Demystifying Income tax and reliefs in Ghana

All over the world, taxation has been levied on individuals by public authorities within their jurisdictions and used as a means to defray the cost of government expenditures with no specific rewards to be gained by the tax payer. These collected levies are used for the common good in the provision of social services or social amenities.

In this regard, taxes can be a tool by which government can use to transfer resources from the private to the public sectors in their social and economic policies. One of such taxes is Income tax which is a direct tax. Direct tax are taxes that is levied on the income of individuals or profits and property and paid directly to the government, it can not be transferred to other consumers as the case may be for Indirect Taxes.

However, the Income Tax Act, 2015 and its Amendment Acts of Ghana provides some reliefs to lessen the tax burden of individuals. Most individuals are not aware of these provisions, Why is that? Is it a deliberate effort to accrue more taxes by not providing education? or perhaps the process of gaining reliefs is frustrating or the amount of reliefs is small such that it will have an insignificant effect on the incomes of tax payers. In this post, I will share with you information that will enlighten you and make you get the maximum benefits from Income Taxes In Ghana.

Income Tax Administration in Ghana
Individuals subject to tax
Monthly Income Tax Rates In Ghana - 2021
Personal Tax reliefs In Ghana
Tax Avoidance

Undistributed profits
Transfer Pricing
Income Splitting
Thin capitalization

How to calculate P.A.Y.E (Pay-as-you-earn) in Ghana

Income Tax Administration In Ghana

The Income Tax administration in Ghana is derived from the Income Tax Act, 2015 and its Amendments Acts of Ghana. Also, court cases and rulings, statement of practice by tax authorities, regulations and directives imposed by supervisory regulatory bodies and International Treaties complement the Act in Ghana.

Attributes of a good tax system

Adam Smith, the father of modern economics, captions the canons of taxation and provides 4 significant attributes below, worth considering today.

1. Equity: A good tax system should provide fairness to tax payers. Tax payers must have the ability to pay the levied taxes from the resources they own and not more.
2. Certainty: Tax payers should be able to determine their tax liability with a fair level of accuracy at any point in time.
3. Convenience: Good tax systems provide convenience for the administration by government and citizens. Tax payers must not find it difficult to comply with their tax obligations.
4. Economy: A cost of collecting and enforcing taxes should commensurate with the revenue generated. Where the cost incurred in collection is at par or in excess of the revenue generated, It is considered uneconomical.

Benefits of Taxation

The benefits of taxation to the national economy is listed below:
#1. Revenue generation to finance the cost of services provided by the state
The government has the duty to seek the welfare of its citizens and provide social amenities, in doing this they may incur operational costs which need to be paid for. Some of these services include provision of water and electricity, health facilities, schools and roads among others.

#2. Prevent the consumption of some goods
To reduce the consumption of harmful goods by citizens, government can impose taxes on these goods which increase the consumer price of the items thereby reducing consumption.

#3. To redistribute wealth and reduce inequalities
Taxes can be used to bridge the income gap between the rich and the poor. More taxes can be imposed on the rich as compared to the poor which has an effect of reducing their purchasing power.

#4. Protect indigenous industries
Government can use taxation to make local industries competitive. In an economy where local businesses seem to face stiff competition from foreign competitors. Government can use import duties and tariffs to assist them in withstanding the competition. Most foreign companies produce at low costs as a result, when pricing their products, they become cheaper.

Individuals subject to tax

Resident individuals are subject to tax in Ghana, In the Income Tax Act, 2015, a resident individual is one who is resident for tax purpose in Ghana if the following circumstances hold:

a citizen, other than a citizen who has a permanent home outside of the country and lives in that home for the whole of that year or most of that year.
an individual present in Ghana during a year for an aggregate period of 183 days or more in a 12-month period that commences or ends during the year.
a citizen with a permanent home in Ghana and temporarily absents from the country for a period not more than 365 continuous days.

Any person who meets the residency criteria in Ghana during the assessment year is deemed to be resident in Ghana for the whole of that year.

Monthly Income Tax Rates In Ghana - 2021

The income of a person for each year of assessment is the total gains or profits of that person for the year/month from each employment less total amount of deductions provided under the Act.
The Income Tax (Amendment) Act, 2019 (Act 1007) provides a revised personal Income tax rates for individuals. The income tax operates on the PAYE (Pay-As-You-Earn) system, where income of employees is taxed before they receive their pay.

