Topics to be Covered

Introduction to general principles of taxation

 Meaning of taxation
 Historical perspective of taxation in Ghana
 Features of income taxation
Tax administration in Ghana

 Nature of tax administration

 The Ghana revenue authority
Income chargeable to tax in Ghana, and income except form tax

 Employment income
 Business income
 Investment income
 Exempt income
Year of assessment and basis period

 Meaning of year of assessment

 Meaning of basis period

Assessment of employment income

 Meaning of employment
 Car element rent
 Reliefs
 Computation of chargeable income

Capital Allowance

 Conditions for granting capital allowance

 Classes of depreciable assets
 General rules governing the pool system
 Determination of capital allowance under each class
Assessment of business income

 Deductions
 Assessment of self-employed
 Assessment of companies
Value added tax

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DEFINITION AND HISTORY OF TAXATION IN GHANA
Meaning of Taxation
A tax can be defined as a compulsory charge, imposed by government on income, expenditure
or capital assets, in order to raise revenue, for which the tax payer receives nothing specific in
return. The word taxation denotes the act of taxing, that is, by the government, or the fact of
being taxed.
The collection of all the taxes in operation in an economy and the rules to these taxes is called a
tax system.

History of Taxation
The history of taxation dates back to the Roman times. Lymer and Hancock (2001) report that
all revenue required by the Roman empire, including the cost of military operations, was
requisitioned from the people who lived in territories which had been occupied by the Romans.
Snape (1999) in tracing the history of tax in the United Kingdom submits that modern income
tax was originally introduced by the Finance Bill of January 1798. Its purpose was to raise
revenue to meet the cost of the war with Revolutionary France. Its architect was the British
Prime Minister William Pitt, who wanted to raise revenue without massive government
borrowing.

Income tax was discontinued in 1802 by Pitt’s successor Prime Minister Addington, although
Addington was forced by circumstances to reintroduce it in 1803. He introduced a new income
tax which introduced five schedules, A to E, which are still used today except scheduled B which
was abolished in 1988 and schedule C, abolished in 1996. The scheduler system classified
income by sources. Addington was also responsible for taxation at the source: Rent, salaries,
pensions and interest were all paid net of basic tax rate.

In Ghana, Taxation started in the form of customs duty in 1850. It was levied on imported goods
at the rate of ½ % advalorem. This was administered by a principal collector stationed at Cape
Coast castle. Recall that, the Cape Coast Castle was one time the seat of Government of the
Gold Coast (now Ghana). In 1852, poll tax was introduced in the Gold Cost.

Income tax was first introduced in Ghana (then Gold Coast), in 1943 during the second world
war and the first year of assessment was 1944/45. The Income Tax Ordinance (No.27) 1943 was
modelled to a large extent, on the general principles adopted in the Income Tax Acts then in
force in the United Kingdom. Recall again that, the Gold Coast was once a British Colony.
It adopted what may technically be called the “Source Jurisdiction”. That is, it imposed the tax
generally on income having its source in Ghana so that foreign sources of income were not liable
until remitted to Ghana.

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In order to ensure a fair measure of equitability in the tax system, the 1943 ordinance provided
rather generously a multitude of personal reliefs or deductions. An individual tax payer could
therefore claim his personal relief and a host of other reliefs like wife or divorced wife
allowance, children’s basic allowance up to five, children’s education allowance covering all the
five children, dependent relative allowance, cost of passages to and from Ghana for the tax
payer, his wife and children and finally life Assurance relief. After granting these reliefs, if no
part of the Assessable income was left, the tax payer did not pay any tax. In terms of coverage
therefore, only a very small proportion of the indigenous Ghanaian population paid any income
tax in view of the very generous personal deductions available.

Those who were not married put in names of their girlfriends; those who had no children claimed
for three, four or a maximum of five and those who did not care for their aged dependent also put
in ghost names. It was almost impossible to check because
(1) of the size of the Ghanaian family, and
(2) almost everybody completed the tax return form to enable him /her full advantage of
the reliefs. The cases were just too many.

In 1958, the Income Tax Ordinance (No.27) of 1943 was amended slightly to bring into the tax
net a greater number of taxpayers who should be paying tax had it not been for the numerous
reliefs available and sometime fictitious claims they made.
By this amendment a minimum tax of £600.00 per annum or more irrespective of any personal
reliefs for which an individual may be eligible was introduced.

Another significant landmark in tax administration in Ghana occurred in 1961. In 1961, the
government, faced with raising more funds for development projects and the rising cost of
administration invited Professor Nicholas Kaldo, an imminent economist from Cambridge
University to study the tax system and to make recommendations for improvement.
Professor Kaldo noted that the tax potential from employment and self-employed persons could
only be increased if the high level of personal reliefs could be reduced to bring into the tax net a
greater number of the tax paying population. Accordingly, he advised Government to abolish all
personal reliefs which hitherto every individual tax payer claimed to the maximum and to
substitute a basic tax free income.

Consequently, in 1961, the Income Tax Amendment No.2 Act of 1961, popularly known as Act
68, therefore introduced a current year basis of assessment and a Pay As You Earn (PAYE)
System for all employees. It also abolished business loss deductions and introduced turnover tax
or minimum Chargeable Income of two per cent (2%) for all self-employed persons, partnerships
and companies. The Income Tax Decree-SMCD 5 of 1975 became the major enactment of
Income taxation in Ghana.

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Yet another significant change in tax administration in Ghana was in 1983 with the enactment of
PNDC law 61. Between July, 1961 and December, 1982, whilst employees paid tax on current
year basis, persons who were engaged in self-employment were subject to the same personal
income tax. Under the Income tax (Amendment) law 1983, all categories of tax payers,
employees, self-employed and companies now paid tax on current year basis.
It is also worthy to note the change-over of the name from Central Revenue Department to
Internal Revenue Service and its attendant structure as well as amendments to the main Law
which are in progress since the promulgation of the income tax ordinance (No.27).
By way of summarising, it is worth noting that since 1943 there have been four consolidated
editions- the 1943 ordinance was used from 1944-1945 to 1965-1966 a period of twenty-one
years. This was followed by the income Tax Decree, 1966 (NLCD-78). This came into force on
1st July, 1966 and was used for only eight years: -1966/67 to 1974/75. The Income Tax Decree,
1975 (SMCD5) was introduced in July 1975 with effect from the year of assessment 1975/76.
This was the third consolidated edition.
The current edition of the income tax law is the Income Tax Act 2015 (Act 896) which is the
fourth consolidated edition and for which we make extensive references throughout this note.

Changes in Tax Laws

The preceding section discussed the history of taxation in Ghana. You might have observed the
various changes in the tax laws over the years. This should not surprise you. It is just because
taxation is a dynamic subject, and the provisions of the law relating to taxation in Ghana keep
changing to accommodate emerging trends in the country’s economic developments. It is
therefore important that you keep abreast with emerging issues on the subject during and even
after this course.

THE ROLE OF TAXATION IN THE ECONOMY OF GHANA

The Government uses taxation for a number of reasons including:
 To raise revenue to finance its expenditure, for example in health, education and roads.
 To redistribute income and help the less well-off, for example, the unemployed.
 To control the economy and influence the level of inflation and economic growth.
 To give incentives to industry to influence location and encourage production and
investment.
 To control the import of certain goods either for balance of payments or other reasons.

a) To raise revenue
Taxation is required to raise revenue to cover government expenditure. It raises revenue to cover
the cost of administration, defence, to provide infrastructure, to settle both internal and external
debts. Taxation is in fact, the main source of revenue to governments. In Ghana, for instance,
taxation alone generates more than fifty percent (50%) of government revenue.

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b) The tax system may be used to redistribute income towards equity
It often happens that a greater part of the nation’s wealth will be in the hands of a few people
while the majority remains in abject poverty. This problem can be solved by redistributing
income among the various social classes. The progressive tax system is effective for this. It
ensures that, the higher income earners pay proportionately more in the form of taxes than the
lower income earners, hence redistribution of income.
Table 1 shows a summary of sources of Ghana Government Revenue for 2005 fiscal year.
c) To check inflation
Taxation is often used to check the effects of inflation and thus stabilize prices. High taxation
reduces the disposable income of consumers, hence, low demand for goods and services, and this
help solve inflation.
d) To protect infant Industries
Infant industries are industries that have not yet found their feet in the field of production or
cannot effectively stand competition on their own. To make them grow, taxes (import duties) are
imposed on imported goods to raise their prices. This has the effect of making imported goods
expensive thus stimulating the demand for the locally produced goods, leading to the growth and
expansion of such industries. This has additional advantages of creating employment avenues
for the local people and promoting the spirit of self-reliance.
e) To correct balance of payments deficits
Balance of payments deficits result when a country’s total import bill for the year exceeds its
total export bill. Tariffs (taxes) on imported goods will have the effect of increasing import
prices and thereby discourage imports. If exports are evenly constant, a fall of imports may help
correct the anomalies in the balance of payment.

(f) To Avoid Dumping

Taxation is an anti-dumping tool. Normally, the advanced counties are fond of dumping goods
of lower prices on developing ones. This does not offer any incentive to local industries. To
avoid this unpleasant situation, high taxes are placed on such items to protect the local industries
or even prevent the importation of such items.

(g) To discourage or control the consumption of certain goods

Taxes are imposed on certain goods which are considered harmful to the health of the people.
High taxes are levied on goods such as tobacco and alcoholic beverages to make their prices
relatively expensive so as to discourage their consumption.
Tax Implications for Businesses
Business organizations are affected by taxation in a number of ways including the following:
 Economic activity will be reduced unless the government ploughs back revenue from
taxation.
 Profits are taxed thus reducing the amount available for reinvestment in the business or
for distribution to shareholders.
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  Prices are affected usually when prices increase, which can reduce demand.
 Costs of production will increase when supplies of goods and services are taxed.
 VAT registration is a legal requirement of all firms whose turnover exceeds ¢200
million.

PRINCIPLES OF TAXATION

These are the principles to be followed to avoid any form of misunderstanding or conflict in
taxation. These principles or qualities are necessary because, without them the government
cannot realize its expected income. The principles are what Adam Smith called the “canons of
taxation”. These are:

(a) Equity
This principle means that, there must be equality in the sacrifice. This implies that, the
people should pay according to their ability. Thus, the rich will have to pay proportionately
more of their income as tax than the poor.

(b) Certainty
A good tax system must be certain in the sense that the tax payer must know how much,
when he is to pay and how the payment is to be made. Collection of taxes will go on
smoothly if the above conditions or information are given to the payer. This information will
help the tax payer to know his/her obligations and plan ahead so as not to run into
difficulties.

(c) Economy
A tax system is good if the cost of collection of the tax is lower than the total revenue
collected. That is, the cost of collection and administration should be smaller in relation to
the total revenue; else it will wipe away the benefits to be derived from the tax.

(d) Convenience
This means that, there should not be any obstacle in the way of the tax payers and the
collectors. Thus, anything that will hinder the smooth collection of the tax should be
removed.

Other Principles of Taxation

Apart from the canons of taxation promulgated by Adams Smith, the following are other
principles of taxation.

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(a) Broadness or wideness: This principle argues that, the tax system should cover those entire
populaces who are capable to pay. There should be no exemptions without any legitimate
reasons. Wideness as a principle will arouse the interest and the desire of the people to pay.
(b) A good tax system should be simple to enforce. The operations of the tax system should not
be too complex, otherwise it would lead to tax evasion.
(c) It should not create political tension which may in turn destabilize the economy.
(d) It should reduce administrative burden.

DIRECT AND INDIRECT TAXATION

Introduction
Taxation as pointed out earlier, as any sum of money which the government of a country
compulsorily collects from her residents without rendering any service or giving any goods in
direct return for the amount collected. There are two broad classes of taxes: direct and indirect
taxes.

Direct Taxes
These are based on either the income or wealth of the tax payer. They are paid directly to the
government as a result of income earned or wealth owned. They are levied on persons and
companies and are borne by the person earning the income. The main direct taxes are PAYE tax,
company tax, capital gains tax and gift tax. These will be explained in turns.
a) Pay as you earn: This is a tax imposed on the income of workers. It is often referred to
as the PAYE system. It is mostly progressive.
b) Company tax: This is the tax imposed on the profits of companies. Companies are
allowed to deduct certain expenditure as tax-free allowances from their gross profit. Tax
is then paid on the net profit remaining.
c) Capital gains tax: This is the tax levied on the increase in the value of an asset between
the time of its purchase and its sale. For instance, if someone bought an asset worth
¢15m in 2000 and if during 2003 the asset is sold for ¢18m then the tax will be on only
the ¢3m.
d) Gift Tax: This tax applies to transfers of personal wealth from one person to another.
Some transfers are exempt, for example those between husband and wife. Others are,
however, taxable, and will attract the applicable gift tax rate.
e) Rent Tax: This is imposed on the incomes earned by landlords from the proceeds
collected from landed properties, such as buildings and farm lands.

Merits of Direct Taxes

Direct taxes provide the following advantages:
a) Direct taxes especially progressive taxes have the advantage of creating income equity.

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 b) Direct taxes are certain. The tax payer knows how much to pay and when and where to
pay.
c) The incidence of a direct tax is easier to determine than that of indirect tax.
d) The cost of collection is comparatively low, especially as much of the tax is deducted at
source.
e) Direct tax enables the state to reach those nationals who derive their income from the
home country but live for a large part of the year in another country.

Demerits of Direct Taxes

In spite of the advantages discussed above, direct taxes have a number of disadvantages
including:
a) Direct taxes reduce disposable income. It sometimes leads to wage agitation.
b) A high income tax can be disincentive to effort and enterprise especially, in the case of
overtime payments.
c) Evasion of direct taxes tends to be easy because of collusion between tax payers and tax
collectors.
d) Assessment of direct taxes is difficult due, in part, to lack of records on income and profit
of the self-employed.

Indirect Taxes
These are taxes imposed on expenditure on goods and services and are paid only when such goods
and service are bought or consumed. Indirect taxes are collected by the Customs, Excise and
Preventive Service and Value Added Tax Service.

Indirect taxes may be specific, that is, consisting of a fixed sum regardless of the value of the
goods, for example ¢90 per litre of petrol or advalorem, that is, a percentage of the value of goods
for example 12.5%.

The main indirect taxes are value added tax, import duty and export duty.

(a) Value Added Tax: Is a consumption tax imposed on the expenditure

incurred in buying goods and services. It is levied at each stage in the production and
distributions of goods are services. The final tax is paid by the consumer. The basic rate is
15% but some items are exempt while others are zero rated.

Find out the difference between exempt items and zero rated items under the value Added Tax
system, discussion.

Value Added Tax (VAT) is a tax which is paid by a producer or a service provider in
proportion to the amount by which the value of his output exceeds the value of his inputs. (i.e.
a percentage of the value which he himself has added to the product). It is a tax, which is

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 imposed on the value added to goods and services at each stage in the production and the
distribution line. Thus, it occurs at each stage of production, including wholesale and retail
stages.
(b) Import duty: Is a tax imposed on imports or goods brought into the country. The amount of
tax to be paid depends on the value or volume of the items imported.

(c) Export duty: This is tax imposed on goods leaving one’s country for another country.
Import and export duties are also called custom duties.

Merits of Indirect Taxes

(a) They are relatively easy to collect since the taxes are usually paid at the point of
consumption.
(b) The taxpayer does not feel the burden so heavily when it is spread on many purchases
throughout the year.
(c) Indirect taxation enables those with small incomes to be reached more effectively and
economically.
(d) Evasion is more difficult than in direct taxation
(e) It enables the state to derive some revenue from foreign investors who normally would be
exempt from paying direct taxes.

Demerits of Indirect Taxes

(a) They tend to be inflationary. Since the tax is on goods and services, it usually leads to a
rise in prices and thereby spark-off inflation.
(b) Sometimes tax payers are not aware of the tax they pay.
(c) The incidence is not always easy to determine.

Types of Tax Rate Structure

There are a number of different types of taxes which the Government can use including:
a. Progressive Tax. This is the tax system where the percentage of tax imposed on a person’s
income increases as his income also increases. Thus, the higher income earner pays more
than the lower income earner.
b. Proportional Tax. In a proportional tax system; the same percentage of tax is applied to all
tax payers irrespective of the size of income. For instance, ten percent tax rate will apply to
both low and high income earners. Under this system, though, the high income earner pays
more than the low income earner, the later feels the pinch more than the former. It is
proportional to the level of income.
c. Regressive Tax. This is a system of taxation whereby the percentage of income paid as tax
decreases as the level of income rises. The lower income earner pays higher percentage of

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 tax than the high income earner. In absolute terms, however, the tax paid by the rich is
generally greater.
d. Flat Tax: This is a tax levied equally on everyone. An example is the basic rate levied on
adults residents of a particular district assembly. Another typical example is the poll tax that
was levied some years ago.

GENERAL TAX ADMINISTRATION IN GHANA

ELEMENTS OF INCOME TAX ADMINISTRATION

Administration means managing the affairs of a business or an organization. The goal of tax
administration is to ensure that the desired objectives of tax laws are achieved.

Otieku (1992) noted that tax administration involves the following four major elements.
(ii) Identification of the taxpayer, his/her tax base and assessment of his/her income tax
base;
(iii) Levying, collection and payment of taxes into the consolidated fund as well as the
audit control over the taxes so collected;
(iv)Review procedure for the settlement of disputes between the taxpayer and tax officials,
and
(v) The enforcement of any penalties for non-compliance with or violation of the tax laws.

(a) Identifying the taxpayer, his tax base and assessment of income
The first step in the tax administration process is to identify the income earner/taxpayer,
ascertain his various sources of income which is described as his tax base and determine as
objectively as possible the cedi amount of each source of income.

The taxpayer may either voluntarily identify/disclose information about himself in compliance
with the requirements of the tax law or the tax officials may have to take steps to identify him.
The identification of the taxpayer enables the tax administrators to prepare a tax roll or tax file.

After identifying the taxpayer, his various sources of income must be ascertained. These are
normally well spelt-out in every tax law. At this stage, therefore, what is required is to determine
which of the various sources of taxable income is applicable to each tax payer.

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 Assessment of the taxpayer’s income involves the determination of the cedi amount of his
income from all taxable sources. The major aim here is to ensure that the taxpayer pays the tax
liability that is commensurate with his income

(b) Levying, Collecting and Paying the Tax Revenue into the Consolidated Fund
Levying of taxes simply means the formal order for tax payment upon the assessed person based
on certain rates or in specific amounts. Where objective assessment of the tax base is possible,
levying of tax becomes a routine exercise. Otherwise it involves an imposition of standard
assessment.

The entire process of tax administration becomes an exercise in futility if tax revenue due to the
state cannot be collected. Collection of taxes and penalties demands two main prerequisites:
(a) Competent and honest tax officials and
(b) Taxpayers conversant with the tax laws.

Tax officials must, themselves, have a good knowledge of the tax laws; otherwise, they may
misinterpret the tax either to the detriment of the taxpayer or the state. They must equally be
honest enough; otherwise, they can divert taxes collected or collude with taxpayers to collect
amounts less than the taxes due to the state.

When taxes due to the state are duly levied and collected, they must be properly accounted for
and paid into the consolidated fund as required by law.

(c) The Review Procedures for the Settlement of Disputes

Tax review procedures are the total appeal systems of resolving tax disputes between tax
authorities and the taxpayer. In the performance of his duties, the Commissioner of IRS
exercises certain discretionary powers and judgments. The exercise of these powers and
judgments may result in imposing tax liabilities and other obligations on the taxpayer which may
not necessarily reflect the correct state of affairs of the taxpayer’s obligations towards the state.
Certainly, this may result in disputes between the taxpayer and the tax authorities. To forestall
the excessive use of the discretionary powers and redress any subjective decisions of the tax
authorities, any good tax law must create the avenue for settling the dispute that may arise. This
opportunity may be evoked by either the taxpayer or the officials at any stage in the taxation
process. But most frequently, it is exercised at the point of assessment. It is at this point that the
principal errors of judgment are likely to occur.

