HISTORY OF TAX IN GHANA
PETROLEUM INCOME TAX AND PROVISION OF GENERAL TAXATION
METHOD OF DATA ANALYSIS
FINDINGS OF THE STUDY
The introduction of direct tax has been a vital tool for revenue collection in Ghana. This study reveals that, revenue acquired from this type of tax is considered very crucial in the development of the country, hence as major source of revenue to the government.
Direct tax was introduced in Ghana to subject the assessable income of income earners to tax, but unfortunately in Ghana, the collection of tax is confronted with numerous problems and thus tax evasion, tax avoidance, improper books of account, non-compliance of tax laws and inadequate logistics.
This research therefore aims at evaluating the effectiveness of direct tax administration in the informal sector in Ghana. Questionnaires were administered to five (5) staff members of the Internal Revenue Service (IRS) and twenty-five (25) to the traders of the Abossey Okai environs.
A simple sampling technique was used to aid in the selection of respondents. Responses from the IRS staff and the traders of the Abossey Okai environs were tabulated and analyzed.
The study finds out that the traders in Abossey Okai are ignorant about what direct tax is about. However one major recommendation is for IRS to make it their priority to embark on educational programs for the traders in the Abossey Okai environs in order to enhance the effectiveness of direct tax administration in the informal sector in Ghana.
Key Word: Introduction Direct Tax Play A Vital Tool For Revenue Collection In Ghana
Governments in the world are faced with the issue of generating adequate revenue for the running of their countries at the state, regional, districts and local levels. The main sources of such revenue are tax and non-tax revenue.
There are four main components of taxes in Ghana, namely, taxes on income and property, taxes on domestic goods and services, international trade taxes and Value-Added Tax.
Tax collection has being the largest source of revenue to the Government which is imposed in two folds that is, either directly or indirectly from the administrative point of view.
Direct tax is intended to be paid by the person or organization on whom/which it is actually levied, the impact and incidence being on the same person or organization. Example includes Income tax, Capital gains tax, Gift tax and corporate tax. The administering authority is the Internal Revenue Service (IRS).
However, indirect tax is levied on one person in the expectation that the tax will be shifted or passed on to another. Here, the impact and incidence are on different persons. Example, Excise duty, Customs, Excise and Preventive Service and Value Added Tax.
The informal sector forms a significant and growing proportion of the economy in developing countries. The origin of the informal sector in Ghana’s economy can be traced back to the very beginning of colonial in the then Gold Coast. The key features of the colonial economy included primarily commodity production for export, investments in mining, transportation and related services, infrastructure and public works, and social development. The promotion of primary commodities production for export and the import of consumer goods for domestic trade gave rise to large contingents of the labor force in both agriculture and petty trading who were either self-employed or hired under traditional or informal agreements.
The size of Ghana’s informal sector is placed at 80 percent of the total labor force. The large-scale retrenchment of labor, coupled with the inability to provide employed persons who have naturally gravitated towards the informal sector.
Due to the improvement in the informal sector, there is increasing interest from government in the potential benefits of taxing the informal sector, but the effectiveness of doing so has been a problem.
To this end, the conception or idea of supplying more detailed information to the management of Internal Revenue Service (IRS) to enable them discharge their duties effectively and efficiently this research came to the fore. The research work therefore, is to evaluate the effectiveness of direct tax administration in the informal sector in Ghana.
This chapter presents the theoretical review of facts and materials of the study. It provides logical and systematic foundational facts designed to improve on the understanding of the Direct Tax Administration in the Informal Sector in the Ghanaian Economy.
HISTORY OF TAX IN GHANA
Income Tax was introduced in the then Gold Coast present day Ghana during the Second World War era with the passing into Law of the Income Tax Ordinance No.27 of 1943 on 22nd September, 1943. The ordinance commenced on 1st April, 1944 thereby the year of Assessment (tax year) was 1st April–March 31st. Now the year of Assessment is on current basis, 1st January–31st December of the same year. Initially, the Department collected tax from only a few Limited Liability Companies and a very small number of Individuals. This ordinance has seen so many amendments.
In 1952, the Income Tax (Amendment) ordinance was passed to rectify the short comings in the previous one. A consolidated edition was published in 1961 by Act 68. On 1st July 1961, the tax year was changed to 1st July–30th June whereas the Pay as You Earn (PAYE) system was also introduced.
In 1952 to 1963, other taxes and duties were added to the Income Tax. They include:
Minerals Duty, 1952
Betting Tax, 1952
Casino Revenue Tax, 1955
Property Tax, 1961
Entertainment Duty Tax, 1962
Airport Tax, Hold Customers Tax, Standard Assessment and Excess Profits Tax in 963.
Following the consolidated edition published in 1961 by Act 68, Acts 178 and 107 and sealed off by Act 312 all in 1963.
In 1966, a Second Consolidated edition (known as Income Tax Decree 1966 No. 78) was published. The third edition (Income Tax Decree 1975–SMCD 5) forms the basis of Income Tax Administration in Ghana.
In July 1986, government took a decision on structural changes in the Central Revenue Department. The Internal Revenue Service (IRS) Law–1986 (PNDCL.143) was passed. The promulgation of the Revenue Agencies Board Act, 1998 (Act 558) established a central governing body to replace the existing governing boards of IRS, CEPS and VATS.
