Balance tax burden to prevent over-taxation of businesses – Deloitte Ghana

Auditing and accounting firm, Deloitte Ghana is urging policy makers to balance the tax burden, so that businesses are not overtaxed in the search for revenue.

In an article on “Maintaining the balance in the proposed income tax reform”, it said 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 domestic debt exchange programme 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”, it mentioned.

Proposed income tax reforms

The main income tax reforms proposed in the 2023 budget statement included the introduction of an additional personal income tax (PIT) band of 35% on monthly chargeable income above ¢50,000; a revision to the upper limit when calculating vehicle benefit for PIT purposes and the introduction of a minimum chargeable income system for businesses.

Deloitte Ghana said “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

Rising inflation, coupled with the depreciation of the Ghana cedi, 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 ¢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 ¢75,000 is recognised for capital allowance purposes, and businesses are unable to claim a deduction for the full cost of these vehicles used to generate income.

Deloitte Ghana said 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.

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 capitalisation of the excess.

The report said in a number of cases, the 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 said it has the potential to create a negative cash flow impact for businesses.

It therefore want an upward adjustment of the limit on deductions between 50% and 70%, adding, 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.