Navigating austerity: A tax practitioner's perspective

What are austerity measures?

Austerity measures are a set of economic policies, which are typically adopted in response to high levels of national debt or to deal with economic crises, used to increase the government's economic stability and decrease the risk of defaulting on its debts. This usually involves reducing nonessential government functions, lowering public sector expenditure, and raising taxes to help balance the budget and keep the national debt under control.

The management of an economy with austerity measures requires the implementation of policies directed towards revenue generation. Ghana’s government has put in place numerous tax policies geared towards this aim.

Form of the measures

The main forms of austerity measures may include, but are not limited to, the following two policies:

• Reducing taxes and government spending: This approach involves reducing both taxes and government expenditure in times of economic difficulty. The rationale for this approach is that a reduction in taxes would increase economic activity, thereby increasing revenue. The increased revenue would in turn lead to more tax receipts for the government.
• Increasing taxes and government spending: The government may decide to increase taxes to fund increased spending, and promote growth.
  

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 goods and services and businesses must incur higher costs for production inputs. High inflation also leads to a 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 eventually could lead to an increase in the cost of doing business in the country. This could result in a distortion of competitiveness, as some foreign-based companies operating in Ghana may have access to cheaper capital from sources.

Currency depreciation is an issue for businesses, especially those that rely heavily on imports. The depreciation of the Ghana Cedi (GHS) has led to an increase in the cost of doing business. Currency depreciation, in general, contributes to an increase in inflation due to the rising cost of imported goods, which also raises the cost of doing business.

Strict tax policies also have created an environment that does not encourage business growth. One of the biggest challenges for businesses in Ghana is navigating the complex tax laws and regulatory environment. The government has imposed a variety of tax policies with the aim of increasing revenue; however, these have unintended consequences that ultimately could harm the business environment.

Navigating the challenges

With austerity measures in place, businesses are forced to make difficult decisions such as headcount reductions and reconsideration of strategic decisions, which has led many to turn to digital solutions to cut costs and improve productivity. Others are venturing into new markets and broadening their product and service offerings, highlighting some of the options available to companies despite the challenging environment.

Action points

Businesses may wish to reevaluate their operational plans, and ensure they include both short and long-term goals, cost-cutting measures, diversification initiatives, and plans for technological investment. Careful planning may assist businesses in identifying potential growth opportunities and developing a road map for growth. Businesses also should consider tax compliance and other general tax matters, as well as any tax incentives that may be available. Some of these tax considerations are discussed below.

Tax compliance

Managing a business’s tax compliance is key to its success, and a strong tax compliance program can help businesses to file and make payments on time, preventing the creation of tax gaps, which can later lead to additional tax costs. With the increase in tax audits by Ghana Revenue Authority (GRA), businesses must ensure they maintain sufficient documentation to minimize tax exposure in case of a tax audit to prevent avoidable surcharges in penalties and interest.

Bad debts

The Income Tax Act of 2015 (Act 896) allows businesses to deduct noncapital expenses such as bad debt in determining the chargeable income to be taxed. In this challenging environment, there may be an increase in bankruptcies or bad debts; provisions for doubtful debts also may rise significantly, although these provisions are not tax deductible. However, this does not apply to written-off bad debts, which are deductible provided certain conditions are met. These conditions include:    

• Compliance with the business’ credit policy;
• Evidence of attempts to collect the debt, such as issuance of reminder notice to the debtor;
• Resorting to debt collecting agencies;
• Renegotiating the terms of the debts; or
• Taking reasonable steps to resolve disputes.
  

A business with bad debts needs to document that the debt could not be recovered even after significant efforts that comply with the conditions in the tax law. Failure to do so may result in bad debts being disallowed, increasing the company’s tax burden.

For indirect taxes, bad debt relief through an input VAT deduction is available on VAT paid to the GRA in respect of the taxable supply that is subsequently treated as a bad debt. The deduction becomes due on the date on which the transaction was written-off in the taxpayer’s book of account. The taxpayer is still obliged to demonstrate to the GRA that it has made a reasonable effort to recover the amount owed.

Withholding tax exemption

Many businesses experience significant cashflow complications arising from a taxpayer’s obligation to withhold between 3%, 5%, and 7.5% of the amount when making payments in relation to goods, works, and services, respectively. 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 a good tax compliance record, among other reasons. In considering a taxpayer’s application for exemption, the GRA will review the tax status of the entity and whether the entity has been subject to a tax audit over the previous three-year period, alongside any applicable requirement. Withholding tax exemptions may provide significant benefits, as they reduce cashflow pressures on businesses.

Group registration for VAT

n effective way to ensure efficient VAT compliance, as well as manage cashflow, is for corporate bodies that are members of group, and their holding companies, to consider registering for VAT as a group. This is often necessary when the members of the 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 be treated as one taxable entity if they obtain approval 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. However, it is important to note that the group must meet all the relevant requirements and comply with all the conditions of the provision to be eligible for this treatment.

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, ensuring unified VAT for all retailers, raising the withholding tax threshold, and increasing the capital allowance deduction cap for road vehicles other than commercial vehicles.  

Tax losses

Many businesses are likely to incur losses, but some may still have a tax liability regardless of the business losses recorded in the financial statements as a result of certain expenses, such as depreciation, certain fines and penalties, and impairment of trade receivables, among others, not meeting the deductibility criteria for tax purposes. 

Currently, businesses in the priority and nonpriority sectors can carry forward tax losses for a period of five years and three years, respectively. The government has initiated steps to harmonize the period for which tax losses can be used to a period of five years. While the harmonization policy could be advantageous, the current economic challenges may quickly erode the policy’s benefit. Carried-forward losses could help companies reduce their future tax burden as compensation for previous years' losses, however, the government may still wish to consider extending the proposed number of years, as the recovery timeframe for some businesses could extend beyond five years, and therefore the benefit of carried-forward tax losses would be lost.

VAT threshold for retailers

The Value Added Tax (VAT) 2013, (Act 870) Act has two rates for retail businesses. Taxpayers with sales between GHS 200,000 and GHS 500,000 charge a flat rate of 3%, while those with sales exceeding GHS 500,000 charge the standard VAT rate of 15%. This creates an uneven playing field between businesses in the same industry, causing unfair competition where businesses selling the same goods charge different VAT rates, resulting in higher prices for one business. In addition, with low consumer disposable income and pressure on household spending, this might serve as a disincentive for some retailers to remain small to continue benefiting from the 3% flat rate and thus be able to charge lower prices. To promote equal access to the market in the retail sector, the government may wish to consider harmonizing the applicable VAT rate for all retailers, which would encourage businesses in this sector to grow and contribute to the economy. In Ghana, large entities remain the largest group of taxpayers, and this policy would encourage the growth of other retailers by making them competitive.

Comments

It is important for the government to encourage stakeholder engagement in the review of tax policies, as it enables the policymakers to gain an insight into the specific needs and challenges faced by businesses. By engaging in discussions with affected parties, such as business owners, industry experts, and economic advisors, the government can better understand the effect of these policies and identify areas where adjustments can be made to provide relief, while still generating revenue. Robust dialogue also can help build trust and credibility with the business community, fostering a collaborative relationship between the government and businesses. Ultimately, this can lead to the development of more effective tax policies that promote economic growth, encourage investment, and create a more prosperous society for all.

The current economic situation is undeniably challenging; however, businesses should be able to support themselves against future challenges and emerge stronger in an ever-changing economic landscape through consideration of the steps noted above.