Two main review procedures for the settlement of disputes are normally provided for. These
are:
(iii) The administrative or semi-judicial review procedures, and
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 (iv) The judicial review procedures.

Administrative reviews deal with the factual rather than the legal issues of taxation, the latter
being the subject matter of judicial reviews. At the rudimentary stages, administrative reviews
are the opportunities for objecting to any decisions of the tax administrator in relation to the
taxpayer’s obligations.

If the commissioner objects to review the assessment made on the taxpayer, the taxpayer is
granted further opportunities to proceed to a high authority for review, if he is still not satisfied
with the commissioner’s decision. This next authority of appeal after disagreement with the
review decision of the commissioner constitutes the semi-judicial aspect of the administrative
reviews.

Where the bone of contention between the taxpayer and the tax authorities relates more to the
‘cold’ facts of law rather than the factual issues of taxation, the courts are the most appropriate
place of settlement, Judicial reviews deal more with the disputes bordering more on the matter of
law. The case of Rutledge Vrs the Commissioner of Inland Revenue is an example. Under any
review procedures the basic requirements of due process, namely notice to the parties involved
and opportunity for hearing must be observed. The guiding principle in settling any disputes
between the taxpayer and the administrator is to ensure that a high degree of confidence in the
whole tax system should be built into the taxpayers.

(d) Enforcement of Penalties for Non-compliance with or Violation of Tax Laws

In order to ensure that any law produces its desired results, tax laws, no exceptions, must contain
penalties for its violation. Tax penalties must be punitive enough to make it disadvantageous for
the taxpayer not to comply with them. The punitive measures normally fall into two broad
categories. These are:
i. Penalties imposed for delay and inadvertent negligence in filing returns or making
payments; and
ii. Penalties for deliberate attempt to evade one’s tax obligations.

Usually, penalties for the first category of offences take the form of addition of interest, at a
relatively high rate, to the amount of tax overdue. Those for the second category include a
substantial fine or even imprisonment in addition to the penalty of interest.

Though tax penalties tend to induce compulsory rather than voluntary compliance with tax laws
by taxpayers, they aid the tax authorities considerably in the discharge of their duties. In the
absence of tax penalties, many taxpayers or income earners will intentionally refuse to honour
their tax obligation to the state.

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RESPONSIBILITY OF MINISTER OF FINANCE
The Role of the Minister of Finance
Act 896 charges the Minister of Finance with the responsibility of laying in Parliament,
Legislative Instruments to make Regulations for the purpose of
(a) dealing with matters authorized to be made or prescribed under Act 896,
(b) exempting any person, class of persons or income from tax,
(c) amending a provision of the schedules to Act 896 or any monetary amount set out in Act
896,
(d) Paying tax at such rate as prescribed under Act 896
(e) Requiring a person or class of persons to withhold and remit tax from amounts payable to
another person.
(f) Providing for the timing of payment, manner of ascertaining and recovering of such tax
to be withheld or paid.

Authority to Exempt Tax

We have noted in the preceding section that the Tax law confers certain power on the Minister of
Finance to make regulations for the administration of taxes. However the power to exempt tax is
vested in Parliament. Clause 1 of Article 174 of 1992 Constitution of the Republic of Ghana
states, “No taxation shall be imposed otherwise than by or under the authority of an Act of
Parliament.” Clause 2 of Article 174 stipulates, “Where an Act, enacted in accordance with
clause (1) of this article, confers power on any person or authority to waive or vary a tax
imposed by that Act, the exercise of the power of waiver or variation, in favour of any person or
authority, shall be subject to the prior approval of Parliament by resolution”.

GHANA REVENUE ATHOURITY

The Ghana Revenue Authority Act, 2009 (Act 791) establishes the Ghana Revenue Authority to
replace the Internal Revenue Service, the Customs, Excise and Preventive Service, and the Value
Added Tax Service for administration of taxes and to provide for related purposes
The Act came into force on December 31, 2009

Objectives of the Authority

The objectives of the authority are to:
(a) Provide a holistic approach to tax and customs administration
(b) Reduce administrative and tax compliance cost and provide better service to taxpayers
(c) Promote efficient collection of revenue and the equitable distribution of tax burden and
ensure greater transparency and integrity
(d) Ensure greater accountability to government for the professional management of tax
administration
(e) Improve information linkage and sharing of information among the divisions of the
Authority
(f) Provide a one-stop service for taxpayers for the submission of returns and payment of
taxes
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Functions of the Authority
To achieve the objects, the Authority shall:
(a) Assess and collect taxes, interest and penalties on taxes due to the Republic with
optimum efficiency
(b) Pay the amounts collected into the consolidated fund unless otherwise provided by this
Act and other Acts
(c) Promote tax compliance and tax education
(d) Combat tax fraud and evasion and co-operate to that effect with other competent law
enforcement agencies and revenue agencies in other countries
(e) Advise District Assemblies on the assessment and collection of their revenue
(f) Prepare and publish reports and statistics related to its revenue collection
(g) Make recommendations to the minister on revenue collection policy
(h) Perform any other function in relation to revenue as directed by the Minister or assigned
to it by any other enactment

Governing body of the Authority

The governing body of the Authority is a Board consisting of:
(a) A chairperson
(a) The Commissioner-General of the Authority
(b) A representative of the Ministry not below the rank of a Director
(c) A representative of the Ministry of Trade and Industry not below the rank of a Director
(d) The governor of the Bank of Ghana or a representative of the Governor not below the
rank of a deputy-Governor
(e) Four other persons from the private sector two of whom are women

The president shall appoint the chairperson and members of the Board in accordance with article
70 of the constitution.

Functions of the Board

The Board shall ensure the proper and effective performance of functions of the Authority
through the:
(a) Supervision and monitoring of the Authority in the performance of its functions
(b) Formulation of administrative policy for the smooth and efficient management of the
Authority
(c) Determination of a scheme of service for the staff of the Authority
(d) Performance of any other function incidental to the objects of the Authority.
The Board shall make recommendations to the Minister on tax policy, tax reform, tax legislation,
tax treaties, tax exemption and tax concessions.
Functions of the Commissioner-General
1. The Commissioner-General is responsible for the day-to-day administration of the affairs
of the Authority and is answerable to the Board for the performance of the functions of
that office
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 2. The Commissioner-General shall perform any other function determined by the Board
3. The Commissioner-General shall delegate a function to an officer of the Authority but is
not relieved from ultimate responsibility for the performance of the delegated function
4. The Commissioner-General is responsible for the direction and supervision of the
employees of the Authority
5. The Commissioner general shall in consultation with the Board appoint one of the
Commissioner to act for the Commissioner-General in the absence of the Commissioner-
General

Divisions of the Authority

The Ghana Revenue Authority has the following divisions:
(a) Domestic Tax Revenue Division
(b) Customs Division
(c) Support Services Division
(d) Any other division determined by parliament

Domestic Tax Revenue Division

The division is responsible, under various legislations, for the collection of the following taxes
and levies:
a) Income Tax – Corporate Tax, Personal Income Tax, and Pay As You Earn (PAYE)
b) Value Added Tax
c) Gift Tax
d) Capital Gains Tax
e) Domestic Excise Duty
f) Stamp Duty
g) Royalties
h) National Health Insurance Levy (NHIL)
i) GetFund Levy
j) Communications Levy
k) Customs Services.

Responsibility of Commissioner, Domestic Tax Revenue Division

Definition of Commissioner
Section 8 of the Internal Revenue Law, 1986 (PNDC law 143) defines Commissioner of Internal
Revenue Service, now domestic tax revenue division, who shall be appointed by the President, as
follows:

“The Commissioner is responsible for the administration of the Internal Revenue Act and shall
pay into the consolidated fund monies due to the service”.

“The Commissioner may by notice in the Gazette or in writing authorize any person within or
outside Ghana to perform or to assist in the performance of a function imposed upon the
Commissioner by the Act”. Sections 10 and 12 of the Internal Revenue Service Law, 1986

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(PNDC Law 143) provide the appointment of Deputy Commissioners, consultants, experts and
such staff as may be necessary.

Powers of the Commissioner

In the preceding section, we noted that the Commissioner has the primary responsibility of the
administration of the Internal Revenue Act. The Commissioner can authorize any person to assist
in the performance of his functions. However, subsection 4 provides restrictions indicating
powers which cannot be delegated. Let us examine the powers that cannot be delegated and
those powers that can be delegated.

Powers that cannot be delegated:

The Commissioner shall not delegate his power:
i. in cases of capitalization of profits. That is the commission alone has the power to
determine any matter concerning taxation of capitalization of profits.
ii. in determining the adjustments to be made under the provisions of section 70 (Transfer
Pricing) and 122 (General Anti-Avoidance Rule) when dealing with undistributed profits
of companies controlled by not more than five persons and their associates.
iii. of exemption for payments in respect of the payments for the supply or use of goods or
property or the supply of services of a contract between the payee and a resident person
iv. to compound an offence
v. to remit taxes, interest or penalties.

Powers that can be delegated

The Commissioner may delegate to senior officers of the Internal Revenue Service including
Deputy Commissioners, Assistant Commissioners and any Chief, Principal and Senior Inspector
of Taxes:
a) the power to extend the date for payment of taxes or vary the amount of instalments; and
b) the power to deal with other functions including the power to authorize an officer to deal
with the provisions of audit, search, seizure and to call for information.

Customs Division
The customs division is responsible for collection of Import Duty, Import VAT, Export Duty,
Petroleum Tax, Import Excise and other taxes. At present, the Domestic Tax Revenue Division
(VAT) collects, Excise Duty on behalf of Customs except Excise Duty on Petroleum products.
The taxes are used to finance the country’s recurrent budget and development projects in the
health, education, housing, the transport sector etc.

Customs also ensure the protection of the revenue by preventing smuggling. This is done by
physically patrolling the borders and other strategic points, examination of goods, and search of
premises, as well as documents relating to the goods. As a frontline institution at the country’s
borders, Customs also plays a key role in surmounting external aggression and maintains the
territorial integrity of Ghana. Customs is part of the country’s security network.

16
In addition to these functions, Customs performs agency duties on behalf of other government
organisations and ministries by seeing to the enforcement of laws on import and export
restrictions and prohibitions.

Support Services Division

The Support Services Division is headed by a Commissioner who reports directly to the
Commissioner General. Under the current transitional arrangements, the three erstwhile revenue
institutions are operating in quasi-autonomous status. Each institution still has Deputy
Commissioners for all the support services functions (i.e. Human Resource (HR), Finance,
Research, Planning and Monitoring and Information Technology (IT). However, they all report
to the Commissioner Support Services Division. These are temporary and transitional
arrangements.

Under full integration, all of these would be merged into one with a Deputy Commissioner
heading each of them and still reporting to the Commissioner instead of three or four different
heads, which is the current situation.

Other Administrative Principles and Documents

Official Secrecy
A person appointed under, or employed in carrying out the provisions of Act 896 shall regard
and deal with all documents and information which may come to his/her possession or
knowledge in connection with the performance of his/her functions under the Act as secret and
shall not disclose any information or document except in accordance with the provisions of the
Act or under an order of a superior court. This notwithstanding, information and documents can
be sent to the Minister for Finance, Auditor-General, Statistical Service and competent authority
of the government of another country with which Ghana has double taxation agreement.

Tax Clearance Certificate

This is a certificate issued by the Commissioner-General of the Ghana Revenue Authority to a
person stating that no tax is due under any of Act by that person in respect of the periods stated
in the certificate or that person has made arrangements satisfactory to the Commissioner-General
for the payment of the tax due. Tax Clearance Certificate will be demanded when an alien is
departing from Ghana, one wants to clear goods in commercial quantities from the port; in order
to register a title to land or in order to bid for government contracts.

Tax Credit Certificate

It is a certificate issued by the Commissioner-General to a withholding agent in favour of the
payee, after the withholding agent has paid the amount withheld to the Commissioner-General.
This is then delivered to the payee.

TYPES OF INCOME TAX ASSESSMENTS

Quarterly Payment of Tax

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A person who derives or expects to derive an assessable income for a year of assessment, which
is not or will not be subject to withholding of tax at source, is liable to pay tax quarterly at the
end of each three months of his accounting period. This payment may be based on a provisional
assessment by the Commissioner-General or a self-assessment by the tax payer.

Provisional Assessment
The Commissioner-General has an option to raise a provisional assessment computed according
to his best judgment soon after the commencement of the basis period of the persons who pay tax
by instalment. The statement would state the estimated chargeable income, the estimated tax
payable, the amount and timing of instalment payments, and the time, place and manner of
objecting to the assessment.

A Section states that a person who is dissatisfied with the Commissioner-General’s assessment
may object to the assessment in writing within 9 months after the commencement of the basis
period to which the provisional assessment relates.

Self-Assessment
This is a system where a person who pays tax by instalment is allowed by the Commissioner-
General to estimate his chargeable income and tax payable thereon for a year of assessment. The
authorization is by notice in a Gazette or print media. The estimate shall conform to the
Commissioner-General’s prescription on or before the commencement of a basis period.

Final Assessments
The Commissioner-General is empowered to make a final assessment on the basis of the
Commissioner-General’s best judgment where a person defaults in furnishing a return of income
for a year of assessment or where a person has furnished a return of income for a year of
assessment but the Commissioner-General is not satisfied with the return furnished by a person.

Additional Assessment
The Commissioner-General may make an additional assessment amending an assessment
previously made. This can be done within 3 years. However, where the need for making
additional assessment arises as a result of fraud by, or on behalf of a taxpayer time limitation
does not arise.

DISPUTE RESOLUTION
Objection to Assessment
The Act 896 permits a taxpayer who is dissatisfied with an assessment made on him/her to lodge
an objection to the assessment with the Commissioner within thirty days of the service of the
notice of assessment or, in the case of a provisional assessment within nine months of the
commencement of the basis period to which the provisional assessment relates.

The objection would be considered following the process below:

(a) Objection must be in writing stating precisely the grounds upon which it is made.
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 (b) Objectors can ask for an extension of time for lodging objection with the Commissioner
on grounds of objector’s absence from Ghana, sickness or other reasonable cause.
(c) Objection may be granted partially or wholly by the Commissioner thereby amending
the assessment or disallowing the objection.
(d) Commissioner is to serve Notice of decision of disallowance on the objector as soon as
possible
(e) Where ninety (90) days after lodging the objection, the Commissioner does not act on
the objection, the objector should deem it that the Commissioner electing to treat his
silence as having disallowed his objection.
If before this point, the Commissioner and the Objector agree or the Objector is satisfied with the
Commissioner’s objection decision in respect of an amendment to assessment or an allowance of
the objection, then this closes the chapter on the administrative dispute resolution.

Appeal to Court
The Act allows a person dissatisfied with an objection decision of the Commissioner to make an
appeal against the decision of the Commissioner at the High Court. The objector should lodge
this with the Registrar of the High Court within thirty (30) days after the service of the notice of
the Commissioner.
The appeals against the decisions of the Commissioner must be:
(a) served on the Commissioner within five(5) working days after it has been filed at the
High Court;
(b) instituted against the Attorney General.

Appeals can only be lodged later than thirty (30) days if the delay in lodging the notice of appeal
is due to:
(a) The objector’s absence from the country (Ghana);
(b) Sickness (i.e. If the objector is sick);
(c) Other reasonable cause; or
(d) There is no unreasonable delay on the part of the objector.
No action would be entertained without objection and appeal procedure being followed.
During the trial, the High Court may confirm, reduce, increase or annul the assessment on which
the decision is based or make an appropriate order.

Appeal to Court of Appeal and Supreme Court

The Commissioner or the appellant may appeal against the decision of the High Court to the
Court of Appeal on a matter of law only. An appeal against a decision of the Court of Appeal
shall lie as of right to the Supreme Court. An appeal to the Court of Appeal or the Supreme
Court is to be instituted within (30) days after the relevant decision has been given.

Payment of Deposit by Objector on Appeal

An objector is required under the Act to pay an amount not less than the amount payable in the
first quarter of that year in respect of provisional assessment before an appeal can be heard.
Unless this is paid, no court shall entertain the objection.
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Burden of Proof
As in all tax cases, the burden of proof is on the taxpayer, to show, on the balance of
probabilities, that the assessment on him is excessive or erroneous.

Payment of Tax
Where a person has lodged a notice of objection to an assessment, the Commissioner shall decide
the amount of tax to be paid by that person pending the determination of the objection and any
appeals. Where an objection or appeal has been determined, any tax outstanding becomes
payable within 30 days from the date of service of the notice of the decision of the
Commissioner or Court

OFFENCES AND PENALTIES RELATING TO INCOME TAX

Interest and Penalties
The Act spells out a number of offences and associated penalties.
Some of the offences are:
 Failure to maintain proper records
 Failure to furnish return
 Understating estimated tax-payable by installment
 Making false or misleading statement
 Aiding and Abetting
 Failure to comply with Act 896
 Failure to withhold tax

OFFENCES AND PENALTIES

OFFENCE PENALTY
Failure to keep books of accounts 5% of the amount of tax payable by that
person for the year under review.
Failure to furnish a return within (a) One penalty unit in the case of a
the time period required company; (b)Half penalty unit in the case
of a self-employed; in respect of each day
of default.

Failure to pay tax on due date Failure of not more than three (3) months;
10% of tax debt, plus tax debt. Failure
exceeding three (3) months; 20% of tax
debt, plus tax debt.
Understating estimated tax payable 30% of the difference between the tax in
by installment (Self-Assessment) respect of the estimated chargeable income
and the tax calculated on 90% of the actual
chargeable income, where estimate is less

20
 than 90% of the actual chargeable income.
Making false or misleading Double the underpayment of tax which
statement may result if not detected, if made without
reasonable excuse.

Treble the amount of the underpayment of

Aiding and abetting
Failure to comply with the Act
Failure to withhold tax
the tax, which may result if not detected, if
made knowingly and/ or recklessly.
Treble the amount of underpayment of the
tax, which may result if the offence went
unnoticed.
Where resulting underpayment is more
than ¢5,000,000; between 50 and 300
penalty units* and in any other case
between 10 and 100 penalty units.
Personal liability to pay to Commissioner
the tax due, but not withheld.

 A penalty unit is the current equivalent of GH ¢ 2.00

 A currency unit is the current equivalent of ¢10,000 or GH¢1.00

SOURCES OF INCOME SUBJECT TO TAX IN GHANA

Source of Income Under Act 896

The Income Tax Act 2015 (Act 896) groups the sources of income subject to tax into three
categories. These are Business, Employment and Investment incomes.

The chargeable income for a year of assessment is, therefore, the total of the person’s assessable
income from each business, employment and investment less the total amount of deductions
allowed to that person for the year under the Income Tax Act 2015 (Act 896).

Explanation of Basic Terms

There are number of key terms such as trade and business, profession and vocation that we need
to explain.

A. Trade, Profession, or Vocation

The Income Tax Act 2015 (Act 896) defines business to include any trade, profession, or
vocation, but does not include employment.