The Internal Revenue Act, 2000, Act 592 (IRA) was enacted in 2000 and was structured as a code under which all taxation laws administered by the Internal Revenue Service are collected together. The Internal Revenue Act does not change the previous law (Income Tax Decree 1975) but provides detailed and precise rules than the old law and introduces new rules to cater for situation not directly dealt with in the previous law.
Tax compliance generally encompasses all activities necessary to be carried out by the tax-paying public in order to meet the statutory requirements of the tax law. This includes the preparation of tax returns that must be filed by individuals and organizations each year.
It is a specified form meant for the declaration of income from all sources by taxable persons for the correct assessment of their tax. Part X, Division I of the Internal Revenue Act, 2000 (Act 592), as amended contains the provisions relating to Returns.
SUBMISSION DATES FOR FILING RETURNS
i. In the case of a company, returns must be submitted not more than four months after the end of the company’s financial year.
ii. In the case of employees, employers are required to finalize the returns and file them not later than 31st March (i.e. three months after the year’s end). This is where the employee has no other sources of income aside his employment income.
iii. All other persons are to furnish their returns within four months after the end of a basis period which ends within the assessment year.
EXTENSIONS OF TIME TO FURNISH A RETURN OF INCOME
The Commissioner of Internal Revenue (CIR) may extend the time for furnishing a return of income under Section 74 of Act 592, for not more than two months. The taxpayer needs to apply for the extension, and the grounds on which the Commissioner may extend the time are the inability of the person to furnish the return by the due date because of:
a) absence from Ghana;
b) sickness; or
c) other reasonable cause
It should be noted that the granting of the extension of time does not alter the due date for the payment of the tax the taxpayer is supposed to pay.
CASES WHERE RETURN OF INCOME NOT REQUIRED
Unless the Commissioner requests in writing that a return be filed, a non-resident person who has no income accruing in or derived from Ghana during a basis period ending within the year is not required to file a return. Where a non-resident has derived income from Ghana and a final withholding tax has been paid on it, the non-resident is not required to file a return.
A resident individual who has no chargeable income or whose chargeable income for the year is subject to a nil rate is not required to file a return.
FAILURE TO FURNISH RETURNS
A person who fails to furnish a return within the time allowed, i.e. on or before the due dates, is guilty of an offence and is liable to one penalty unit (in the case of a company), and half penalty unit (in the case of a self-employed person) in respect of each day of default. A penalty unit is equivalent to, GH¢12.00. (Abdallah, 2008:23-29)
THE CONCEPT OF DIRECT TAXATION IN GHANA
The Internal Revenue Service is responsible for the collection of Direct tax revenues whiles the Customs Excise and Preventive Service and the VAT Service are responsible for the administration of Indirect Tax in Ghana. The Internal Revenue Act 2000 (Act 592) covers six major areas namely; Income Tax, Capital Gains Tax, Gift Tax, Stamp Duty, Petroleum Income Tax and Provision of general taxation. Income tax is collected from individuals and corporations.
CORPORATE INCOME TAX
It is levied on all source of income of a corporation. Currently the corporate tax is 25% in Ghana. In addition, the corporate income tax leads to double taxation of corporate income. Income is taxed once when it is earned by the corporation and a second time when it is paid out to shareholders in the form of dividends.
INDIVIDUAL INCOME TAX
It is also known Personal Income Tax which is charged on a person’s income. A person’s income may include wages, salaries and other earnings from one’s occupation. Income also includes capital gains, which are profits from the sale of stock, real estate or other investments whose value has increased over time.
CAPITAL GAINS TAX
Capital gain tax is payable by a person on capital gains accruing to or derived by that person from the realization of a chargeable assets owned by that person in Ghana, or gains on chargeable assets brought into or received in Ghana. Tax–payers are required to report any capital gain and pay any tax arising therefore within thirty days of realization of an asset.
Capital gains tax was introduced in Ghana by Capital Gains Tax Decree, 1975. Capital gains tax is payable by a person at the rate of 10% (for the period, 2001-2006) and 5% (from 2007 year of assessment) of capital gains accruing to or derived by that person exceeding GH¢50.00.
A gift is defined to mean a receipt without consideration or for inadequate consideration. A gift, which is taxable under the Act shall be taxed at the rate of 5% on the total value received by a person within a year of assessment. The value of a taxable gift is market value of the gift at the time of the receipt.
Stamp duty is a tax levied on some legal documents. It is administered under the Stamp duty Act, 2005 (Act 689) as amended by Act 764 of 2008.
PETROLEUM INCOME TAX AND PROVISION OF GENERAL TAXATION
Petroleum Income Tax or fuel levy is the largest contributor to the Ghana Road Fund, contributing over 94% of total revenue of the fund. For the year 2007, the road fund generated GH¢115,857,385.63 out of which the fuel levy contributed GH¢109,031,541.60 representing 94.1%.
TAXING THE INFORMAL SECTOR
There has been a growing interest in taxing the Informal Sector in most developing countries including Ghana for a number of reasons. The quest for government to broaden the tax net to cover the large Informal Sector is as a result of these factors:
Taxation is a major source of revenue for governments worldwide. Revenue maximization is the primary objective of tax policy. The Informal Sector therefore becomes the obvious avenue to be drawn into the tax net having been mostly out of it many years. In Ghana, tax revenue is used for:
The provision of infrastructural development, that is, good roads, schools, portable water, provision of health and sporting facilities, electricity etc.