	C. Income (Cy)	Cum Cy	Rate %	Tax amount	Cum Tax
First	319	319	-	-	-
Next	100	419	5	5	5
Next	120	539	10	12	17
Next	3,000	3,539	17.5	525	542
Next	16,461	20,000	25	4,115	4,657
Exceeding	20,000		30

Effective 1st January, 2020

Income tax for non-residents still at a flat rate of 25%

Personal Tax Reliefs In Ghana - 2021

The Income Tax (Amendment) Act, 2019 (Act 1007) also provides a revised personal tax relief for resident individuals per annum (p.a).
A tax relief is an approved deductible allowance intended to reduce one's tax liability. Some reliefs are generic while others are specific. Specific reliefs have to applied for by the individual because it is based on an individual's circumstance.

Description	Old relief	New personal relief
Dependent spouse or at least 2 dependent children	200	1,200
Individuals with disability	25% of assessable Income from business or employment	25% of assessable Income from business or employment
Individuals 60 yrs & above	200	1,500
Individuals sponsoring a child's education	200	600
Dependent relative 60 yrs & above, other than spouse	100	1,000
Training to update the professional, technical, vocational skill	400	2,000

Effective 1st January, 2020

Tax avoidance

Tax avoidance can be described as legal means by which individuals and business employ to reduce their tax liabilities. One has to pay only legally required taxes and not more. However, the commissioner general may disregard an arrangement when he is of the view that it is part of schemes to avoid taxes. Below are some of the arrangements that may be disregarded when used to avoid tax.

Undistributed profits: In this scenario, companies and their associate do not distribute dividends to shareholders for a basis period or within a reasonable time after the basis period. This is normally done to prevent the tax effect associated with dividends.
Income splitting: Income splitting involves the transfer of value from a tax payer to another, mostly in a controlled relationship or related party transaction and it has the effect of the beneficiary receiving or enjoying income from the transfer to reduce their combined tax liability.
Transfer pricing: Transfer pricing is a way of pricing transactions involving related parties or parties in a controlled relationship (such as employment) and not conducted at arm's length (thus a price that is either excessive or not priced at all). Its normally the practice among transnational corporations and their subsidiaries.
E.g. Supposing it costs a business $1,000 to produce goods. The business then invoices its subsidiary for goods produced for $1,000, the subsidiary in the tax haven jurisdiction then re-sells the goods for $1,500 paying little or not tax on profit.

Another scenario: Supposing it costs a business $1,000 to produce a phone in China. It then sells the phone to a subsidiary located in Bahamas for $1,000, leaving no profits in China. The tax haven subsidiary in Bahamas also sells the phone to an affiliate in Switzerland for $1,200, leaving $200 profit in the Switzerland.

These are some of the ways that multinational businesses with affiliates in other countries use to outsmart regulators in paying taxes.
Thin capitalization: This occurs when businesses are funded with little equity and a lot of borrowed funds. Interest on the borrowed funds are tax deductible and are fully deducted with little or no dividends to declare. In Ghana, if the debt held by shareholders or related entities is excessive, The Ghana Revenue Authority may disallow the expense with the reasoning that, some or all of the debt is disguised equity.
In Act 896, the debt to equity ratio has been widened to 3:1 of shareholders debt, meaning that the allowable interest expense is three (3) times the amount of shareholders fund.

Tax evasion

Tax evasion is using illegal means to reduce taxes. Tax evasion is punishable under all laws. Some common ways to evade taxes include.

Keeping two different books for recording business transactions
Working extra jobs and requesting for payments to be made in cash. Most cash transactions prove difficult to trace
Engaging in barter transactions, when services are rendered or goods exchanged using the barter system, it becomes difficult to quantify the monetary value, hence transaction is left unrecorded.

How to calculate P.A.Y.E (Pay-as-you-earn) in Ghana

P.A.Y.E is also known as income tax and its computed on the chargeable Income of a resident individual
Formula:
Chargeable Income(CY)=Basic salary + Cash allowances + Benefits in kind (Rent & Car) -reliefs (SSF 5.5%, personal reliefs)+ Other Non-cash benefits

You may be able to enjoy a reduced tax liability if you qualify and apply for it. Special reliefs needs to be applied for yearly.
Special rates on the total cash allowances exist for benefits in kind if any to include in the computation of Chargeable Income.

From the Chargeable Income formula above, the graduated monthly income tax rates is applied to it to arrive at the monthly tax liability for the individual.