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(a) Trade refers to normal regular routine commercial activity and over the years certain
principles have been evolved as a result of decided tax cases which help to determine
whether an activity constitutes trading or not.
There are 10 of such features or badges which can help to determine whether or not a
transaction is in fact trading. If trading is taking place it is likely that there will be evidence
of the existence of more than one badge.
i. The motive of the transaction
If the objective of the undertaking or the transaction is to make a profit then trading can
be said to have taken place (Wisdom v Chamberlain).

ii. The way in which the asset was acquired

If it was purchased then there is a stronger case for trading than if it was received as a gift
or through inheritance.

iii. The nature of the asset

If it is something of aesthetic value like work of art then the case for trading is weak. If
however, it is something which is easily marketable then an inference for trading can be
made (Wisdom v Chamberlain 45, TC 92). Norman Wisdom acquired a quantity of
silver ingots as a hedge against an anticipated devaluation. He sold them at a profit within
a little more than a year. The profit was taxable as a trading profit.

iv. The quantity acquired

If the quantity is more than what can reasonably be used by one person and his family
then there is a strong case for trading. (Rutledge v CIR 14 TC 490)

v. Modification of the asset

Trading is more likely to be taking place if either work is done on the asset to make it more
marketable, or an organization is set up to sell it.
If the asset is in such a state that some repair, improvement or alterations had to be
carried out in order to make it marketable then a case for trading has been established.
CIR v. Livingstone 11TC 538).

vi. The length of ownership

If a person buys a property and retains it for some years before disposing of it, there may
be some mitigating factors. The presumption is that the shorter the period of ownership
the more likely it is that trading is taking place (Johnson v Health 46 TC 364).

vii. The way in which the sale is effected

Where the sale is planned and organized on commercial lines, then there is a strong case
for trading (Martin v. Lawry 11 TC 297)
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viii. The frequency of similar transactions
If the action is repeated the case is stronger than if it is only one transaction (Pickford v
Quirke 12TC 251)
ix. Other interests in the same field
If there is evidence that the party has experience in related business or vocation then there
is strong case (Cape Brandy Syndicate v CIR 12TC 358). The tax payer bought a
quantity of brandy which was blended, repacked and sold in lots. It was held to be a
trading transaction.

x. The method of financing

Where money is borrowed to finance the undertaking then there are strong grounds to
suspect that trading is going on.

(b) Profession
Profession refers to intellectual or specialized skill or a manual skill controlled by an
intellectual skill. For example, Doctors, Lawyers, Accountant, Engineers etc.

(c) Vocation
Vocation is the semi-skilled through which way a person earns his living e.g. carpenters
fitters, lotto forecasters, fetish priests “prophets” etc. These are commonly classified as
Trading Incomes.

B. Employment
This is normally defined as “contract of service” as opposed to “contract for service”. It
means simply how parties enter into an agreement whereby one party engages the services of
the other under specific terms.
The terms may include what has to be done, how it must be done; the remuneration; and the
conditions for termination of contract. These terms establish a master-servant relationship.
Contract for service is where a professional is engaged to do some job. There is no master-
servant relationship. Example is hiring the services of a lawyer, doctor, or an engineer.
Employment income does not only include fixed cash salaries and allowances but other
benefits attached to the office of employment, like provision of accommodation and car.

C. Interest, Discount and Dividend

(a) Interest
Act 896 of 2015 exempts interest paid (i) to an individual by a resident financial
institution; or (ii) to an individual on bonds issued by the Government of Ghana, from
tax.
(b) Dividend
The withholding tax on dividends paid by a resident company, other than dividend
exempt from tax, to a resident person (i.e individuals and corporate bodies) or a resident
23
 partnership is final and such receipt or payment shall not be taken into account in
computing the assessable income or for arriving at the tax liability for the year of
assessment of the recipient. The rate of withholding tax is currently 8%.

(c) Discount
Discount may be defined as the amount of money deducted from the face value of a note.
Discounting is not a very popular economic activity in Ghana. However, examples can
be cited of lotto winnings which are discounted and the Bank of Ghana Treasury Bills or
Bonds which are issued at a discount.

D. Charge or Annuity
A charge is normally paid under the terms of a will or under court order. An example is
payments made to a beneficiary from the estate of a deceased person.

An Annuity: is a form of insurance scheme whereby the policyholder or beneficiaries

receive regular or yearly payments according to the terms of the scheme. Normally a
formula is provided to distinguish between the capital contribution by the holder and the
interest receivable on the capital. It is only the interest which is taxable.

E. Royalties, premiums and other profits arising from property

The term Royalties used here refers to industrial royalties such as copyrights, patents, trade
names, trademarks, designs, and models. For example, if a Ghanaian writes a book which is
published by say Woeli Publishing Services, the writer will receive royalties on the number
of books printed and sold. The royalties thus paid is taxable income.
‘Royalties’ is also used to refer to royalties arising from the exploitation of natural resources
like timber and minerals.

It is significant that with regard to natural resources, any income arising there from is taxable
in Ghana whether received in Ghana or not.
Premiums normally accrue from leaseholds which have been let out over and above the
lease rent. The profit arising from such transaction is referred to as premium and is taxable.

When is Income Chargeable? Worldwide basis or global basis

As stated in section 6(1) of Act 592 “tax shall be payable upon the income of any person
accruing in, derived from, brought into or received in Ghana during any basis period of the
person ending within the year of assessment. This means the source of the income must be
from Ghana before it can be taxed. Alternatively, if the source is not from Ghana then the
income must be brought into or received in Ghana before it can be taxed. Once an income is
generated in Ghana or accrues in Ghana it is taxable in Ghana. It must be noted that if the
source of income is from Ghana, the income is still taxable in Ghana even though the income
24
 may not be receivable in Ghana. It can be stated emphatically that an income is taxable in
Ghana so long as the source is from Ghana. Whether the recipient of the income is resident
in Ghana or not is immaterial.

The other point is that if the source is not from Ghana, then the income can only be taxed if it
has been brought into or received in Ghana. So that so long as an income has not been
brought into or received in Ghana, it cannot be taxed in Ghana if the source is not from
Ghana. An example is when for instance a Ghanaian boxer fights outside Ghana and the
income paid into his foreign bank account. This cannot be taxed in Ghana because the
source is not from Ghana and is not brought into or received in Ghana. On the other hand, if
a foreigner comes to fight in Ghana his income is taxable in Ghana even if it is paid into his
foreign bank account. The reason is that the source is from Ghana.

It is to be noted, however, that income brought into or received in Ghana is assessable in

Ghana only if the person bringing it is resident in Ghana. If the income accruing or derived
from outside Ghana is applied in whole or partial satisfaction of any debt, incurred in Ghana
or applied to purchase a movable property which is brought to Ghana the income is taxable in
Ghana.

I. Resident Individual
An individual is a resident individual for tax purposes in any year of assessment if that
individual is:
i. A citizen of Ghana, other than the citizen who has a permanent home outside
Ghana for the whole year
ii. Present in Ghana for a period, or periods amounting in aggregate to 183 days or
more in any twelve-month period that commences or ends during the year of
assessment;
iii. An employee or official of the Government of Ghana posted abroad during the
year of assessment; or
iv. A citizen who is temporarily absent from Ghana for a period not exceeding 365
continuous days where that citizen has a permanent home in Ghana.

II. A “Non-resident person” means a person who resides/lives outside Ghana or does not
qualify as a resident individual based on the conditions for determining a resident person,
indicated above.

III.A “Non-resident company” means a company; the control and management of whose
business are exercised outside Ghana

25
 IV. A Resident Company is a company, for a year of assessment which is incorporated under
the laws of Ghana or has its management and control exercised in Ghana at any time during
the year of assessment.
V. A Resident Partnership for a year of assessment is a partnership which, at anytime during
the year of assessment, any partner in the partnership qualifies as a resident person.
VI. Permanent Establishment is “a place where a person carries on business, and
i. A place where a person carries on business through an agent, other than a general agent
of independent status acting in the ordinary course of business as such;
ii. A place where a person has, is using, or installing substantial equipment or machinery;
or
iii. A place where a person is engaged in a construction, assembly, or installation project
from ninety days or more, including a place where a person is conducting supervisory
activities in relation to such a project.

VII. Resident Bodies of Persons

A body of person is a resident body of persons for a year of assessment if it:
i. is established in Ghana
ii. has a resident person as a manager at any time during the year of assessment
iii. is controlled directly or indirectly by resident person at any time during the year of
assessment.

Geographical Source of Income

The Income Tax Act 2015 (Act 896) deals with the international dimensions of incomes that are
taxable within Territorial boundaries of Ghana. These are:

i. The gains or profits from any employment exercised in Ghana are treated as accruing in or
derived from Ghana, regardless of the place of payment. Offshore emoluments are a typical
example of this type of income. These gains or profits include benefits arising out from
employment.

ii. The gains or profits from a business of

a). a resident person are treated as accruing in or derived from Ghana unless they are earned
outside Ghana, or
b). non-resident person, are treated as accruing in or derived from Ghana when they relate
to a permanent establishment of the non-resident person in Ghana.

iii. The gross receipts of a non-resident person who carries on a business of operator,
charterer, or air transport operator from
(i) the carriage of passengers who embark or
(ii) mail, livestock, or goods, which are embarked in Ghana, other than transhipment,
are treated as accruing in or derived from Ghana.
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 iv. The gross receipts of a non-resident person who carries on a business of transmitting
messages by cable, radio, optical fibre, or satellite communication from the transmission of
messages by apparatus established in Ghana, irrespective of where the messages
originated, are treated as accruing or derived from Ghana.

v. A dividend is treated as accruing in or derived from Ghana where it is paid by a company

resident in Ghana.

vi. Interest is treated as accruing in or derived from Ghana where

(i) the debt obligation giving rise to the interest is secured by real property located in
Ghana.
(ii) The interest is paid by a resident person; or
(iii)Where the interest is borne by a permanent establishment of a
non- resident person in Ghana.
vii. Any charge, annuity, management and technical fee, proceeds of a life insurance policy,
pension or other payment from a retirement fund is treated as accruing in or derived from
Ghana where it is paid by a resident person or is borne by a permanent establishment of a
non-resident person in Ghana.

viii. A royalty is treated as accruing in or derived from Ghana under any of the following
conditions:
(i) the use of or right to use a copyright of literary, artistic, or scientific work
(including cinematograph films, or video or audio tapes), patent, trade mark,
design or model, plan or secret formula or process in Ghana;
(ii) the use of or right to use any industrial, commercial, or scientific equipment in
Ghana;
(iii)the use of or right to use information concerning industrial, commercial, or
scientific experience in Ghana;
(iv) the rendering of or the undertaking to render assistance ancillary to a matter
referred to above; or
(v) a total or partial forbearance with respect to a matter referred to in paragraph (a),
(b),(c) or(d).

ix. A natural resource payment is treated as accruing in or derived from Ghana where the
payment is made in respect of a natural resource taken from Ghana

x. Rent is treated as accruing in or derived from Ghana where rent is paid for the use of
personal property or real property situated in Ghana.

xi. Gross premiums, including premiums on re-insurance from carrying on a short-term

insurance business in Ghana are treated as accruing in or derived from Ghana.

xii. Any income arising from an activity undertaken in Ghana whether or not mentioned above
is treated as accruing in or derived from Ghana.
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xiii. Any income that is not treated as accruing in or derived from sources in Ghana is therefore
regarded as accruing in or derived from outside Ghana.

INCOME EXEMPT FROM TAX IN GHANA

A. Income Exempt From Tax
The following constitute a list of exemptions granted under the Sections of Act 896
(i) The salary, allowances, pension and gratuity of the President. That is the income earned
by the President of the Republic of Ghana is tax exempt.

(ii) The income of a local authority, other than income from activities which are only
indirectly connected with the local authority’s status as a local authority. If a district
assembly embarked on income generation activities, for example, by establishing a
bakery, the income from the bakery will be subject to tax. However, if the assembly
charges fees for refuse collection, this will be exempted from tax.

(iii) The income of a statutory or registered building society or statutory or registered

friendly society, other than income from any business carried on by that society;

(iv)Income accruing to or derived by an exempt organization other than income from any
business;

(v) Interest paid

(i) To an individual by a resident financial institution; or
(ii) To an individual on bonds issued by the Government of Ghana;

(vi) Capital sums paid to a person as compensation or a gratuity in relation to

(i) Personal injuries suffered by that person; or
(ii) The death of another person;

(vii) The interest, dividend or

(i) Any other income of an approved unit trust scheme or mutual fund,
(ii) Any other income payable under an approved unit trust scheme or mutual fund
to a holder or member of that scheme;

(viii) the income of a non-resident person from any business of operating ships or aircraft,
provided the Commissioner is satisfied that an equivalent exemption is granted by that
person’s country of residence to persons resident in Ghana;

(ix) the income of a public corporation or institution exempted from tax under any
enactment;

28
 (x) the income of a person receiving instruction at an educational institution from a
scholarship, exhibition, bursary, or similar educational endowment;

(xi) the income of an individual entitled to privileges under the Diplomatic Immunities Act,
1962 (Act 148) or a similar enactment to the extent provided in that Act or similar
enactment or under Regulations made under that Act or similar enactment;
(xii) the income of an individual entitled to privileges under an enactment giving effect to the
Convention on the Privileges and Immunities of the United Nations and the Convention
on the Privileges and Immunities of the Specialized Agencies of the United Nations to
the extent provided for in that enactment;

(xiii) the income of an individual to the extent provided for in an agreement between the
Government of Ghana and a foreign government or a public international organization
for the provision of technical service to Ghana where
a). The individual is a non-resident person or an individual who is resident solely by
reason of performing that service; and
b). the President has concurred in writing with the tax provisions in the agreement;
and
c). it is in accordance with the Constitution of the Republic of Ghana.

(xiv) the income of a person from an employment in the public service of the government of a
foreign country provided
(a) that person is either a non-resident person or an individual who is resident solely
by reasons of performing that service;
(b) that person does not exercise any other employment or carry on any business in
Ghana;
(c) the income is payable from the public funds of the foreign country; and
(d) the income is subject to tax in the foreign country.

B. Exempt Employment Income

Apart from the general exemption outlined above, The Tax law stipulates income from
employment exempt from tax to include the following:
i. a reimbursement or discharge of a person’s dental, medical, or health insurance
expenses where the benefit is available to all full-time employees on equal terms;
ii. a passage to or from Ghana in respect of that person’s appointment or termination of
employment where that person
(i) is recruited or engaged outside Ghana;
(ii) is in Ghana solely for the purpose of serving the employer, and
(iii) is not a resident of Ghana;
iii. any provision of accommodation by an employer carrying on timber, mining, building,
construction or farming business to that person at any place or site where the field
operation of the business is carried on;
29
 iv. a discharge or reimbursement by an employer of an expenditure incurred by that person
on behalf of the employer that serves that proper business purposes of the employer;
v. a severance pay; or
vi. A night duty allowance not exceeding 50% of the monthly basic salary of the employee.

C. Industry Concessions
One of the aims of Government fiscal policy is to provide incentives to key sectors of the
economy to promote economic growth and development. The Income Tax Act 2015 (Act 896)
provides concessions to industrial establishments as follows:

1. Subject to Act 896, the income of a person from a farming business in

Ghana is exempted from tax.
(a) in the case of farming tree crops, for the period of ten years of assessment commencing from
and including the year in which the basis period of the person ends, being the period in which
the first harvest of those crops by the business occurs;
(b) in the case of farming livestock (other than cattle), fish, or cash crops, for the period of five
years of assessment commencing from and including the year in which the basis period of that
person ends, being the period in which the business commences; or
(c) in the case of farming cattle, for the period of ten years of assessment commencing from and
including the year in which the basis period of that person ends, being the period in which the
business commences.

2. The income of company from an agro processing business in Ghana is exempted from tax for the
period of three years of assessment commencing from and including the year in which the basis
period of the company ends, being the period in which commercial production commences.
The income of a company from agro processing business established in Ghana in or after the
financial year commencing 1st January 2004 is exempt from tax for a period of five years of
a. assessment commencing from and including the year in which the basis period of the
company ends being the period in which commercial production commences.
b. The income of a company which produces on commercial basis cocoa by-products
derived from substandard cocoa beans. Cocoa husks and other cocoa waste as its main
raw materials is exempt from tax for a period of five years of assessment commencing
from and including the year in which the basis period of the company ends being the
period in which commercial production commences.
c. The income of a company whose principal activity is the processing of waste including
recycling of plastic and polythene material for agricultural or commercial purposes is
exempt from tax for a period of seven years of assessment commencing from and
including the year in which the basis period of the company ends being the period in
which commercial production commences.
d. Where a company conducts both farming and agro processing business, the company
may elect to be treated as if the business were a farming business or a processing
business and claim the exemption for which it is eligible under subsection (1) or (2).
30
3. The income of a rural bank from a business of banking is exempt from tax for the period of ten
years of assessment commencing from and including the year in which the basis period of the
bank ends, being the period in which operations commence.

4. The rent income of a person from any residential or commercial premises is exempt from tax for
the period of five years of assessment commencing from and including the year in which the
basis period of that person ends, being the period,
ii. in the case where the premises is constructed by that person, the construction of the
premises is completed, or
iii. in the case where the premises is purchased from a registered real estate company, that
person is given a certificate or right of entry;
5. The income of a company from a business of construction for sale or letting of residential
premises is exempt from tax from the period of five years of assessment commencing from and
including the year in which the basis period of that company ends, being the period in which
operations are commenced.

6. The income from cocoa of a cocoa farmer is exempt from tax.

7. The income of the Ghana Stock Exchange is exempt from tax for the period of thirty one years
of assessment commencing from and including the year in which the basis period of the Ghana
Stock Exchange ends, being the period in which operations commenced.

8. For the purposes of this section, a business of a person of the type referred to in subsection (1),
(2),(4), or (6) which is carried on by that person at a particular time is treated as the same
business as one of a similar type carried on by that person or an associate of that person at a later
time.

Definition of Terms.
 “cash crops” includes cassava, maize, pineapple, rice, and yam;”
 “farming business” ,means the business of producing crops, fish, or livestock;
 “agro processing business” means the business of converting crops, fish or livestock
produced in Ghana into edible, canned or other packaged product other than in their raw
state;
 “tree crops” includes coconut, coffee, oil palm, rubber, and shear nut.

It must be noted that the above provisions of the tax law relating to income exempt from tax,
exempt employment income and industrial concessions are subject to various amendments.

31
Apart from the exemptions stated above, other exemptions can be granted. The Act 896
stipulates that the Minister responsible for Finance in consultation with the Commissioner of
Domestic Tax Division may, subject to the prior approval of parliament by resolution in
accordance with clause (2) of Article 174 of the Constitution grant a waiver or variation of tax
imposed by Act 896 in favour of any person or authority.

BASIS FOR COMPUTING ASSESSABLE INCOME

The income Tax law contains rules for deciding which period the income is to be taxed for a year of
assessment.

A. year of assessment
According to Act 896, a year of assessment or assessment year refers to the government financial
(fiscal) year during which tax is levied. In Ghana, the year of assessment has undergone several
changes. Originally, it was from 1st April in one year to 31st March in the following year. This was
changed in July, 1961 when it runs from 1st July in one year to 30th June in the following year. The
third change which is still prevailing came into effect in 1983 where the Year of Assessment is from
1st January to 31st December in the same year. For example, 2013 year of Assessment is from 1 st
January to 31st December, 2013.

B. Basis period
A basis period defines, describes or determines the income to be assessed in a particular Year of
Assessment. It refers to the period of income of which the tax payer is to be taxed for the year of
assessment. In other words, it is the period by reference to which the assessable income of any person
is computed in accordance with the provisions of Act 896. While Year of Assessment refers to
Government fiscal year, basis period only relates to an individual taxpayer.

The Act clarifies the definition further by providing that:

The basis period of a person is:
(a) In the case of an individual or a partnership, the calendar year from 1st January to 31st
December and
(b) In the case of a company or body of persons, the accounting year of the company or body
of persons.
Types of Period
Ghana has practised three different systems of Assessment with various basis periods. These are:
a. Preceding Year basis
b. Current Year basis
c. Accounting Year basis
a. Preceding Year (1943-1982)
Under the preceding year basis income from all sources except employment were assessed on
previous year basis. Under this system, there were commencement and cessation provisions.

b. Current Year Basis (1983 – 1988)

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 This system was introduced in 1983. Incidentally, the Year of Assessment was also changed
in the same year to 1st January - 31st December of the same year. Under this system, the basis
period and the year of assessment are the same. Another aspect of this system is that
incomes from all sources are assessed on the same current basis.

The current year basis was changed in 1988 Assessment Year to Accounting Year basis.
There are however no special rules as occurred during the change over from the preceding
year to current year i.e. Proper and Transitional Year of Assessment.

