliament a mid-year fiscal policy review”
The important aspects of the budget review are the Expenditure side, which outlines the various projects and activities that the government intends to undertake, and the Revenue side, which shows where we will get the money to fund those projects and activities. Taxation becomes the main focus when one looks at the Revenue side. So, are we going to see some mid-year tax policy changes?
Ghana cannot develop sustainably without taxation. The introduction of any new taxes in mid-year budget review, in my view, impacts significantly on taxpayers during implementation, irrespective of whether the taxes are being reduced or increased.
- The 2018 5% Levy and its implementation challenges
Exactly a year ago, during the 2018 mid-year budget review, we saw a major review of the VAT system since its introduction in Ghana in 1998. In the 2018 mid-year review, the Finance Minister said that based on the fiscal performance for the first five months of 2018, the following measures were going to be implemented to ensure that the fiscal deficit target of 4.5 percent of GDP was achieved before the year-end 2018:
- Conversion of National Health Insurance of 2.5 percent to a straight levy of 2.5 percent;
- Conversion of GETFund value-added tax rate of 2.5 percent to a straight lev of 2.5 percent;
- The imposition of luxury vehicle tax on vehicles with engine capacity of 3.0 litres and above;
- Review of Personal Income Tax to include an additional band of GH¢10,000 and above per month at a rate of 35 percent; and
- Intensify tax compliance measures
The most critical implementation challenges were the conversion of the National Health Insurance of 2.5 percent to a straight levy of 2.5 percent and the Conversion of GETFund value-added tax rate of 2.5 percent to a straight levy of 2.5 percent.
Many taxpayers did not understand what the Minister of Finance meant by the straight levy policies leading to serious debate, and some confusion, within the business community. Whilst taxpayers were wondering, the only option left was to wait for the implementing agency, GRA, to issue an interpretation note to educate taxpayers so they could comply with the law.
Parliament then passed the laws amending the tax law under a certificate of urgency and assented to by the President on 31st July 2018. This meant that, effectively, the various tax laws were to take effect on 1st August 2018.
The main difficulties in the implementation of these amendments to the business community, and even to the Customs division of GRA, included the following:
- Changes to Accounting systems to account for the new Levies:
Over the years, the Value Added System combined both National Health Insurance levy (2.5%) and GETFund levy (2.5%) with the main standard rate of 12.5%. All VAT invoices and accounting systems were designed to account for VAT at 17.5%. With the law passed on 31st July and effective 1st August 2018, the simple challenge was how companies would switch seamlessly at midnight to comply with the law. This was a huge challenge to deal with. Selling to customers using the old tax rates meant companies were not complying with the new law.
- Customs Duty Calculations at the Various Ports of entry
The GRA customs division could also not switch over within a short time. Clearly, if the Customs division of GRA was any ordinary taxpayer, they would have defaulted and would be required to pay huge penalties for not implementing the new law on time. Indeed, as far as November 2018 (4 months after the passage of the amendments) the GRA was said to have been calculating VAT using the old rates and had not started charging the new levies at the various entry ports in Ghana. The explanation was that it took time to get their system changed to accommodate the amendments. The main question then is: can the GRA, in future, charge companies penalties for not charging the levies from 1st August 2018? This is an interesting situation to watch out for during future tax audits of various companies.
- Late issue of Practice Note on the New Levies:
With the confusion in the minds of many taxpayers, the GRA was required to educate Ghanaians on how to comply. This is done through the issue of Practice Notes. Section 3 of the Ghana Revenue Authority Act, 2009 (Act 791) enjoins the GRA to promote tax compliance and tax education. To achieve this objective, Section 100 of the Revenue Administration Act, 2016 (Act 915) provides that, “to achieve consistency in the administration of tax laws and to provide guidance to persons affected by the tax laws, including tax officers, the Commissioner-General may issue practice notes setting out the interpretation placed on provisions of a tax law by the Commissioner-General”.
We were anxiously waiting for the practice note from the GRA so we could start complying with the law from 1st August 2018. The GRA finally issued the administrative guidelines on 24th August 2018. This meant that technically speaking, taxpayers did not know what to do until 24th August 2018.
- Non-deductibility of input tax for the 5% Levy
The biggest challenge to the business community was the fact that the levies were not available as input VAT. This meant that the 5% was supposed to be added to the cost of goods and services. Effectively, this meant that there was a marginal increase in the total cost, being the 5% levy and the impact of 12.5% on the levy. For companies who could not immediately increase prices, the option was to absorb the cost, especially when this happened mid-year and contracts had already been agreed. For such companies, they had to absorb the additional cost, at least in the early part of the implementation, because they could not pass on the increased cost to the final consumers. Such companies faced possible losses at the year-end.
- Claim for Input Tax on old invoices on past transactions with 17.5% VAT.
The GRA also did not make any provision for claims of input tax on old invoices with VAT at 17.5% taxes paid already. The various GRA offices did not allow taxpayers to claim input VAT for past transactions. However, under the VAT law, a VAT registered entity has 6 months within which to claim an input VAT. Due to the overnight change in the VAT system, at the time of filing the first returns under the new VAT system, i.e. end of September 2018 for August 2018 sales, it is possible VAT registered entities will have input VAT yet to be claimed. But the GRA did not allow this in most parts of the country. In my own view, this practice by the GRA of refusing to allow the deduction of arrears of input VAT was erroneous because the High Court in the case of Clement Apaak V GRA held in July 2018, held that taxpayers cannot be denied input VAT when the plaintiff was converted from a standard rate of 17.5% to a flat rate of 3%. The right of taxpayers cannot be affected by the subsequent amendment of the VAT law.
- The Way Forward
To avoid these challenges in the future, the following proposals are being made:
- Transitional Implementation Arrangements
For effective implementation of tax reforms, adequate transitional arrangements must be made in the law. For all the tax reforms in this mid-year review, we expect the tax reforms to have enough transitional arrangements, to ensure that the law is not passed overnight, requiring it to take effect the following day. Such a short time period makes tax compliance almost impossible, leading to tax evasion and avoidance in some cases. To the business community, the separation of the NHIL/Get Fund Levy was a massive reform which demanded serious changes to existing systems. System changes took longer than it was anticipated in the mid-year review. Transitional arrangements will also give enough time for the implementing agency, GRA to prepare and educate taxpayers through the issue of Practice Notes (Administrative guidelines). Our lawmakers and tax administrators must understand that a measured transition will allow taxpayers time to understand the new system and comply fully.
- Future GRA Audits
On the basis that, even the GRA itself, (the Customs division of the GRA) could not implement the new taxes according to the requirement of the Act, it is expected that no sanctions should be levied against taxpayers who faced similar changes. The GRA could declare that up to December 2018, companies who could not implement the new taxes will not suffer any penalties. This will be in line with natural justice. If the implementing agencies faced challenges, taxpayers did too.
“Taxation is the legitimate support of government” — Louis Adolphe Thiers
By: Timore Francis Boi - Tax Consultant