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Maintaining the balance in the proposed income tax reform

A key theme in Ghana’s 2023 budget statement was the country’s fiscal challenges, and the government’s actions both before and after the presentation of the budget have been geared towards achieving economic recovery and stability. The government has produced a seven-point agenda for economic recovery, with a focus on maximizing domestic tax revenue. This drive is evident in various recent developments including amendments to reform the VAT regime, measures to curb noncompliance with electronic VAT invoicing rules, and proposals to reform aspects of the income tax regime.

As parliament considers additional proposals to help the government increase income tax receipts, it is important for policy makers to balance the tax burden, so that businesses are not overtaxed in the search for revenue. This article highlights a number of aspects of the proposed reforms that could potentially be amended during the parliamentary process to help achieve this.

Proposed income tax reforms

The main income tax reforms proposed in the 2023 budget statement are contained in the Income Tax (Amendment) Bill laid before parliament for approval. If passed without further amendment, the following changes to the income tax regime are expected:

  • The introduction of an additional personal income tax (PIT) band of 35% on monthly chargeable income above GHS 50,000;
  • A revision to the upper limit when calculating vehicle benefit for PIT purposes;
  • The introduction of a minimum chargeable income system for businesses;
  • Harmonization of tax loss carryforward rules for all businesses;
  • The restriction of tax deductibility for foreign exchange losses to the actual losses incurred; and
  • A review of tax exemptions and an increase in the concessional corporate income tax rate from 1% to 5%.

As a response to the current economic challenges, these reforms are expected to increase tax revenue, but at the same time increase the tax burden for taxpayers still recovering from the economic downturn. As the government has called for an even distribution of the increased tax liabilities, the draft bill is an opportunity to consider reforms to particular areas not yet taken into account, to provide for a more equal distribution of any tax increases.

Potential areas of relief for businesses

Capital allowance deduction for certain vehicles

Rising inflation, coupled with the depreciation of the Ghana Cedi (GHS), have significantly increased the cost of vehicles, but the third schedule to the Income Tax Act, 2015 (Act 896) limits capital allowance deductions for road vehicles other than commercial vehicles to GHS 75,000. The definition of a commercial vehicle covers vehicles designed to carry a load of more than half a ton, or more than 13 passengers. This means that for vehicles which do not exceed either threshold, only GHS 75,000 is recognized for capital allowance purposes, and businesses are unable to claim a deduction for the full cost of these vehicles used to generate income.

The upwards revision of the capital allowance deduction cap in respect of vehicles (other than commercial vehicles) would reassure taxpayers while ensuring the revenue targets are achieved.

Threshold for withholding tax deduction

Section 116(3) of Act 896 exempts contracts for the supply of goods, works, and services, that do not exceed GHS 2,000 from withholding taxes. However, since the legislation was enacted in 2015, Ghana has recorded an average inflation rate of 13.5% year-on-year, and the intended benefits of this provision have been effectively eliminated. With proposed major reforms in progress, a possible upward adjustment to this threshold could be reconsidered, which would help to improve business cashflows. Businesses with small profit margins would benefit from this reform, retaining enough cash to meet other tax obligations.

Taxation of unrealized exchange gains

Under Act 896, exchange losses incurred in respect of foreign currency and financial instruments, whether realized or unrealized, are tax deductible subject to specific conditions. In the same way, both realized and unrealized exchange gains are treated as taxable income.

The minister of finance has proposed in the draft bill that tax deductions for foreign exchange losses are limited to actual losses realized in a year. In addition, foreign exchange losses resulting from transactions between two resident persons would be disallowed. The bill does not expressly address the tax treatment of unrealized foreign exchange gains. This could potentially result in a reduction in the amount of deductible expenses available, without addressing the increased revenue resulting from any unrealized foreign exchange gains. This would mean that while tax deductible expenses are limited to realized expenses, gains could be taxed even when unrealized. Given the fluctuation in the value of the Cedi, some businesses may have significant unrealized foreign exchange gains. In order not to disadvantage taxpayers, and in line with the matching concept, the government may wish to consider aligning the treatment of unrealized foreign exchange gains and unrealized foreign exchange losses.

Deduction of repair and improvement expenses 

Section 12 of Act 896 limits the deduction of repair and improvement expenses to 5% of the written-down value of the pool to which the asset belongs, and requires capitalization of the excess. In a number of cases, entities are unable to claim a tax deduction for the full cost of repairs and improvements in the year they are incurred, increasing their tax costs as a result. Although this may be a timing issue, it has the potential to create a negative cash flow impact for businesses.

An upward adjustment of the limit on deductions to between 50% and 70%, if not 100% of the repair and improvement cost incurred, would potentially provide a form of relief to taxpayers without necessarily damaging the government’s revenue augmentation efforts. This adjustment would reduce a business’s taxable profits and tax costs, improve their cash flow position, and enable them to meet other immediate tax obligations.

Deloitte Ghana comments

The current economic climate is providing new challenges, and it is important for taxpayers to see that tax policy makers are taking their changing circumstances into account. A key lesson from the implementation of the electronic transfer levy and the ongoing domestic debt exchange program is that all parties must shoulder an appropriate share of the increased tax burden. Retaining this balance in the income tax reform will be critical to achieving the government’s 2023 tax revenue targets.

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