However, since taxpayers are allowed to maintain their own accounting dates as regards
incomes from trade, business, profession and vocation, it means that if a taxpayer’s
accounting date does not coincide with the Government Fiscal year (year of assessment) the
income must be apportioned accordingly to fit into the statutory basis period. Section 2 (4) of
PNDCL 61 makes allowance for this.

c. Accounting year (1988-date)

This system was introduced in 1988 but it affects income from trade, business, profession
and vocation only. Income from employment and other sources are still assessed on
current year basis.

The Income Tax Act 2015 (Act 896) provides that the income of any person for any year of
assessment from each source of his income (hereafter referred to as ‘‘assessable income’’)
shall be the full amount of his income from each source for the year of assessment.

Provided that for the purpose of determining the assessable income of any person whose
accounting period ends on a date other than 31st December, the accounting period of that
person shall be the basis period for assessing his income for that year of assessment within
which his accounting period ends.

EMPLOYMENT INCOME

Meaning of Employment
To identify the sources of the gains or profits to be charged Act 896 provides as follows:
‘‘employment’’ means: -

(a) The position of an individual in the employment of another person

(b) The holding of or acting in any office or a position entitling the holder to a fixed or
ascertainable remuneration other than an office or position as director of a company or
manager of a body of persons.

33
Contract of Service (Employment) and Contract for Service (Profession)
In determining whether a contract is one of service or one for service, a useful guide is whether the
tax payer gets a salary or is paid so much an hour for work actually done.

The characteristics that distinguish employment (contract of service) from contract for service are
summarized in table 3.1.

Table 3 Comparison of contract of service and contract for service.

Contract of Service (Employment) Contract for Service (Profession)

1 Control by another in manner of work No control

2 Delegation of powers restricted Free to delegate work

3 Employee does not bear loses or keep profits Bears all loses and keeps all profits

4 Parties agree on employment contract Determines terms of contract for services

5 Person for whom work is done provides tools Persons performing work provides own
for the job. tools.

6 Regular and defined hours of work Free to decide when to work

7 No ability to withhold payment contractual Ability to withhold payment for service,

obligation until work is done as agreed

8 Dismissal powers given to the employer No dismissal powers but work can be
cancelled with compensation rights

9 Reward for work is emoluments. Reward for work is fees

Imposition of Tax on Employment Income

The Income Tax Act, 2015 (Act 896) imposes tax on income from employment sources. It
provides as follows: ‘‘A person’s income from an employment is that person’s gains or profits
from that employment.’’ It expatiates further by providing what constitutes assessable
employment income, the exceptions and the treatment of allowances and benefits from an
employment.

Employment Income Exempt from Tax

34
The Act 896 stipulates as follows the following employment income to be exempt from tax;

a) a reimbursement or discharge of a person’s dental, medical or health insurance

expenses where the benefit is available to all full time employees on equal terms:

b) a passage to or from Ghana in respect of that person’s appointment or termination of

employment where that person
i) is recruited or engaged outside Ghana;
ii) is in Ghana solely for the purpose of serving the employer; and
iii) is not a resident of Ghana;

c) any provision of accommodation by an employer carrying on timber mining, building,

construction or farming business, for that person at any place or site where the field
operation of business is carried on;

d) a discharge or reimbursement by an employer of an expenditure incurred by that person

on behalf of the employer that serves the proper business purposes of the employer;

e) a severance pays; or

f) a night duty allowance not exceeding 50% of the monthly basic salary of the employee

INCOME TAX RELIEFS IN GHANA

What is Tax Relief?

A tax relief is an amount legally approved to be deducted from the assessable income of tax payers to
cushion the effect of tax on the individual and to make it bearable for him or her to pay. In other
words, a tax relief is an approved deductible allowance intended to reduce a tax payer’s taxable
income and thereby lessen his or her tax burden. The relief is based on the individual’s
circumstances, and it is granted against his or her assessable income. The equity principle mentioned
at the beginning of this course is manifested when reliefs are granted. The ability of tax payer to pay
the tax is enhanced by deducting specified amounts from his assessable income.

Types of Tax Relief

There are a number of reliefs that taxpayers can apply to reduce their tax liability. Following are a
number of such reliefs. Pay particular attention to each relief, the amount granted under it and the
condition(s) to satisfy before it is granted. It must be noted that the reliefs have been stated according
to existing and applicable provisions of the law.

The value for a relief in this text refers to the 2016 personal tax reliefs. It must, however, be noted
that, since 2001, Ghana has experienced several changes in the values of the personal tax reliefs over
the years. From 2001 – 2006; 2001 – 2010; 2011; 2012 to the current reliefs effective 2016.

35
 a. Personal Relief
Currently, a basic amount of GH¢2592 per annum is given to all tax payers. This is allowed
irrespective of the circumstances of the tax payer. There is no string attached. It is a marginal relief. It
is free from income tax no matter your total income.

b. Marriage /Responsibility Relief

This relief is granted to an individual with a dependent spouse or at least two dependent children.
Evidence of the provision of the basic necessities of life for the spouse or child would be enough to
apply for this relief. The relief is GH¢200 per annum.
Only one spouse is entitled and marriage relief will only be granted on production of a marriage
certificate or certified copy of the registration of the marriage to support the claim.

c. Disabled Relief
Any individual who proves to the satisfaction of the commissioner that he is disabled and is either
self-employed or an employee shall be granted a deduction of twenty-five per centum of the total
income accruing to him or her from any trade, business, profession or vocation in which he is
engaged or as an employee. Disabled relief is 25% of that individual’s assessable income from
any business or employment.

d. Old Age Relief

All taxpayers above the age of 60 and are either self-employed or an employee shall be granted an
amount of GH¢200 or their total income accruing to them, whichever is less, during the year from
an employment or business.

e. Children’s Education Relief

Taxpayers who have their children or wards in any registered educational institution in Ghana
shall be allowed an amount of GH¢200 per child in respect of the education of their children or
wards. A child under this law includes an adopted child or ward, any person recognised by the
applicant as his child or to whom the applicant stands “in loco parentis” and in the case of a
Ghanaian, any person recognised by customary law as the applicant’s child.

The following conditions however are to be met for one to qualify for the relief:

a) The relief is for each child up to a maximum of three for each parent.
b) On production of a certified statement issued by the head of the educational institution
concerned, stating that the child or ward is a pupil of that institution.
c) Where two or more persons qualify, only one person may claim that relief. Both parents
cannot claim this relief in respect of the same child or children.

f. Aged Dependents Relief

36
Any individual who proves to the satisfaction of the commissioner that he has an aged dependent
relative, other than a child or spouse who is 60 or more years of age may claim a relief of GH
¢100 per annum in respect of each such dependent. The relief is limited to two dependents.
Where two or more persons qualify in respect of the same relatives, only one relief shall be
granted.

g. Cost of Training (Professional, technical or Vocational)

This relief is granted to persons who have undergone any training to update their professional,
technical or vocational skills or knowledge. The relief is up to GH¢400 per annum.

Summary of Personal Tax Reliefs

2016 to date
GHC
Personal Relief 3132

Marriage/responsibility relief 200

Disabled relief 25% of Y*

Old age relief Y* up to 200

Children education relief (up to 3) 200 per Child

Aged dependent relative (up to 2) 100 per dependant

Cost of training
(professional, technical or vocational) 400

Note: refer to notes above for the limits imposed on these reliefs, as well as the conditions
attached thereto.

Y* is assessable income from any business or employment

Granting Tax Reliefs

As pointed out in the preceding paragraphs, every resident individual chargeable with tax is entitled
to personal relief per Act 896 according to his personal circumstances. These reliefs apart from the
basic nil included in the individual tax rate structure, are granted at the end of each tax year on filing
a return.

The Income Tax Act 2015 (Act 896) now empowers the Commissioner to grant these reliefs up front.
The process may be outlined as follows:
37
 a) the employee is to apply for a tax reliefs card from the Commissioner indicating his personal
circumstances
b) he is to support his application with the necessary documents confirming his claims e.g. Life
insurance certificate if any, letter from the school or receipt confirming children’s education,
etc.
c) the Commissioner is to calculate the quantum of the reliefs to be granted and return the
certified tax reliefs card to the employee:
d) on receipt of the tax reliefs card, the employee is to hand it over as soon as possible to the
employer who will use the information on it to determine the chargeable income and the tax
to be withheld each month.

Treatment of Benefits in Cash or in Kind

A benefit is described as “an allowance paid in cash or given in kind to an employee by his
employer.’’ It includes a payment that directly or indirectly benefits that person and a payment
dealt with as if the payment had been made directly to him”. These benefits are usually provided as
incentives, salary supplements, or fringe benefits to the employee.

The Act 896 provides that any amount, allowance or benefit is a gain or profit from the
employment if it:
(a) is provided by the employer, an associate of the employer, or a third party under an
arrangement with the employer or an associate of the employer.
(b) is provided to an employee or an associate of an employee.
(c) is provided in respect of past, present or prospective employment.

Types of Benefits
Benefits in cash or in kind take several different forms and include:
(a) Direct daily, weekly, fortnightly or monthly cash payments.
(b) Accommodation, watchman, garden boy, cook, steward, etc
(c) Vehicle, driver or both, fuel, fuel coupons etc.
(d) Professional, responsibility, risk allowances etc.
(e) Canteen subsidies, transport allowances.
(f) Low interest loans or interest free loans.
(g) Sale of products of the employer to the employee at under value.
(h) Tax free salaries and payment of the employee’s personal commitments like electricity
and telephone bills.

Chargeability of Benefits
Act 896 imposes tax on gains or profits from employment. It states categorically that the gains or
profits from the employment chargeable under the Act 896 include any allowances or benefits,
paid in cash or given in kind to or on behalf of that person from the employment.
38
It stipulates as follows:
“the amount of any allowance or benefits from an employment to be included in ascertaining a
person’s gains or profits under the Act 896 shall be determined in accordance with the Fourth
Schedule and, in any case not referred to in that Schedule, as the value of the allowance or
benefits to a reasonable person in the position of that person. The Fourth Schedule however
provides for benefits in respect of accommodation and vehicles only leaving the numerous other
benefits to be dealt with “as the value of the allowance or benefits to a reasonable person in the
position of that person”

Benefits in Cash
Unless specifically exempted, cash allowances and benefits are to be included in full in
ascertaining the assessable income for tax purposes.

Benefits in Kind
The determination of the actual value of the benefits to be included in the chargeable income of
the employee if not specifically provided in the law, regulation or a schedule will depend on a
number of considerations. For example;
(a) Defining the benefits to be assessed.
(b) Valuation of the benefit:
(i) Cost to the employer
(ii) Value of the benefit to the employee
(iii) Open market value of the benefit to the employee
(iv) Second-hand value of the benefit to the employee.

The Income Tax Act 2015, Act 896, however provides that the value of a benefit in kind is the
open market value of the benefit on the date the benefit is taken into account for tax
purposes.

Secondly, the open market value of a benefit should be determined without regard to any
restriction or transfer or to the fact that it is not otherwise convertible to cash.

Table 5: Accommodation facilities and vehicle related benefit are valued as follows:
Facility Provided 2016 to date
Provision of Accommodation Value (% of Total Cash Emolument)
Accommodation with furnishing 10%
Accommodation only 7.5%
Furnishings only 2.5%
Shared accommodation 2.5%

39
 Provision of Means of Transport Value (% of Total Cash Emolument)
Fuelled vehicle with driver 12.5% up to GHC600 per month
Vehicle with fuel 10% up to GHC500 per month
Vehicle only 5% up to GHC250 per month
Fuel only 5% up to GHC250 per month

Determination of Chargeable Income from Employment

One of the principles of taxation, perhaps the first and the most important, is equity. It requires that
imposition of tax must show clear evidence of ‘equal treatment of equals and reasonable difference in
the treatment of unequals. The circumstances of every taxpayer, i.e. the ability to pay the tax must be
taken into consideration in determining the tax payable. Is the person assessable to tax capable of
meeting his obligation without undue hardship? This is the question to be answered whenever tax is
being levied.

Efficient administration of a tax system requires that taxpayers must be made to pay taxes according
to their true income. Income from all sources including allowances must therefore be declared by the
income earner in every year to the tax authorities for correct assessment to be made. To determine
the true income for tax assessment, every person in business or employment must give information
about his/her income.

Consolidation of Employment Income for Tax Purposes

In determining what constitutes an employment income and for our purpose, let us refer to Act 896
which describes employment income as:
“gains or profits from any employment including any allowances or benefits paid in cash or given in
kind to or on behalf of an employee other than in respect of medical, dental or health insurance or any
expenses passage from or to Ghana in respect of apartment or termination of employment.

We need to add that, reimbursements to employees for expenses incurred exclusively on behalf of
and for the benefit of the employer do not constitute an employment income.
With effect from 1st July, 1991 all income supplements payable or given in kind were expected to
be aggregated and added to the basic salary as at that date. This arrangement was to give full
effect to Session 1, (2) (b) of SMCD5.

(i) Basic Salary

Basic salary refers to the income represented usually, by the monthly salary paid to an employee
and applicable to the grade, rank or position of that employee without the addition of any
allowance or benefit paid in cash or given in kind to that employee.
40
Usually, when a person is employed he or she is put on a point/step within a salary scale. After
each anniversary and good appraisal the employee is given an increment.

Let us look at how the salary scale looks like and how salary is determined.

Illustration 1
Yaa Papafio was employed on 1st October, 2008 on a salary scale of GH¢12,000 x GH¢150 - GH
¢13,500. Compute his assessable income for 2013.

Note that employment income is always assessed based on the current year.

Solution to illustration 1:
Step 1: - Find the number of increment in salary:
GH¢
1/10/2008 - 30/09/2009 - 12,000
1/10/2009 - 30/09/2010 - 12,150
1/10/2010 - 30/09/2011 - 12,300
1/10/2011 - 30/09/2012 - 12,450
1/10/2012 - 30/09/2013 - 12,600
1/10/2013 - 30/09/2014 - 12,750

Step 2: Find his annual salary for 2013:

GH¢
1/01/13 - 30/09/13 9/12 x 12,600 = 9,450
1/10/13 - 31/12/13 3/12x 12,750 = 3,187.50
Salary for 2013 12,637.50

(ii) Assessable and Chargeable Incomes

Assessable income refers to the total of all income supplements payable in cash or given in kind to
the employee. It is defined as including salaries, fees, wages, perquisites and profits whatsoever.
The consolidated salary is arrived at by adding the following to the basic salary.

(a) All cash allowances payable in respect of rent, transportation canteen and leave;
(b) Any other cash allowance payable in respect of such items as clothing, education, utility,
furniture/furnishing, profession, etc. which are routinely paid and are therefore income
supplement;

41
 (c) Allowances peculiar to certain jobs which are routinely or paid regularly as part of the
salary and intended to be permanent, such as duty, height, underground, heat discomfort,
call-in and night-shift allowances;
(d) Car maintenance allowance;
(e) Annual bonus paid regularly as part of the salary and not dependent on any
contingency;
(f) Any cash allowance paid to the employee in respect of garden boy, watchman and
house help;
(g) Any amount spent by the employer on the provision of utilities to employees;
(h) Any other allowance as determined by the commissioner;
(i) Where an employee is provided with rent free accommodation and private use of vehicle, the
value of the benefits shall be computed based on Fourth Schedule Table A & B of the Tax
law. This is what is normally referred to as rent element and car element. The fourth
schedule of the Tax law relating to accommodation and vehicles are as presented in Table 5

Note:
 Total Cash Emolument (TCE) is the consolidated salary plus all allowances paid in cash to
the employee.
 Employment Assessable Income is obtained by adding other Non-cash benefits to the TCE.
 Total Assessable income is obtained by adding incomes from other sources (if any) to the
Employment Assessable Income.
 Chargeable Income is obtained by deducting total reliefs from Total Assessable Income.

Format For Computing Chargeable Income From Employment

GH¢ GH¢
Basic Salary xxx
Add: Cash Allowance xxx
Total Cash Emoluments (TCE) xxx
Add:*Car Element (%of TCE) xxx
Rent Element (%of TCE) xxx xxx
xxx
Add: Other Non-Cash Benefits xxx
Assessable Income xxx
Less: Reliefs
Social Security (5.5% of Basic Salary) xxx
Marriage xxx

42
 Children’s Education xxx
Aged Dependants xxx
Old Age xxx
Professional Training xxx
Disabled Person xxx xxx
Chargeable Income xxx

Note
 Car Element has some restrictions or maximum amounts that must be taken into
consideration.

 In the case of an employee engaged in a timber, mining, building construction or farming

enterprises, there shall be excluded from the application of sub-section (I) provision of
accommodation to the employee at any place or site where the operation of the enterprise is
carried on.

Determination of Employees’ Tax Liability

Under the withholding system, the only relief the employee enjoys is the basic annual relief
(GHC2,592) and 5.5% Social Security Fund Contribution. This is because the other reliefs are
dependent on individual circumstances. They are granted only when returns are filed and the
applicable relief identified and claimed for.

After determining the assessable income, the employer is required, by virtue of Section 55(I) of
SMCD, to make monthly tax deductions from the total emoluments due for payment to the
employee.

It must be noted that, besides being a statutory requirement for all income earners to file their
annual returns, the actual tax liability of an employee is known only after returns are submitted
indicating other sources of income, if any, and the applicable reliefs.

43
The Income Tax Act 2015 (Act 896) provides the tax deduction schedule for income tax. It is
this schedule that is applied on the chargeable income to determine the tax liability. The current
personal income tax threshold for tax resident individuals was implemented effective December
2015. That is, the personal income tax is applicable to chargeable income of resident individuals.
The table below indicates the applicable annual income tax bands and rates:

Chargeable Rate
income (%)
(GHC)
First 2,592.00 Free

Next 1,296.00 5

Next 1,812.00 10

Next 33,180.00 17.5

Exceeding 38,880.00 25

Illustration 2
Esi Enyidado was employed by Maranatha Ent at Eyifua on July 2010. Her Chargeable income
for 2016 assessment year was GHC57,721. Calculate her Tax Liability for 2016.

Solution illustration 2:
Computation of Tax Liability
Chargeable
Income Tax Rate Amount
(GH₵) (%) (GH₵)
First 2,592 Free 0
Next 1,296 5 64.8
Next 1,812 10 181.20
Next 33,180 17.5 5,806.50
Next 18,841 25 4,710.25
57,721 10,762.75

Her Tax Liability is therefore, GHC10,762.75

44
Treatment of Overtime and Bonus Payments
Taxation of Overtime
Overtime payments made to qualified junior employees (a junior employee whose qualifying
employment income for a month does not exceed GHC1,500.) in a month are taxable at 5% if the
payment does not exceed 50% of the basic salary of the employee for the month. Any overtime
payment to a qualifying junior employee that exceeds the above threshold is taxable at 10%.

For all other employees, overtime payments are included in employment income and taxed under
the graduated rates of tax.

Basic Conclusions on overtime taxation provisions

 The provisions are for junior employees. i.e. employees with monthly salaries not
exceeding GH¢1,500. Thus, these provisions do not apply to senior employees, from the
point of view of this provision.
 The overtime is taxed this way. From above 0% to 50% of basic pay, tax at 5%. Anything
more than 50% of basic pay tax at 10%.
 If the employee does not qualify as a junior employee, overtime payments are included in
employment income and taxed under the graduated rates of tax. We should note that
overtime payments are cash benefits and should therefore form part of total cash
emoluments.

Illustration 1
During the year to December, 2016, Kofi Agyei received an annual basic pay of GH¢9,650. In
addition, his overtime income amounted to GH¢4,500. His company has given him a well
furnished accommodation. He is also entitled to an official car with fuel and driver for both
private and official use. Determine his tax liability, given his condition and assuming the only
relief due him is his SSF contribution.

Solution to illustration 1
Kofi Agyei is a junior employee because his qualifying employment income (GH¢11,821.25) is
less than the maximum threshold (GH¢1,500 x 12 = GH¢18,000) that defines a junior employee.
Thus, his overtime would be taxed at 5% if it is less than 50% of basic salary and the excess
10%.

45
Determination of the Chargeable Income of Kofi Agyei for the 2016 Assessment Year
GH¢
Basic Salary 9,650.00
Total Cash Emoluments 9,650.00

Add:
Rent Element (10% x GH¢9,650) 965.00
Car element (12.5% x GH¢9,650) 1,206.25 2,171.25
Total assessable income 11,821.25

Less Reliefs
SSF(5.5%xGH¢9,650.00) 530.75
Taxable Pay 11,290.50
Determination of Tax Liability
Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3,888.00 64.80
Next 1,812 10.0 181.20 5,700.00 246.00
Next 5,590.5 17.5 978.34 11,290.50 1,224.34

Total Tax Liability;

Final tax on overtime (5%*4500) 225
Tax on Income excluding overtime 1,224.34
1,449.34

Illustration 2 Where a junior employee receives an overtime which is more than 50% of
basic salary
Assume that all the information in Illustration 1 are the same except that his basic salary and
overtime for 2013 were GH¢9,650 and GH¢4900 respectively. Determine Kofi Agyei’s Tax
Liability.

Solution to illustration 2
Kofi Agyei is a junior employee because his qualifying employment income (GH¢11,821.25) is
less than the maximum threshold (GH¢1,500 x 12 = GH¢18,000) that defines a junior employee.
Thus, his overtime would be taxed at 5% if it is less than 50% of basic salary and the excess
10%.

Determination of the Chargeable Income of Kofi Agyei for the 2016 Assessment Year
46
Basic Salary 9,650.00
Total Cash Emoluments 9,650.00
Add:
Rent Element (10% x GH¢9,650.0) 965.00
Car element (12.5% x GH¢9,650.0) 1,206.25 2,171.25
Total assessable income 11,821.25
Less Reliefs
SSF(5.5%xGH¢9,650.00) 530.75
Taxable Pay 11,290.50

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3,888.00 64.80
Next 1,812 10.0 181.20 5,700.00 246.00
Next 5,590.50 17.5 978.34 11,290.50 1,224.34

Since the overtime (GH¢4,900) is more than 50% of his basic salary (GH¢4,825), the tax would
be as follows:
GH¢
First GH¢4,825(50% of Basic Salary) @ 5% = 241.25
Excess GH¢75 (GH¢4,900 - GH¢4,825) @10% = 7.5
Total Tax on Overtime 248.75
Total Tax Liability
GH¢
Final Tax on Overtime 248.75
Tax on Income excluding overtime 1,224.34
1,473.09

Illustration 3 Where an employee earns a qualifying employment income which is more

than the maximum limit;
Assume that all the information in Illustration 1 are the same except that his basic salary and
bonus for 2016 were GH¢20,000 and GH¢2,500 respectively. Determine Kofi Agyei’s Tax
Liability.

Solution to illustration 3
Kofi Agyei is a senior employee because his Qualifying employment income (GH¢22,500) is
more than the maximum threshold (GH¢1,500 x 12 = GH¢18000) that defines a junior employee.
47
Thus, his overtime would be included in his employment assessable income and taxed using the
graduated scale.

Determination of the Chargeable Income of Kofi Agyei for the 2016 Assessment Year
. GH¢ GH¢
Basic Salary 20,000.00
Overtime 2,500.00
Total Cash Emoluments 22,500.00
Rent Element (10% x GH¢22,500) 2250.00
Car element (12.5% x GH¢22,500) 2812.5 5062.5
27,562.50
Less Reliefs
SSF (5.5% GH¢20,000.00) 1100.0
Taxable Pay 26,462.5

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592 0.00
Next 1,296 5.0 64.8 3,888 64.8
Next 1,812 10.0 181.20 5,700 246
Next 20,762.5 17.5 3,633.44 26,462.50 3,879.44

Hence the total tax liability of Kofi Agyei is GHS 3,879.44

9.8.2 Taxation of Bonus

Sub-regulation (2) of Regulation 28 (as amended), states that where an employer pays bonus to
an employee during the year and the sum of the payment and other bonuses paid by the employer
to the employee previously during the year fall below the threshold of 15% of the employees’
annual basic salary, that bonus is taxed at a rate of 5%.

Basic Conclusions
 The conditions apply to all employees, junior or senior.
 If the bonus payment is less than 15% of basic the final tax to be withheld is 5%.
 Impliedly, bonus payments in excess of the 15% threshold are added to the employment
income of the employees and taxed at the graduated rates of tax.

We are to remember that overtime and bonus payments are cash benefits and therefore form part
of total cash emoluments. Also, withholding taxes on overtime and bonus are final. Where the

48
employer is not required to withhold tax from the above payment, the payment shall be included
in calculating the employee’s income from the employment and taxed according to the graduated
rates.

Illustration 4: where an employee receives bonus payment which is less than or equal to
15% of basic salary.
During the year to December, 2016, Kofi Agyei received an annual basic pay of GH¢9,600. In
addition, his bonus amounted to GH¢1,248.00. His company has given him a well furnished
accommodation. Additionally, he is entitled to an official car with fuel and driver for both
private and official use. Determine his tax liability, given his condition and assuming that the
only relief due him is his SSF contribution.

Illustration 4: where an employee receives bonus payment which is less than or equal to
15% of basic salary.
During the year to December, 2016, Kofi Agyei received an annual basic pay of GH¢9,600. In
addition, his bonus amounted to GH¢1,248.00. His company has given him a well furnished
accommodation. Additionally, he is entitled to an official car with fuel and driver for both
private and official use. Determine his tax liability, given his condition and assuming that the
only relief due him is his SSF contribution.

Solution to illustration 4
Kofi Agyei’s bonus (13% = 1,248/9,600 x 100) is less than 15% of his basic salary. So the whole
amount would be taxed at 5%.

Determination of the Chargeable Income of Kofi Agyei for the 2016 Assessment Year
. GH¢ GH¢
Basic Salary 9,600.00
Total Cash Emoluments 9,600.00
Rent Element (10% x GH¢9,600) 960
Car element (12.5% x GH¢9,600) 1,200 2,160.00
Total Assessable Income 11,760.00
Less Reliefs
SSF (5.5% X GH¢9,600.00) 528.00
Taxable Pay 11,232.00

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
49
 First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3,888.00 64.8
Next 1,812 10.0 181.20 5,700.00 246
Next 5,532 17.5 968.10 11,232.00 1,214.1

Total Tax Liability

GH¢
Final Tax on Bonus (5% x 1,248) 62.40
Tax on Income excluding Bonus 1,214.10
1,276.50

Illustration 5: where an employee receives bonus payment which is more than 15% of
basic salary.
Assume that all the information in illustration 4 are the same except that his bonus for 2016 was
GH¢4,500. Determine Kofi Agyei’s Tax Liability.

Solution to illustration 5
Kofi Agyei’ bonus (46.88%% = 4,500/9,600 x 100) is more than 15% of his basic salary. So GH
¢1,440 (15% of GH¢ 9,600) would be taxed at 5%. The remainder would be left in his other
employment income to be taxed at the graduated rates.

Determination of the Chargeable Income of Kofi Agyei for the 2016 Assessment Year
GH¢ GH¢
Basic Salary 9,600.00
Exces Bonus 3,060.00
Total Cash Emoluments 12,660.00
Rent Element (10% x GH¢12,660) 1,266.00
Car element (12.5% x GH¢12,660) 1,582.50 2,848.50
Total Assessable Income 15,508.50
Less Reliefs
SSF (5.5% X GH¢9,600.00) 528.00
Taxable Pay 14,980.50

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3,888.00 64.8
Next 1,812 10.0 181.20 5,700.00 246
Next 9,280.50 17.5 1,624.09 14,980.50 1,870.09
50
Total Tax Liability
GH¢
Final Tax on Bonus (5% x 1,440) 72.00
Tax on Income excluding bonus withheld 1,870.09
1,942.09
Comprehensive Examples on Employment Income
Piotorico has been in the employment of Balahu ltd since 1/11/2013 on a salary scale of GH
¢2,300.00 x GH¢450.00 - GH¢4,750.00. As the financial controller of his company, he is
provided with the following as part of his condition or service.

1. A well furnished bungalow provided by his employer in respect of which he pays GH

¢50.00 per month as rent by way of deduction at source.
2. Watchman allowance per annum, GH¢172
3. Risk allowance of 15% of the basic salary and car maintenance allowance of GH¢380.00
for the year.
4. Leave allowance of GH¢445.00 per annum.
5. Watchman and garden boy on salary of GH¢65 and GH¢45 per month respectively.
6. Medical allowance per year GH¢680.00
7. Special retirement package of which he contributes 7% of his basic salary, while the
company tops it up with 12.5%.
8. Meals allowance of GH¢18.00 per month.
9. Two maidservants on GH¢190.00 wages per annum. The amount is paid directly by the
company.
10. Thirteenth month salary of 40% of annual basic salary.
11. Entertainment allowance of GH¢400.00 a year
12. He has life Assurance Policy with Enterprise Insurance Ltd. The details are as follows:
Policy Sum Assured Premium
GH¢ GH¢
A 4,000 420
B 2,800 240
C 16,000 1,650
D 5,000 525

13. He is entitled to 35 gallons of fuel at GH¢3.20 each per month for which the company
pays him cash. He is entitled to company car, driver and fuel for both official and private
use. On 1st January 2014 he was given a car loan of GH¢5,000.00 to purchase a car for
private use at a simple interest rate of 15.5% per annum. The existing market rate of
interest is 22.50% per annum. The loan is to be amortised over a four-year period.
51
 14. He is married with 5 children, 3 of whom are in Senior Secondary School, the rest are
working. He is also responsible for the upkeep of 4 aged relatives of his.

Required:
a. Compute his chargeable income for 2016 year of assessment;
b. Compute his tax liabilities for that year and;
c. Determine the take home pay of Piotorico for the 2016 year of assessment.

Solution to Comprehensive Question

Determination of basic salary for 2016
Anniversary Years Basic Salary
GH¢
1 /11/2013 – 30/10/14 2,500.00
1/11/2014 – 30/10/15 2,950.00
1/11/2015 – 30/10/16 3,400.00
1/11/2016 – 30/10/17 3,850.00

Basic Salary for 2016 Assessment Year

(10/12 x 3,400.00) + (2/12 x GH¢3,850.00)
= GH¢2,833.33 + GH¢641.67 = GH¢3,475.00

Piotorico
Determination of Chargeable Income for the 2016 Assessment Year
GH¢ GH¢
Basic Salary 3,475.00
Add Cash Benefits
Watchman allowance 172.00
Risk allowance (15% x GH¢3,475.00) 521.25
Leave allowance 445.00
Car maintenance allowance 380.00
Medical allowance 680.00
Special retirement fund (12.5% x GH¢3,475.00) 434.38
Meals allowance (GH¢18 x 12) 216.00
Entertainment allowance 400.00
Petrol entitlement (20 @35 gallons @12) 1,344.00
52
Bonus 1,390.00 5,982.63
Total Cash Emolument 9,457.63

Add:
Rent element (10% x GH¢9,457.63) 945.76
Less amount paid (12 x GH¢50.00) 600.00 345.76
Car element (12.5% x GH¢9,457.63) 1,182.20
Other Non- Cash Benefits
Maid servants 190.00
Interest on car loan (7% x GH¢2,500) 175.00
Total Qualifying Employment Income 11,350.59
Less Bonus to be taxed @ 5% (15% x GH¢3,475.00) 1,702.59
Assessable Income 9,960.00
Less reliefs:
SSF (5.5% x GH¢3,475) 191.13
Retirement fund (7% x 3,475.00) 243.25
Marriage 200.00
Children education (3 x GH¢ GH¢200) 600.00
Aged Dependants (2 x GH¢100) 200.00
Life Policy (w1) 1,135.06 2,569.44
Chargeable Income 7,390.56

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3,888.00 64.80
Next 1,812 10.0 181.2 5,700.00 246.00
Next 1,690.56 17.5 295.848 7,390.56 541.848
Total Tax Liability
GH¢
Final Tax on Bonus (5% x 1,702.59) 85.13
Tax on Income excluding Bonus 541.848
626.978

Workings

53
Relief for Life Assurance Insurance
1 Calculation of individual policy relief
Policy 10% of Sum Assured Premium 10% of QEI Relief
GH¢ GH¢ GH¢ GH¢
A 400 420 1,135.06 400.00
B 280 240 1,135.06 240.00
C 1,600 1,650 1,135.06 1,135.06
D 500 525 1,135.06 500.00
Total 2,275.06

2. Compare the total relief and 10% of qualifying employment income

10% of Qualifying employment income = GH¢1,135.06
Total Relief = GH¢2,275.06
Thus relief to be granted = GH¢1,135.06

Computation of Take-home Pay

GH¢ GH¢
Basic Salary 3,475.00
Watchman allowance 172.00
Risk allowance 521.25
Leave allowance 445.00
Car maintenance allowance 380.00
Medical allowance 680.00
Meals allowance 216.00
Entertainment allowance 1,344.00
Petrol entitl 1,390.00
9,023.25
Less deductions:
SSF 191.13
Special Retirement fund 243.25
Loan repayment 1,250.00
Interest on loan 387.50
Rent deducted at source 600.00
Income tax 626.978 3,298.858
5,724.392
Comprehensive Example 2
Dr. Kofi Agyei was appointed Chief Accountant of Kwabre Group of companies on a salary
scale of GHC90,000 x GHC3,600 – GHC111,600 on 1st August 2013.

54
He is provided with furnished bungalow for which the employer deducts rent of GHC400 a
month from his salary. He is also provided with a company vehicle for both official and private
purposes with fuel but drives himself.

He was entitled to the following benefits in 2016 year of assessment:

i. Children education allowance – GHC1,680 per annum;
ii. Responsibility allowance - 12% of basic salary;
iii. Medical allowance - GHC120 per month; and
iv. Accountable entertainment allowance – GHC180 per month.
v. 13th month Salary - 40% of basic salary
vi. Overtime - GHC9,870

One of the company’s security officers watch over his bungalow. His monthly salary of
GHC1,000 is paid by the company. Dr. Agyei contributes 5.5% of his basic salary to the Social
Security Fund and has two life insurance policies with the following details:

Company Capital Sum Annual Premium

GHC GHC
Total Insurance 64,000 6,800
Pride Insurance 48,500 4,650

Dr. Agyei is divorced but has four children all attending recognized schools in Ghana.

Required
Compute the tax payable by Dr. Agyei for the 2016 assessment year (15 marks)

Annual Income Tax Bands and Rates for 2016

Year Chargeable Rate
2013 Income GH¢ %
First 2,592 0.0

Next 1,296 5.0

Next 1,812 10.0

Next 33,180 17.5

Exceeding 38,880 25

Suggested Solution
Dr. Kofi Agyei
Determination of Taxable Income for the 2016 year of Assessment
GH¢ GH¢
Basic Salary 98,700.00
55
Children Education Allowance 1,680.00
Responsibility Allowance (12% x 98,700) 11,844.00
Medical Allowance (120 x 12) 1,440.00
Bonus (40% x 98,700) 39,480.00
Overtime 9,870.00 64,314.00
Total Cash Emolument 163,014.00
Car Element (10% x GH¢163,014) 16,301.40
Restricted to (12 x GH¢500) 6,000.00
Rent Element (10% x GH¢163,014) 16,301.40
Less deduction (12 x GH¢400) 4,800.00 11,501.40
180,515.40
Less bonus to be taxed @ 5% (15% x GH¢98,700) 14,805.00
165,710.40
Less reliefs:
Responsibility 200.00
Children education (3 x GH¢200) 600.00
SSF (5.5% x GH¢98,700) 5,428.50
Life assurance policy 11,050.00 17,278.50
Taxable Pay 148,431.90

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3,888.00 64.80
Next 1,812 10.0 181.20 5,700.00 246.00
Next 33,180 17.5 5,806.50 38,880.00 6,052.50
Next 109551.90 25.0 27,387.975 148,431.90 33,440.475

Tax on bonus (5% x GH¢14,805) = GH¢740.25

Total tax liability = tax on bonus + tax on other income
= GH¢740.25 + GH¢33,440.475

56
 = GH¢34,180.725

Workings
Determination of basic salary
2014 1/8/13 – 31/07/14 = GH¢90,000
2015 1/8/14 – 31/07/15 = GH¢93,600
2016 1/8/15 – 31/07/16 = GH¢97,200
2017 1/8/16 – 31/07/17 = GH¢100,800

Thus, 2016 basic salary = (7/12 x GH¢97,200) + (5/12 x GH¢100,800)

= GH¢56,700 + GH¢42,000
= GH¢98,700
Overtime
Dr. Agyei’s qualifying employment income is GH¢163,014.00 which is higher than GH
¢18,000.00 (12 x GH¢800). So Dr. Agyei is not a junior employee. The entire overtime will be
taxed the same way as his basic salary.

Bonus
The 5% tax is restricted to 15% of the basic salary even though the bonus was 40% of basic

Life assurance relief

Company 10% of Capital Sum Annual Premium 10%QEI Relief
GH¢ GH¢ GH¢ GH¢
Total Insurance 6,400 6,800 17,811.54 6,400
Pride Insurance 4,850 4,650 17,811.54 4,650
11,050

Since the total relief is lower than 10% of qualifying employment income, the total relief will be
granted.

Comprehensive Example 3
Mr. Johnson Zakari is a widower with four children all of whom are attending secondary schools
in Ghana. He was employed by Hansowodi Mining Company as a Mining Engineer on 1st
September, 2007 on a salary scale of GHS120,000 x ¢6,000 – GHS150,000.
His service conditions include the following allowances:
(i) 7.5% of his basic salary as professional allowance
(ii) 15% of his basic salary as responsibility allowance
(iii) 2.5% of his basic salary as risk allowance
(iv) Accountable entertainment allowance of GHS2,000 per month
(v) He was provided with fully furnished accommodation at the mining site
(vi) He was provided with vehicle with fuel for both official and private use
(vii) He contributed 5.5% of his salary towards the social security fund.

57
 (viii) He engaged in part-time teaching at Tarkwa School of Mines and was paid a total of
GHS20,400 net of 10% withholding tax in 2016 year of assessment
(ix) He earned interest of GHS19,225.88 on his investment in Government Treasury Bills
and savings with Unique Trust Financial Services.
(x) He also engaged in trading activities which earned him an agreed chargeable income
with the Ghana Revenue Authority (GRA) of GHS28,125 in 2016 year of assessment. He
paid GHS4,000 tax to GRA on his trading activities for 2016 year of assessment.
(xi) His employers deducted a tax of GHS24,856.25 from his salary and paid to GRA for
2016 year of assessment.

Required:
Compute Mr. Johnson Zakari’s total Tax Liability and tax to be paid (if any) for 2016 year of
assessment (15 marks).

Annual Income Tax Bands and Rates for 2016 and 2017
Year Chargeable Income GHS Rate
%
First 2,592 0.0

Next 1,296 5.0

Next 1,812 10.0

Next 33,180 17.5

Exceeding 38,880 25

Mr.Johnson Zakari
Computation of Chargeable Income for the 2016 Assessable Year
GHS GHS
Basic Salary 150,000
Cash Benefits
Professional All (7.5% x 150,000) 11,250
Responsibility All (15% x 150,000) 22,500
Risk All (2.5% x 150,000) 3,750 37,500
Total Cash Emoluments 187,500
Benefits in kind
Vehicle All (10% x 187,500) 18,750
Restricted to (500 x 12) 6,000
Total Employment Income 193,500
Add Trading Income 28,125
221,625
less reliefs
58
 SSF (5.5% x 150,000) 8,250
Responsibility 200
Child Educ (3 x 200) 600 9,050
Taxable Pay 212,575

Determination of Tax Liability

Year Chargeable Rate % Tax Cumulativ Cumulative
2016 Income GH Payable e Income Tax GH¢
¢ GH¢ GH¢
First 2,592 0.0 0.00 2,592.00 0.00
Next 1,296 5.0 64.8 3888.00 64.80
Next 1,812 10.0 181.20 5,700.00 246.00
Next 33,180 17.5 5,806.50 38,880.00 6052.50
173,695 25.00 43,423.75 212,575.00 49,476.25

Tax on part-time teaching

Net income = GHS20,400 Withholding tax = 10%
Gross Income = 100/90 x GHS20,400 = GHS22,666.67
Tax = GHS22,666.67-GHS20,400 = GHS2,266.67

Interest on Government Treasury Bills and savings are exempted from taxation

Thus, total tax liability = Tax on employment and business plus tax on part-time teaching
= GHS49,476.25 + GHS2,266.67 = GHS51,742.92

Net Tax Payable = Total Tax Liability – total withholding tax – total tax paid
= GHS51,742.92– (GHS24,856.25 + GHS2,266.67) – GHS4,000
= GHS20,620.00

CAPITAL ALLOWANCE

Production of income for any business requires the use of non-current assets in addition to other
assets. Obviously, as these non-current assets are used over time they lose their productive
capacity. Accounting principles recognizing this allows for the calculation and inclusion of
depreciation in the determination of profit. In taxation, the erosion of the productive capacity of
non-current assets is also allowed as a legitimate business deduction (see section 9(14) of Income
59
Tax Act 2015 Act 896) even though the deduction of the entire cost of the capital asset in one
year is disallowed (Section 9(2) of Act 896). From taxation point of view, the amount quoted by
the accountant as depreciation is disallowed due partly to the arbitrariness of the determination of
depreciation rates and methods used. Thus capital allowances are granted in lieu of depreciation.
Section 14(2a) of Act 896 says that capital allowance is granted in respect of a depreciable asset
owned and used by that person for business.

A depreciable asset is defined under the Third Schedule to the Act as an asset to the extent to
which it is used in carrying on a business, which asset is likely to lose value because of wear and
tear, obsolescence, or the expiration of time, but does not include trading stock.

1. Base rules form granting capital allowances

 Capital allowance is granted on depreciable assets
 The depreciable assets must be owned by the person
 The depreciable assets must be used in carrying on the business of the person during
the relevant basis period.
 The depreciable assets must be owned at the end of a basis period of the person
ending within the year of assessment.
 Capital allowance granted in respect of a particular year of assessment shall not be
deferred by a person entitled to that capital allowance as provided in section 14(3) of
the Act.

2. Classes and Rates of Depreciable Assets.

Capital allowances are granted under section 14 of the Income Tax Act 2015 (Act 896) and in
accordance with the Third schedule.

Act 896 classifies qualifying assets into five classes i.e. classes 1 to 5 and works with the pool
system that existed under Act 592. It allows two methods of depreciation, the reducing balance
method and the straight line method.

Classes 1, 2 and 3 assets are placed in separate pools and depreciated on reducing balance basis
at specified rates. Classes 4 and 5 assets are to be placed in a pool of its own separately from
other assets of that Class or any other Class. They are depreciated on a straight line basis at

60
specified rates. Depreciable assets of mining and petroleum companies are treated separately
from the above pools and capital allowance granted separately at 20% using the straight-line
method.

The table below shows the various classes of depreciable assets and the respective rates of
depreciation.

CLASS DEPRECIABLE ASSETS RATE

1 Computers and data handling equipment together with peripheral 40 percent

devices.

2 (i) Automobiles, buses and minibuses, goods vehicles; construction 30 percent

and earth-moving equipment, heavy general purpose or
specialised trucks, trailers and trailer-mounted containers; plant
and machinery used in manufacturing.
(ii) Assets resulting from expenses incurred by a person in the
production of income of that person;
a) in respect of planting vegetation from which timber, rubber,
oil palm or other crops are derived; and
b) where the business is a timber concern or a large scale
rubber, oil palm or other long term crop plantation.
(Note: such expense shall be treated as if the expense was incurred
in securing the acquisition of a depreciable asset used by the person
in the production of income).

3 Railroad cars, locomotives and equipment; vessels, barges, tugs and 20 percent
similar water transportation equipment; aircraft; specialised public
utility plant, equipment and machinery; office furniture, fixtures and
equipment; any depreciable asset not included in another class.

4 Buildings, structures and similar works of a permanent nature 10 percent

5 Intangible assets 1 divided by the

useful life of the
asset in the pool

COMPUTATION OF CAPITAL ALLOWANCES IN A POOL OF CLASS 1, 2 OR 3

ASSETS.
61
Act 896 classifies depreciable assets into a pool of class 1, 2, 3, 4, and 5. For classes 1, 2, and 3,
the reducing balance method of depreciation is allowed. With the pool system the individual
assets lose their identity, so that we can only talk of the depreciable value of a pool and not the
depreciable values of the individual assets in a pool.

3.1 The formula for computing the capital allowances for classes 1, 2, and 3 assets.

Depreciable assets are placed into separate pools for each class of asset, and capital allowance
granted for each pool for a year of assessment.

The capital allowance (CA) for class 1, 2, or 3 depreciable assets for a basis period is computed
using the following formula:

CA = Pool Value x Depreciation rate x No of Days in Basis period

365

The pool value is calculated by adding purchases during the year to the written down value at the
end of the last basis period and deducting the sales proceeds from the result.

Example 3.1

K. Diawuo has been in business for several years and keeps accounts to 31 December, every
year. He had the following assets as at 1st January, 2018.

ASSET WDV

Computers GHS 7,000

Computer Software GHS 3,000

During the year to 31 December, 2018, the following transactions in fixed assets took place.

1/03/18 Bought two computers and printers GHS 10,000

5/06/18 Sold some old computers GHS 2,000

62
Compute the capital allowance for the basis periods ending 31/12/18 and 31/12/19

Solution 3.1– Computation of Capital Allowance (Class 1 pool)

2018 (1/1/18-31/12/18) GHS

WDV for the pool as at 1/1/18 10,000

Additions 10,000

20,000

Less sales proceeds 2,000

Depreciation basis 18,000

Depreciation allowance 7,200

WDV b/d 10,800

2019 (1/1/19 – 31/12/19)

WDV b/d 10,800

Capital allowance (10,800 x 40% x 1) (4,320)

WDV c/d 6,480

Example 3.2

Koo Nsiah has been in business for some years. His accounting period is 1 st January to
December. On 31 December 2017 he had the following assets:

ASSET WDV

Motor Vans GHS 200,000

Forklift GHS 150,000

63
He bought the following assets during the year to 31 December, 2018

1/4/18 Mini Bus GHS 160,000

1/8/18 Forklift GHS 200,000

On 31/10/18, he sold the old forklift for GHS 110,000

Compute the capital allowances for the basis periods ending 31/12/18 and 31/12/19

Solution 3.2

Computation of Capital Allowance (Class 2 pool – 30%)

2018 (1/1/18 – 31/12/18) GHS

WDV for the Pool as at 1 January, 2018 350,000

Additions 360,000

710,000

Sales proceeds 110,000

Depreciation basis 600,000

Depreciation allowance 180,000

WDV c/d 420,000

2019 (1/1/19-31/12/19)

WDV c/d 420,000

Capital allowance (420,000,000 x 30% x 1) 126,000

WDV c/d 294,000

64
Example 3.3

Komfo Adu Enterprise’s accounting period is 1st January to 31 December.

every year. On 31 December, 2017 he had the following assets.

Asset Written Down Value

Office furniture GHS 40,000

Office equipment 60,000

The following transactions in non-current assets took place during the year to

31 December, 2018.

01/02/18 Bought Office furniture GHS 30,000

31/05/18 Sold the old Office furniture for 15,000

1/08/18 Bought new Office equipment for 50,000

Compute the Capital Allowances for the 2018 and 2019 Assessment Years

Solution 3.3

Computation of Capital Allowance (Class 3)

2018 (1/1/18-31/12/18) GHS

WDV b/d 100,000

Additions 80,000

180,000

Less sales proceeds 15,000

65
Depreciation basis 165,000

Depreciation allowance 33,000

WDV b/d 132,000

2019 (1/1/19 – 31/12/19)

WDV b/d 132,000

Capital Allowance (132,000 x 20% x 1) 26,400

WDV c/d 105,600

Example 3.4

Daasebere Enterprise’s accounting period is 1st January to 31 December, every year. On 31 st

December, 2016 he had the following assets:

Asset Written Down Value

GHS

Computers and accessories 140,000

Office equipment 120,000

Motor vans 250,000

The following transactions in assets took place during the year to 31 December, 2017.

1/03/17 Bought 2 new computers at GHS 50,000 each

5/04/17 Sold an old computer for 15,000

1/06/17 Bought a mini bus for 340,000

66
30/06/17 Sold a car for 65,000

1/12/17 Bought office furniture for 80,000

Compute the capital allowances for the 2017 and 2018 assessment years.

Solution 3.4

Computation of Capital Allowances.

2017 (1/1/17-31/12/17)

Class 1(40%) Class 2 (30%) Class 3 (20%) Total

GHS GHS GHS GHS

WDV b/d 140,000 250,000 120,000

Additions 100,000 340,000 80,000

240,000 590,000 200,000

Sales Proceeds 15,000 65,000 -

225,000 525,000 200,000

Capital Allowance 90,000 157,500 40,000 287,500

WDV c/d 135,000 367,500 160,000

Note that the totals column is only for the capital allowance for the period. The total capital
allowance is the amount that is allowed as deduction for tax purposes.

2018 (1/1/18-31/12/18)

Class 1(40%) Class 2(30%) Class 3(20%) Total

67
WDV b/d 135,000 367,500 160,000

Capital Allowance 54,000 110,250 32,000 196,250

WDV c/d 81,000 257,250 128,000

Computation of Capital Allowance of Assets under class 4 and 5

DEPRECIABLE ASSETS IN CLASS 4

Capital allowance is granted for a year of assessment on each class 4 depreciable asset in respect
of a basis period calculated as follows:

Cost base x Rate of 10% x no of days in the basis period

365days

Here the assets are to be placed in a pool of their own separately from other assets of that Class
or any other Class and the computation is on asset-by-asset basis.

DEPRECIABLE ASSETS IN CLASS 5

Capital Allowance is granted for a year of assessment on each class 5 depreciable asset in respect
of a basis period calculated as follows:

Cost base x no of days in the basis period

Useful life in yrs 365 days

Example 4.3

68
Ntiamoah commenced business on 1st January, 2016 and prepares accounts to 31 December
every year. He purchased a plot of land for GHS 25,000 and spent GHS 800,000 to put up a
factory building which was completed and put to use on 1 st April, 2016. Calculate capital
allowance on the factory building for 2016 and 2017 years of assessment.

Solution 4.3

2016 (1/1/16-31/12/17) GHS

Cost Base 800,000

C.A (10% x 800,000) 80,000

WDV c/d 720,000

2017 WDV b/d 720,000

C.A (10% x ¢800,000) 80,000

WDV c/d 640,000

Example 4.4

Koo Dwomo has been in business for some time now. On 1st January 2016, he moved into a new
building constructed for the purpose of running the affairs of the business at a cost of GHS
600,000. If his accounting date is 31 December every year, compute the capital allowance for
the first three years of assessment.

2016 1/1/16-31/12/16 ¢

Cost Base 600,000

C.A (10% x 600,000) 60,000

WDV c/d 540,000

69
2017 1/1/17-31/12/17

Bal b/d 540,000

CA (10%x 600,000) 60,000

WDV c/d 480,000

2018 1/1/18 -31/12/18

WDV b/d 480,000

C.A (10% x 60,000) 60,000

WDV c/d 420,000

Example 4.5

Frema Manufacturing Ltd (FML) has been in business for some time operating at Tuobodom
with head office at Sunyani. The company prepares accounts to 31st December, every year. The
positions of assets as at 31st December, 2016 were as follows:

Asset Cost Capital Allowance

Granted up to 31/12/16

GH₵ GH₵

Plant and Machinery 95,000 65,000

Office Equipment 75,000 42500

Motor Vehicles at Head Office 300,000 175,000

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Building and other structures 720,000 288,000

The following transactions in depreciable assets took place during the period to 31 December,
2019.

Asset Date of Acquisition Cost

GH₵

Office Equipment 30/6/17 30000

2 Minibuses for use at Head Office 1/12/17 200000 each

FML declares the following profits: GH₵

Period to 31/12/17 10,000

31/12/18 9,600

31/12/19 11,000

You are required to compute the appropriate capital allowances and the chargeable income for
FML for 2017, 2018, and 2019 assessment years.

Solution

FREMA MANUFACTURING BUSINESS

COMPUTATION OF WRITTEN DOWN

VALUES

ASSETS COST CCA WDV

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 GHc GHc GHc

Plant and
machinery 95,000 65,000 30,000

office equipment 75,000 42,500 32,500

125,00
Motor vehicles 300,000 175,000 0

432,00
Buildings 720,000 288,000 0

DETERMINATION OF DEPRERCIATION
ALLOWANCE

CLASS 2 CLASS CLASS TOTAL

2008 (30%) 3(20%) 4(10%) ALLOWANCE

GHS’000 GHS’000 GHS’000 GHS’000

WDVb/f 5000 2000 3000

Additions 4000 3000

-
depreciation basis 9000 5000 3000

capital allowance 2700 1000 720 4420

WDVc/d 6300 4000 2280

2009

WDVb/f 6300 4000 2280

capital allowance 1890 800 720 3410

WDVc/d 4410 3200 1560

2010

WDVb/f 4410 3200 1560

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 capital allowance 1323 640 720 2683

WDVc/d 3087 2560 840

DETERMINATION OF CHARGEABLE INCOMES FOR THE RELEVANT YEARS

2008 2009 2010

GHS’000 GHS’000 GHS’000

Profit for the year 10,000 9,600 11,000

Depreciation allowance 4,420 3,410 2,683

Chargeable income 5,580 6,190 8,317

Some Special Considerations

Sale of Class 1, 2, and 3 assets

The written down value of pool cannot fall below zero

Illustration 1

On 1/1/16 the written down value of class 3 assets of ABC ltd was GHS7,000. The company sold
some of the assets in this class for GHS10,000. Account for the above transaction if ABC’s
accounting period ends on 31/12/ each year and the company has been operating for some time.

Solution to Illustration 1

WDV (Class 3) 1/1/11 7,000

Sale (10,000)
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Additional income (3,000)*

*Would be included in the income of the business and taxed accordingly. This is sometimes
referred to as additional income. If there exist other assets in the pool, after the sale of some, then
it implies that the depreciation of such assets has been accelerated. Thus, no capital allowance
will be granted in the current year.

Where the written down value of a pool falls below GHS500.00

Where at the end of the basis period the depreciation basis of the pool after deducting
depreciation allowance for the year of assessment is less than GHS 500

Illustration 2

XYZ manufacturing company prepares account to 31/12 each year and has been in business for
some time. The written down value of class 2 depreciable assets of XYZ brought forward from
2015 year of assessment is GHS700. Compute the depreciation allowance for 2016 year of
assessment.

What will be the capital allowance to be granted, with respect to the class 2 pool for the year
2016?

Solution to illustration 2

Year of Assessment Basis Period

2016 1/1/16 – 31/12/16

WDV b/d 700

Depreciation allowance 210

WDV c/d 490

Additional depreciation allowance 490

WDV c/d 0

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*Since the written down value of the pool (GHS490.00) was below the GHS500.00 , additional
depreciation of GHS490.0 is granted to bring the written down value to zero.

Where there still remains a written down value but all assets in the pool have been realized.

Illustration 3

Assume that in 2012, XYZ sold all its assets in class 3 pool with a WDV of GHS1,200 for
GHS1,000. What would be the effect of this transaction on the capital allowance to be granted on
class 3 pool for 2012 basis period?

Solution to Illustration 3

GHS

WDV class 3 b/d 1,200

Amount realized from the sale of all assets in pool 1,000

Depreciable Amount 200

Capital Allowance 200*

WDV 0.00

*Since all the assets have been sold out, the tax authorities would grant the remaining written
down value as capital allowance. This is sometimes referred to as balancing allowance.

Where the cost base of a road vehicle, other than a commercial vehicle goes beyond the current
threshold of GHS75,000 (since 1/1/2016).

“Commercial Vehicle” is defined as a road vehicle designed to carry loads of more than half a
tone or more than thirteen passengers or a vehicle used in a transportation or vehicle rental
business.

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Illustration 4

Assume that ABC Company bought a saloon car for GHS80,000 on 1/6/2016. If the company’s
accounting year ends on 31/12/ each year and has been operating since 2010, what would be the
effect of the above transaction on class 2 assets of ABC if the WDV at 1/1/16 was GHS70,000.

Solution to illustration 4

GHS

WDV (class 2) 1/1/2016 70,000

Add 75,000

145,000

CA Allowance (30% x GHS145,000) 43,500

WDV c/d 101,500

Illustration 5

Assume that in 2017, the only transaction that took place was a sale of the saloon car bought on
2016 for GHS85,000. What would be the capital allowance for 2017?

Solution to illustration 5

GHS

WDV (class2) 1/1/2017 101,500

Less sale of saloon car (75,000/80,000 x 85,000) 79,687.50

Depreciable Amount 21,812.50

CA (30% x GHS21,812.5) 6,543.75

WDV c/f 15,268.75

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Sale of Class 4, or 5Asset

The Act provides for a balancing charge or allowance where a class 4 or 5 depreciable asset is
realized. This is typically calculated as the difference between the consideration received on
realization and the written down value of the asset. “Written down value” is defined to mean the
cost base of the asset as reduced by any capital allowances granted to the person for the asset.

 Where the WDV is greater than the consideration received, an additional capital
allowance is granted in an amount equal to the difference. Refer to illustration 3 above.
 Where the consideration is greater, the difference is included in calculating income from
the business in which the asset is used. Refer to illustration 1 above.
 Where the consideration received is greater than the cost base of the asset, only the cost
base is used to determine this difference. This ensures that the balancing charge is not
levied with respect to any capital gain on a class 4 or 5 depreciable asset. Any such
capital gain may be subject to capital gains tax.

Where the consideration is greater than the cost base of the asset

Illustration 6

ABC company has a building which it bought 3 years ago at a cost of GHS300,000.

The company sold the building in 2013 for GHS450,000. Determine how to account for
this transaction for tax purposes.

Solution to illustration 6

GHS

Building – cost 300,000

Cumulative capital allowance (10% x 300,000 x 3) 90,000

WDV 210,000

Sales Proceeds (GHS450,000) but restricted to 300,000*

Profit on Sale to income statement 90,000

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 *Since the sales proceed is greater than the cost base of the asset, balancing charge to be
taken to income statement is calculated using the cost base of the asset. The excess could
be assessed for capital gains tax.

Assets acquired under Hire Purchase Agreement

Hire purchase is the legal term for a contract, in which a purchaser agrees to pay for items
bought in installments and sometimes after the payment of a deposit. Under this agreement,
legally, the ownership title in the property passes to the hirer (buyer) only when she has finished
paying for the last installment. But from accounting point of view, based on the substance over
legal form concept, the hirer is deemed to be the owner of the asset once he is in the process of
acquiring the asset (i.e. paying the installment). Due to this, the asset is included in the assets of
the hirer as her property.

For the purpose of determining the capital allowance to be granted on an asset bought under hire
purchase, every deposit and installment paid is treated as if a portion of the asset has been
acquired.

Illustration 7

ABC company, a manufacturing company which has been in business for several years, bought a
plant under a three-year hire purchase agreement. The terms of the agreement specified, inter
alia, that ABC would have to pay three annual installments of GHS7,000 in addition to a deposit
of GHS1,000 to be paid in the first year.

Determine the capital allowance to be granted in the first three years after signing agreement.

Solution to Illustration 7

GHS GHS

Year 1 Cost Base: Deposit 1,000

First Installment 7,000 8,000

78
Capital Allowance (30% x 8,000) 2,400

WDV c/f 5,600

Year 2

WDV b/f 5,600

Installment Payment 7,000

Depreciable Value 12,600

CA (30% x 12,600) 3,780

WDV c/f 8,820

Year 3

WDV b/f 8,820

Installment 7,000

Depreciable Value 15,820

CA (30% x 15,820) 4,746

WDV c/f 11,074

Use of Partly Completed Assets

Where a person commits to use a depreciable asset that is partly completed, capital allowance
will only be granted for the portion of the depreciable asset that is committed to use in business.
This implies that an appropriate basis for apportioning the entire value of the asset should be
applied. Also, just like asset bought under hire purchase agreement, anytime a portion of the
depreciable asset subsequently becomes ready for use and is committed to use that portion is
treated as addition to the class.

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Illustration 8

NBSA Construction Company limited constructed an equipment to be used for its operations at a
total cost of GHS200,000. The construction took 2 years but at the end of the first year 80% of
the equipment was ready and committed to use. The remainder was ready and committed to use
in the second year. Show how this asset will be treated for capital allowance purposes for the
first and second years.

Solution to illustration 8

Year 1 GHS

Class 2 Asset (Construction Equipment) 80% x GHS200,000 160,000

Capital Allowance (30% x GHS160,000) 48,000

WDV c/f 112,000

Year 2

WDV b/f 112,000

Addition (20% x GHS200,000) 40,000

152,000

CA (30% x GHS152,000) 45,600

WDV c/f 106,400

Summary of Some Key Issues

 The law requires class 1 to 3 assets to be pooled, while that of classes 4 and 5 should be
presented separately for each asset. This ensures that total amount of capital allowance
granted to a person in respect of class 4 and 5 assets shall not exceed the cost base.
 Classes 1, 2 and 3 assets are depreciated on reducing balancing method while that of 4
and 5 are currently on straight-line basis.
 The written down value of a pool cannot fall below zero. If the consideration received
from the realization of assets in the pool during a period exceeds the WDV of the pool
then the amount of the excess is included in ascertaining the person’s income from the
business for the year of assessment. This inclusion is sometimes referred to as a
“balancing charge”.

80
  Where the WDV of an asset does not exceedGHS500.00. The law allows for an
additional capital allowance equal to that WDV to be granted for the asset.
 Where all assets belonging to a pool as at the end of a basis period have been realized and
there still remains a WDV for the pool, the law grants a capital allowance for the
remaining WDV. This is sometimes referred to as “balancing allowance”
 The cost base of a road vehicle, other than a commercial vehicle, to be included in class 2
for the purpose of determining capital allowance shall not exceed GHS75,000.
 Where a person incurs a non-deductible expense, like capital expenditure, relating to a
depreciable asset, the person should treat that expense as an acquisition of a new asset in
the year in which it was incurred. For instance, a person may have acquired a plant in a
year. If in the subsequent year, the person replaces a significant part of the plant, the cost
of the replacement should be added to the WDV of the pool in which the plant belongs.
Capital allowance is then granted on the total.
 Capital allowance is granted on depreciable assets used for business. Where only part of
the asset is used for business, the value of the asset shall be apportioned between business
and private use. Capital allowance shall only be granted on the business portion only.
 Persons who use depreciable assets in the production of exempt income are required to
calculate capital allowance for the period of exempt. The income to be exempt shall be
after deducting capital allowance. When the exempt period expires, capital allowances
may only be claimed with respect to the WDV of the assets in the pools at the time of the
expiration of the exemption period.

DEDUCTIONS AND ASSESSMENT OF BUSINESS INCOME

1.0 DEDUCTIONS ALLOWED AND DEDUCTIONS NOT ALLOWED

In ascertaining the net profit of a business organization for a period the expenses incurred are
matched against revenues earned for the period. Meanwhile, not all expenses are allowed as
deductions for tax purposes. Thus, we are going to look at the deductions that are allowed and
the deductions that are not allowed in determining the chargeable income of a business
organization.

1.1 Meaning of Deduction

81
A deduction is a legitimate business expense which has to be allowed in determining profits.
Deductions are business expenses which are applicable to self-employed and companies only.

The law relating to deductions to be made in arriving at the profits or gains which are chargeable
under the Act other than those from employment are contained in Act 896 (Sec 9)

1.2 The Principles in Allowing Deductions

The principles in allowing deductions found in the Act 896 are: the out goings and expenses
must be wholly, exclusively and necessarily incurred in the production of the income. Can you
explain the underlined words? Let us now look at the meaning of the terms “Wholly”
“Exclusively” and “Necessarily”

1. “WHOLLY”- the whole amount (the quantum) must be used for the

business purposes.

2. “EXCLUSIVELY” refers to the purpose for which the expenditure was incurred. In other
words, the expense must be a relevant factor in the operation of the business.
3. “NECESSARILY” implies that the expense must be inevitable. In other words, without
incurring the expense, the business cannot go on.

1.3 DEDUCTIONS ALLOWED as contained in Act 896

Per the Income Tax Act 2015 (Act 896), the expenses allowed include the following:

INTEREST

Sums payable by way of interest upon any money borrowed by him, where the commissioner is
satisfied that the interest was payable on capital employed in acquiring the income.

RENT

Rent payable by any person in respect of land or buildings occupied by him for the purpose of
producing the income. However, if any part of such land or building is occupied for domestic or
private purposes so much of the rent as may be determined by the commissioner to be in respect
of such purposes shall not be so deducted.

REPAIRS AND IMPROVEMENTS

Any expense incurred for repair of premises, plant, machinery or fixtures employed in acquiring
the income or for the renewal, repair or alteration of any implement, utensils, or articles.
However, if any of such items are employed in part for domestic or private purposes, so much of
any such expenses as may be determined by the commissioner to be in respect of such purposes
shall not be so deducted.

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1.1 Specific Rule on Deductions for Repairs and Improvements.
In spite of the provisions under Section 9, the Act allows a deduction of a percentage of
capital expenditure relating to repairs and improvements.

Section 12 of the Act provides specific rules for deduction of expenditure relating to repairs
and improvements, which stipulate that:

(i) the expense should have been incurred for the repair or improvement of a
depreciable asset
(ii) the repair or improvement expense is incurred wholly, exclusively and necessarily
in the production of income from an investment or business in satisfaction of the
requirements of subsection (1) of section 9;
(iii) the repair or improvement expense may be of a capital nature.

The deduction allowed in respect of an expense for repair or improvement of a

particular asset shall not exceed five percent (5%) of the written down value of the
applicable pool of that depreciable asset held at the end of the year.

This should be approached as follows:

(a) the written down value of the applicable pool shall be the written down value
before considering the addition of the excess computed under (5.3) below
(b) Since the deduction or capitalisation will be made at the end of the year, a taxpayer
should:
(i) Identify the pool in which each asset which is the subject of repairs or
improvement belongs;
(ii) Determine 5% of the written down value of the pool;
(iii) The amount of the expenditure for repair and improvement of each asset
should be matched against the 5% of the written down value of the pool;
and
(iv) the excess amount should be capitalised under 5.3 below
83
 (v) Deduct the expense or capitalise the excess amount in the order in which
the expense is incurred.
The excess of the expense after deduction under 5.2 above is added to the depreciation
basis of the applicable pool for calculation of capital allowance expenditure in the
current year.

2.0 ILLUSTRATIONS

2.1 Illustration 1
Mawuko Limited incurred expenses of GHS2,500.00 on repairs and improvement of Plant
and Machinery and declared a profit of GHS100,000.00 for the 2016 year of assessment.

NB: The Written down value of the applicable pool before capitalising any excess is
GHS60,000.00.

Determine the following:

(a) Deductible amount for repairs and improvement.

(b) Excess amount of repairs and improvement to be added to the depreciation basis of
the applicable pool.

Solution for Illustration 1 GHS

Profit as per account 100,000.00

Add back Repairs and improvement 2,500.00

Assessable Income 102,500.00

Less

Allowable Repair and improvement {5% of 60,000=3,000} 2,500.00

Adjusted profit 100,000.00

84
NB: Mawuko Limited is allowed to deduct the entire amount of GHS2,500.00 on repair and
improvement because the expense is less than 5% of the written down value of the applicable
pool.

2.2 Illustration 2
Mawuko Ltd incurred expenses on repairs and improvement of GHS6,500.00 on a Plant and
Machinery and also declared a profit of GHS100,000.00 for the 2016 year of assessment.

NB: The Written down value of the applicable pool before capitalising any excess is
GHS60,000.00.

Determine the following:

(a) Deductible amount for repairs and improvement

(b) Excess amount of repairs and improvement to be added to the depreciation basis of
the appropriate pool.

Solution for Illustration 2

GHS

Profit as per account 100,000.00

Add back Repairs and improvement 6,500.00

Assessable Income 106,500.00

Less

Allowable Repairs or improvement {5% of 60,000=3,000} 3,000.00

Adjusted profit 103,500.00

5% of the WDV of GHS60,000.00 is GHS3,000.00 which is allowed as a deduction. The

excess amount of the repairs and improvement expenditure of GHS3,500.00 (i.e. 6,500.00 -
3,000.00) for which a deduction is not allowed shall be added to the depreciation basis of the

85
 applicable pool for purposes of computing capital allowance expenditure for the 2016 year of
assessment .

DEDUCTIONS IN RELATION TO THE RENTAL OF PREMISES

Any sums paid as local rates by individuals from rent received, to any local, Urban, City or
District Council in respect of any residential or commercial premises and a mortgage interest on
sums borrowed for the purposes of constructing or acquiring such premises.

BAD DEBTS

Bad Debts incurred in any business where the amount of debt claim is included in determining
the assessable income of the person’s prior basis period or the debt claim is in respect of
advances made by that person in the normal course of business other than advances made on
capital account where all reasonable steps have been taken to pursue payments but have proved
futile.

Note: All sums recovered during the said period on account of amounts previously written off or
allowed in respect of Bad or Doubtful Debts shall for the purposes of this Act be treated as
receipts for the business for that period.

RESEARCH AND DEVELOPMENT EXPENDITURE

Any outgoing or expenses incurred by a person on research and development for the purpose of
developing the business improving its products or process. However, the Company needs to
produce a certificate issued by the Minister responsible for Industry in support of the Research
and Development programme. Again the commissioner may determine whether the full
expenditure under this paragraph shall be deductible in respect of the year of assessment which it
was incurred or whether it shall be spread over subsequent years of assessment.

CAPITAL ALLOWANCES

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In ascertaining the income of a person for a basis period from any business, there shall be
deducted the capital allowances for the business calculated in accordance with the third schedule
of the Act.

FOREIGN CURRENCY EXCHANGE LOSSES

Foreign exchange losses other than a loss that is capital in nature, incurred in the production of
income during the period in respect of any debt claim, debt obligation, or foreign currency
holding of that person where the commissioner has been notified.

CARRY OVER LOSSES

In ascertaining a person’s income for a basis period from business a person shall deduct the
losses incurred within the previous 5 or 3 basis periods in carrying on that business. Tax losses
can be carried forward for three or five years, depending on the industry/sector of operation.

A person shall deduct in ascertaining the income of that person from business for a year of
assessment;

 an unrelieved loss of the person in a specified priority sector for any of the previous five
years of assessment from the business; (Farming business, Mining business and
manufacturing business, petroleum operations energy and power business, agro
processing business, tourism business and ICT business.)
 an unrelieved loss of the person in all other sectors for any of the previous three years of
assessment from the business.

Deductions allowed as contained in the Internal Revenue Regulations

Apart from the above business related deductions, contained in the Act, the Internal Revenue
Regulations, 2001 (LI 1675) provides additional allowable deductions. These are contained in
regulations 2-6.

Contributions to Charities

Contribution by any person to a charitable institution or fund approved by the government is

allowed, for example, donations to National Trust Fund.

Scholarships

87
Amount expended by any company or body of persons during a year of assessment under a
scholarship scheme approved by the Government for technical, professional or their course of
study.

Donations for Rural and Urban Development

Any donation made by a person for the purpose of the development of any rural or urban area
and approved by the government.

Donations for Sports Development and Promotion

Donations made by a person for the purpose of sports development or sports promotion and
approved by the government.

Donations to Government for Worthwhile causes

Donations made by a person to the government for worthwhile government causes approved by
the Commissioner.

Additional Notes

1. Advertising: Normal advertising in the media would be allowed. Advert by permanent

signboard is treated as capital expenditure.
2. Bad Debts. General provisions for doubtful debts are not allowed but specific provisions
are allowed (i.e. Provisions which are determined on scientific and rational business)
3. Legal Expenses:
Allowable in the following cases

(a) Defending rights (b) Protecting assets (c) Collecting debts

(d) Current company matters.

Not Allowable in the following cases

(a) Formation of partnership and companies (b) Sale of property

(b) Income Tax appeals (d) Breaches of the law.

4. Premiums paid on lease: this is not allowable. But the interest aspect of the payment is
allowable.
1.4 DEDUCTIONS NOT ALLOWED
The Income Tax Act 2015, Act 896, stipulates deductions not allowed which include:

(a) Domestic or private outgoing or expense (including cost of traveling between

residence and place of business or employment) incurred by that person. Any

88
 disbursement or expense not being money wholly, exclusively and necessarily laid out
or expended for the purpose of acquiring income is not allowed.

(b) Any capital withdrawn or any sum employed or intended to be employed as capital or
capital employed in improvement

(c) Any sums recoverable under an insurance or contract of indemnity.

(d) Any amount paid or payable in respect of any Income Tax or other similar taxes
whether charged within or outside Ghana.

(e) The depreciation of any fixed assets.

COMPUTATION OF ASSESSABLE INCOME AND TAX LIABILITIES OF SELF-

EMPLOYED TAX PAYERS

Who is a self-employed person? A self-employed person is an individual who is doing his own
business. He is a master and servant to himself. His income is a business income and will be
assessed as such.

Act 896 provides rules for calculating a person’s income from a particular business. Such
income is calculated as the person’s gains or profits from any business carried on by the person
for whatever period of time.

1. Assessment of a Sole proprietor

A sole proprietor is a person who does business alone and takes profits or bears the risks of the
business alone.

In assessing a sole proprietor, the gains or profits from his business are amounts accruing to or
derived by him that are attributable to the business and would not be included in income from
investment. Normally we look at the financial statements of the sole proprietor, especially, the
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profit and loss account and adjust the net profit with expenses not allowed as deductions and
incomes not considered as business income.

Example 5.1

Kokoroko commenced business on 1st January, 2019. He decided to prepare accounts to 31

December every year. His trading results for the year to 31

December, 2016 is shown below:

GHS’000 GHS’000

Sales 250

Cost of Sales 120

Gross Profit 130

Add: Other Income

Discount Received 3

Interest Received 5 8

138

Less: Operating Expenses

Salaries and wages 26

Repairs and Renewals 12

Rent and Rates 6

Depreciation 24

Mortgage Interest 2

Bad Debts 5

Refrigerator 35 110

Net Profit 28

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Notes

e. Interest received is interest on fixed deposit account with the Ghana Commercial bank.
f. Repairs and renewals : The WDV of the pool before any capitalization was GHS 100,000
g. Mortgage interest and Rent and Rates are in respect of a building occupied by Kokoroko
both for business and private purposes. The ratio is 1:1 between business and private use.
h. Kokoroko had taken goods worth GHS500 every month for personal use.

You are required to compute the tax liability of Kokoroko for the 2019 assessment year.

Solution 5.1

Kokoroko

Computation of tax liability for 2019

GHS’000 GHS ‘000

Net Profit as per accounts 28

Less: Interest Received 5

23

Add Back:

Repairs and renewals 7

Rent & Rates 3

Mortgage Interest 1

Depreciation 24

Refrigerator 35

Drawings (12x GHS500) 6 76

Changeable Income 99
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After getting the chargeable income we use the personal income tax rates to compute the tax
liability. The same rates used in computing tax liability of employees are used.

Chargeabl Rate Tax Cumulative Cumulative

e Income
% GHS Income Tax
GHS
GHS GHS

First 2,592 Free - 2,592 -

Next 1,296 5 64.8 3,888 64.8

Next 1,812 10 181.2 5,700 246

Next 33,180 17.5 5,806.5 38,880 6,052.5

Next 60,120 25 15,030 99,000 21,082.5

Therefore, the tax liability is GH¢21,082.5.

2. Assessment of a partner of a partnership

A partnership is a form of organization where two or more people come together to carry on
business with the aim of making profits.

The chargeable income of a partnership for a year of assessment is the assessable income of the
partnership less the total amount of deductions allowed including capital allowances.

A partnership is not assessed as an entity, rather individual partners of the partnership are
assessed separately in the ratio in which profits and losses are shared. This means that the profit
or loss from operations is shared among the partners of the firm and thereafter, the partners are
assessed separately on their share of profit or loss. Thus each partner is liable to his or her own
tax.

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Ascertaining partnership income

The chargeable income of a partnership for a year of assessment is the assessable income of the
partnership less the total amount of deductions allowed including capital allowances. The
chargeable income is then distributed to the individual partners in the ratio in which profits and
losses are shared. Each individual partner then makes a claim for personal reliefs.

It is to be noted that losses of a partnership for a basis period are not allocated to the partners of
the partnership, but rather are carried over and taken into consideration in ascertaining the
partnership income of the partnership in subsequent basis periods of the partnership as contained
in the Income Tax Act 2015, Act 896.

Example 5.2

Let us take an example where two partners (A & B) share profit equally (i.e. equal partners)

Assessable Income from Partnership 36,000

Less Capital Allowance (8,400)

Chargeable Income 27,600

A B

GHS GHS

Share of Profit 13,800 13,800

If any of them enjoys any reliefs, then these will be deducted from the share of profit to arrive at
the chargeable income for each partner. Let us assume that A and B are both married but A has 4
children all attending recognized educational institutions in Ghana and B has only one child in
school. Their chargeable income will be calculated as follows:

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 A B

GHS GHS

Share of Profit 13,800 13,800

Less Reliefs:

Marriage (200) (200)

Children Education (600) (200)

13,000 13,400

Example 5.3

Blackie and Red have been in partnership and share profits and losses equally. The net profit for
the partnership for the year ended 31 December, 2019 is GH¢ 70,500. Capital allowance granted
is GH¢ 12,000. Compute the chargeable income of each partner for the 2019 assessment year.

Solution

2016 (1/1/19 –
31/12/19) GH¢

Net Profit as per Account 70,500

Less Capital Allowance (12,000)

Partnership Income 58,500

Blackie Red

GH¢ GH¢

Chargeable Income 29,250 29,250

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Treatment of salaries and interest on capital to partners

In examining the accounts of a partnership, it must be noted that partners cannot employ and pay
themselves. Salaries and interests on capital are distribution of profits and are added to the
chargeable income of the partners separately.

Example 5.4

Kwakye and Dwomo have been in partnership for some time now sharing profits and losses in
the ratio of 2:1. The partnership agreement stated among other things that the partners were
entitled to additional benefits in the form of salaries and interest on capital as follows:

Salaries:

Kwake GHS 36,000

Dwomo GHS 60,000

Interest:

Kwakye GHS 24,000

Dwomo GHS 20,000

The following results were declared by the firm after charging partners’ salaries and interest on
capital for the years specified below:

Year to 31/12/18 GHS 180,000

31/12/19 220,000

If the capital allowances for 2018 and 2019 have been agreed at 36,000 and 34,000 Ghana cedis
respectively, compute the chargeable income of each partner for 2016 and 2017 relevant years of
assessment.

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Solution

2018 (1/1/18 - 31/12/18) GHS

Net Profit 180,000

Less Capital Allowance (36,000)

Partnership Income 144,000

Kwakye Dwomo

Share of Profit (2:1) 96,000 48,000

Add: Salaries 36,000 60,000

Interest on Capital 24,000 20,000

156,00
Chargeable Income 0 128,000

2019 (1/1/19 – 31/12/19) GHS

Net Profit 220,000

Less Capital Allowance (34,000)

Partnership Income 186,000

Kwakye Dwomo

Share of Profit (2:1) 124,000 62,000

Add: Salaries 36,000 60,000

Interest on Capital 24,000

20,000

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 Chargeable Income 184,000 142,000

Example 5.5

Brisie and Kuntunkunu have been in partnership for several years trading in second hand
clothing. Their accounts are prepared to 31 December each year and they share profits or losses
in the ratio of 3:2. Other details of their partnership agreement are as follows:

Brisie Kuntunkunu

GHS GHS

Salaries per month 1200 1000

Inconvenience allowance per month 500 300

Transport allowance per month 750 460

Rent allowance per month 350 280

Garden boy allowance per month 420 400

These were charged in the accounts in arriving at a net profit of GH¢36,000 in 2019. The
following expenses were also charged in the accounts.

 Miscellaneous GHS 4,600

 Entertainment 3,400
 Medicals 5,000
 Donations 4,500
 Depreciation 11,500
 Legal fees 1,800

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Notes to the accounts:

a) Miscellaneous: these are made up as follows:

i. Telephone and postages GHS 1,400
ii. Advertisement tax 1,200
iii. Cleaning 2,000
b) Entertainment consists of
i. Visitors at shop 1,800
ii. Occasional lunch for partners 1,400
iii. Business calendars for customers 200
c) Medicals are in respect of
i. Employees 2,000
ii. Partners 1,000
iii. Partners’ children 2,000
d) Donations are made up as follows
i. Local Presbyterian church harvest 1,000
ii. Christmas gift to the chiefs and elders 1,500
iii. Osu children’s home 2,000
e) Depreciation is in respect of business assets
f) Legal fees is in respect of a charge of assault leveled against a security officer of the
business
g) Capital allowance has been agreed at GHS 12,200 for 2019

You are required to compute the chargeable income of the partners for the year 2019.

Solution

COMPUTATION OF CHARGEABLE INCOME FOR 2019 YEAR OF

ASSESSMENT

GH¢ GH¢

Net Profit as per accounts 36,000

Add:

Miscellaneous 1,200

Entertainment 3,200

Medicals 3,000

Donations 2,500

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 Depreciation 11,500

Legal fees 1,800 23,200

59,200

Less : Capital allowance 12,200

Chargeable income 47,000

ASSESSMENT Brisie Kuntunkunu

GH¢ GH¢

Share of profit 28,200 18,800

Add:

Salaries 14,400 12,000

Inconvenience allowance 6,000 3,600

Transport allowance 9,000 5,520

Rent allowance 4,200 3,360

Garden Boy allowance 5,040 4,800

Chargeable Income 66,840 48,080

TAXATION OF COMPANIES

A company is an artificial person which is considered an economic entity separate from its
owners. It has tax bearing capacity separate from its owners or the shareholders. A company is
therefore, liable to tax separately from its shareholders.

We have already talked about deductions and the principles in allowing or disallowing
deductions are the same for all businesses. This means that in assessing companies for tax we

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have to take note of deductions that are allowed and deductions that are not allowed in arriving at
the chargeable income.

1. Industry Concessions
Certain companies enjoy tax holidays or have concessionary tax rates to serve as tax incentives.
Let us look at some of these companies and the type of concessions enjoyed by them.

1. Agro-processing Company
A company in agro processing business is exempt from tax for 3 years commencing from and
including the year when commercial production begins. This is applicable to agro processing
company established before 2004. However agro processing company established in Ghana after
the financial year starting 1st January, 2004 is exempt from tax for a period of five years of
assessment commencing from the period in which commercial production begins.

 Company which produces on commercial basis cocoa by-product derived from

substandard beans, husks and other cocoa waste is exempt for 5 years when commercial
production begins.

 Company in both agro processing and farming can elect to be treated as agro processing
business or tree crop farming business and claim eligible exemption.

 Company whose principal activity is the processing of waste including recycling of

plastic and polythene material for agricultural or commercial purposes is exempt for 7
years from when commercial production begins.

 A company in rural banking is exempt for 10 years from when operations begin.

 A company engaged in construction for letting of residential premises is exempt for 5

years from when operations begin.

 Company engaged in construction for sale of residential premises is exempt for 5 years
when operations begins

 Income of Ghana stock exchange is exempt for 31years from when operations
commenced.

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2. Corporate Tax Rates
The nature and type of industry in which a company operates determines the tax rate applicable
to it. The Income Tax Act 2015, Act 896 gives the following rates.

2016 Corporate Tax Rates

(v) Companies, other than those in hotel industry and non-traditional exports -25%
(vi)Companies engaged in non-traditional exports – 8%
(vii) Rural and Community Banks – 8%
(viii) Companies listed on the Ghana Stock Exchange -22%
(ix)Companies engaged in the Hotel Industry -22%
(x) Income of Financial Institutions from a loan to a farming enterprise for use by that
enterprise in the production of its income- 20%
(xi)Income of Financial Institutions from a loan granted to a leasing company for use by that
company for the funding of acquisition of assets for lease -20%

3. Location Incentives
The income tax rate applicable to a company’s chargeable income from a manufacturing
business other than manufacturing business located in Accra or Tema is given in the table below:

Location Rate of Income Tax

(a) Manufacturing business 75% of the rate of

located in regional income tax applicable
capitals of Ghana

(b) Manufacturing business 50% of the rate of

located elsewhere in income tax applicable
Ghana

4. Determining the Chargeable Income and Computation of Tax Liability of a company

Like a sole trader or partnership the accounts of a company are examined and the net profit
adjusted to arrive at the chargeable income. After determining the chargeable income, the
appropriate tax rate is applied to compute the tax liability.

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Example 6.1

Paa Kwasi Company Ltd has been operating as a wholesale and retail business in Accra and the
following is an extract of the profit and loss account for the year ended 31 December, 2019.

GHS GHS

000 000

Gross Profit 200

Less operating expenses:

Mortgage Interest 10

Depreciation 16

Donations 3

Bad Debts 14

Salaries 28

Repairs and Renewals 15

Property Rates 9

Income Tax 27

Loss on Sale of Motor Van 16 138

Net Profit 62

Notes

 Mortgage interest and property rates are in respect of a building used, for private and
business purposes. The ratio of private to business is 1:1
 Donation is made up as follows:
Donation to Tuobodom Santos football club GHS1, 000

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 Donation to National Trust Fund GHS 2,000

 Salaries include GHS500 paid every month to a labourer on MD’S private farm.
 Repairs and Renewals; the written down value of the pool of assets to which the repairs
were made before capitalization was GHS 140,000
 Capital allowance is agreed at GHS 28,500
You are required to compute the tax liability of the company.

Solution 6.1

GHS GHS

000 000

Net profit as per accounts 62

Add Back:

Mortgage Interest 5

Depreciation 16

Donations 1

Salaries 6

Capitalised repairs and renewal 8

Property Rates 4.5

Income tax 27

Loss on sale of motor van 16 83.5

Adjusted Profits 145.5

Less capital Allowance 28.5

Chargeable Income 117

Tax at 25% =25% x GHS 90,000 = GHS 22,500.00

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Other Illustrations

Jonas Kpalito has been operating a trading business “Go Slow” for several years in Ninko
township in the Greater Accra region. He presented the following statements for the year ended
31st December, 2019.

GHC'000 GHC'000

Sales 540,000

Cost of Sales 200,000

Gross Profit 340,000

Discount Received 4,000

344,000

Less:

Management Salaries 54,000

Repairs 48,000

Entertainment 12,000

Donations 10,000

Legal Fees 11,500

Unrealised Exchange Loss 24,000

Bad Debts 24,200

Loss on Sale of Equipment 6,000

Depreciation 47,000

Medical Expenses 64,000

Sundry Expenses 72,000

Advertising 15,000

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 Rent 80,000

Interest on Loan 18,000 485,000

Net Profit (Loss) (141,700)

The following additional information is available to you:

i. Repairs: The WDV of the pool before any capitalization was GHS 260,000
ii. Rent: this was in respect of a building part of which was used for the business. It has been
agreed with the Commissioner that business is occupying 80% of the floor space.
iii. Management Salaries: This is made up as follows:
 Kpalito GHC40,000
 Senior staff GHC12,000
 Kpalito’s first son GHC2,000
iv. Entertainment: This was in connection with an end of year party organized for members
of staff and customers of the firm.
v. Medical expenses: An amount of GHC18,000 was spent on the dependants of members
of staff. The rest represent the medical bills of Kpalito’s family.
vi. Bad Debt GHC’000
 Special provisions 2,000
 General provisions 10,000
 Actual Debts Written-off 12,200
vii. Interest on Loans is in connection with uncollectible staff loans written-off. The staff
concerned are no longer in the employment of the firm.
viii. There are no financial documents evidencing an amount of GHC64,000 included in
Sundry expenses.
ix. Assume Capital allowance of GHC134,000.

Required:

(a) Determine the chargeable income for the 2016 year of assessment.
(b) Calculate the tax liability of Jonas Kpalito for the 2016 year of assessment(20 marks)

Annual Income Tax Bands and Rates for 2015 and 2016

Year Chargeable Rate

Income GH¢ %

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 First 2,592 0.0

Next 1,296 5.0

Next 1,812 10.0

Next 33,180 17.5

Exceeding 38,880 25

Solution

Jonas Kpalito Trading as “Go Slow”

Computation of Chargeable Income 2019(1/1/19 – 31/12/2019)

GHC GHC

Net Profit (Loss) (141,700)

Add:

Capitalized repairs and improvement 35,000

Rent (20% x GHC80,000) 16,000

Management salaries: Kpalito 40,000

Kpalito’s Son 2,000 42,000

Medical expenses 46,000

Bad debts: Gen. Prov. 10,000

Interest on loans 18,000

Sundry expenses 64,000

Donations 10,000

Unrealized exchange loss 24,000

Loss on sale of equipment 6,000

Depreciation 47,000 318,000

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Taxable Business Income 176,300

Less capital allowance 134,000

Chargeable income 42,300

Computation of Tax Liability

First 3456 0% -

Next 1,200 5% 60.00

Next 1,680 10% 168.00

Next 35,964 17.5% 6294.00

Total tax liability 6522.00

VALUE ADDED TAX (VAT)

Value Added Tax was first introduced in the country in March 1995, after passing the VAT bill
into Law (ACT 486). However, due to insufficient public education and misapplication of the
law, the VAT ACT was repealed on 14 th June, the same year. It was again re-introduced in the
year 1998 after the passage of the Value Added Tax Act, 1998 (ACT 546) and the Value Added
Tax Regulations, 1998 (L.I. 1646). This was also repealed and the new Value Added Tax 2013
(Act 870) introduced. VAT as the name implies is the taxation of value added in the production-
distribution chain. In this unit we are going to look at the very important issues of the VAT.

Definition of VAT

In production there is the need to procure inputs from other firms, pass the inputs through a
process and turn out outputs, which are sold for higher prices than the inputs. In passing the
inputs through a process, some value is added to the inputs to turn out the outputs. The value
added, therefore, is the addition made by the firm through its own activity, to the value of the
inputs procured from other firms to turn out the output. From this explanation of value added,
how then do you define value added tax?

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VAT in its simplest term, can be defined as the taxation of the Value Added to the inputs to turn
out outputs. It can also be defined as a tax applied to the costs and profits which a firm incurs in
producing goods and services. VAT is included in the final price of the outputs and it is the
consumer who pays the VAT.

Characteristics of VAT

VAT has the following characteristics which distinguish it from the other taxes.

i. It is a general tax on consumption expenditure

ii. VAT is a tax on the final consumer
iii. VAT is a multi-stage tax, collected in little bits at the various stages in the
production-distribution chain.
iv. At each stage of the productiondistribution chain, VAT is effectively levied on the
“value added” created, and not the full value of the product.
v. VAT though a consumption tax is collected by registered businesses that act as agents
of the VAT authorities at all the points in the production-distribution chain.

Reasons for Introducing VAT in Ghana

1. To improve efficiency and equity in tax collection.

2. To expand the tax base
3. To adopt a uniform basis for collecting the general consumption taxes
4. To control smuggling
5. To raise revenue for development
6. To control inflation
7. To reduce government borrowing

EXPLANATION OF TERMS

Taxable Supply

A taxable supply is any sale of goods or provision of service not specifically exempt or relieved
under the VAT Act 2013 (Act 870) and its subsidiary legislation, the VAT Regulations. Taxable
supplies include exports which under the VAT law are taxed at a rate of zero to permit a full
recovery of input tax by the exporter.

By virtue of the Act, a taxable supply is a supply of goods or services made by a taxable person
for consideration in the course of or as a part of his business activities and include:

(a) The processing of data or supply of information or similar service

(b) The supply of staff

108
 (c) The acceptance of a wager or stake in any form of betting or gaming including
lotteries and gaming machines.
(d) The making of a gift of any taxable goods or taxable service in the course of
business
(e) The letting of goods on hire, leasing or other transfers.
(f) The appropriation of goods for personal use or consumption by the taxable person
or by any other person;
(g) The sale, transfer, assignment, or licensing of patents, copyrights, trademarks,
computer software, and other propriety information and export of non-traditional
products.
(h) Any other disposal of taxable goods or provision of taxable services.

Supply of Goods

A supply of goods means any arrangements under which the owner of the goods parts with or
will part with possession of the goods including provision of goods by sale, batter, lease,
transfer, exchange, gift or similar disposition.

Supply of Services

Supply of Services means any supply, which is not a supply of goods or money and includes:

(a) The performance of service for another person

(b) The making available of any facility or advantage or
(c) Tolerating any situation or refraining from the doing of any activity.
It should be noted, however, that supply of services made by an employee to his employer
because of the employment is not a supply made by the employee.

Taxable Person

The definition of a taxable person includes a sole proprietor, partnership (including husband and
wife partnership), limited company, Government institution and non-profit organizations.

Taxable Value

The amount of VAT payable is the value of the supply multiplied by the tax rate for the
commodity or service. The value of the supply is referred to as the taxable value. In general, the
value of a particular supply depends on what is given in exchange for that supply. This is called
consideration and may be given in money and/or in kind.

EXEMPT SUPPLY

Exempt supplies do not attract any VAT even when sold or supplied by a VAT registered person.
In effect, exempt supplies are considered to fall outside the scope of VAT, therefore traders

109
engaged exclusively in the sale or supply of exempt goods or services are not obliged to register
for VAT irrespective of their turnover.

Since the supply of exempt goods or provision of exempt service is considered by law to be
outside the scope of VAT, dealers in exempt supplies cannot recover any input tax that may have
been paid on inputs relating to exempt supplies. In other words, where taxable inputs are used in
the production of exempt supplies, the firm can only teat the input tax as cost and pass it on to
the consumer as part of the selling price. The price of an exempt supply includes any VAT that
may have been paid on the inputs.

Goods and Services Exempt from VAT

The following Goods and services are exempt supplies and not subject to VAT.

Live animals
This classification includes all live animals such as cattle, sheep, goats, swine and poultry, but
excludes horses, asses, mules, hinnies and similar exotic animals.

Goods for the disabled

Articles designed exclusively for use by the disabled.

Educational Items / Services

The supply of educational services at any level by an educational establishment approved by the
Minister for Education. Laboratory equipment for educational purposes and library equipment.

Medical supplies and services – Pharmaceuticals

Medical services, essential drugs as listed under Chapter 30 of the ‘HS Code’ produced or
supplied by retail in Ghana, specified active ingredients for essential drugs, and selected
imported special drugs determined by the Minister for Health and approved by Parliament.

Transportation
Includes transportation by bus and similar vehicles, train, boat and air.

Machinery
Machinery, apparatus, appliances and parts thereof, designed for use in
a) agriculture, veterinary, fishing and horticulture
b) industry
c) mining (as specified in the mining list) and dredging; and
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d) railway and tramway.

Crude oil and hydrocarbon products

Petrol, diesel, liquefied petroleum gas, kerosene and residual fuel oil.

Land, Building and Construction

Land and buildings; the granting, assignment or surrender of an interest in land or buildings; the
right to occupy land or buildings excluding hotel accommodation, warehousing, storage and
similar occupancy incidental to the provision of the related services. Civil engineering works.
This exemption excludes professional services such as architectural or surveying (i.e. these are
taxable services).

Financial Services
Provision of insurance; issue, transfer, receipt of, or dealing with money (including foreign
exchange) or any note or order of payment of money; provision of credit; operation of any bank
(or similar institution) account.
This exemption excludes professional advice such as accountancy, investment and legal services
(i.e. these are taxable services).

Animals, livestock, poultry and fish imported for breeding purposes

Live asses, mules, and hinnies, live bovine animals, live swine; live sheep and goats; live marine
mammals, live fish and aquatic invertebrates.

Animal product in its raw state produced in Ghana

Edible meat and offal of the animals, livestock and poultry earlier listed, provided any processing
is restricted to salting, smoking, freezing or similar simple processes of preparation or
preservation.
This exemption excludes pate, fatty livers of geese and ducks and similar products (i.e. these are
taxable).
NOTE: These items are considered to be in their raw state even if they have undergone simple
processes of preparation or preservation such as freezing, chilling, drying, salting, smoking,
stripping or polishing.

Agricultural and aquatic food product in its raw state produced in Ghana.
Fish, crustaceans and molluscs, vegetables, fruits, nuts, coffee, cocoa, shea butter, maize,
sorghum, millet, tubers, guinea corn and rice.
This exemption excludes ornamental fish (i.e. the supply of ornamental fish is taxable).

Seeds, bulbs, rooting, and other forms of propagation;

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Of edible fruits, nuts, cereals, tubers and vegetables.

Agricultural inputs
Chemicals including all forms of fertilizers, acaricides, fungicides, nematicides, growth
regulators, pesticides, veterinary drugs and vaccines, feed and feed ingredient.

Fishing equipment
Boats, nets, floats, twines, hooks and other fishing gear as well as imported inputs for fishing
nets and twines.

Water
Supply of water. The exemption excludes packaged and distilled water (i.e. they are taxable).

Electricity
Domestic use of electricity up to a specified consumption level prescribed in regulations by the
Minister (i.e. all commercial use of electricity and domestic consumption above the limit
specified is taxable).

Printed matter (books and newspapers)

These must be fully printed or produced by any duplicating process. It includes atlases, books,
charts, maps and music.
The exemption excludes imported newspapers, plans and drawings, scientific and technical
works, periodicals, magazines, price lists, greeting cards, almanacs, calendars and stationery.
These are taxable.

Transfer of a Going Concern

The supply of goods as part of the transfer of a business as a going concern by one taxable
person to another taxable person.

Postal Services
Supply of postage stamps (i.e. other commercial services rendered by postal agencies are
taxable).
VAT/NHIL is not chargeable on the sale of exempt supplies but at the same time no credit may
be allowed to the business making exempt sales for the VAT/NHIL paid on purchases or
expenses applied for the purpose of the exempt sales – S. 24(3). The business can however
recover these input taxes by including it in the cost of production and distribution. It must be
noted that businesses which make only exempt supplies cannot register for VAT.

Zero-Rated Supplies

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In contrast with exemption, zero-rating ensures a complete relief of VAT on the target product.

A transaction is zero-rated when the supply, though taxable, the rate of tax is zero, resulting in no
tax being charged to the buyer. Since zero-rated supplies are taxable any input tax incurred in
relation to them is recoverable.

Unlike exempt supply, zero-rated supply is wholly within the VAT system and the registered
trader making zero-rated supplies is required to submit returns to the VAT service.

From the zero tax on sales, the trader dealing exclusively in zero-rated supplies must deduct the
input tax, ending up with a claim on the VAT service equal to the VAT paid on inputs.

Under VAT ACT, 2103(ACT 870) the following supplies destined for consumption outside the
territorial boundaries of Ghana are zero-rated

(a) Exports of taxable goods and services

(b) Goods shipped as stores on vessels and aircrafts leaving the territories of Ghana.

The Value Added Tax Amendment Act, 2006 (Act 546) added the following to the zero-rated
list:

(c) Locally produced Textbooks and Exercise books

(d) Locally manufactured Agricultural Machinery and other Agricultural Implement or tools.

Mixed and Composite Supplies

Sometimes different goods and services are invoiced together at an inclusive price. Such is
called a mixed supply. Some items may be chargeable at standard rate, some at zero rate and
others exempt. When this happens the supplier must account for tax separately on the standard
rated and zero rated items by splitting the total amount payable in proportion to the different
items and applying the appropriate rate.

How can this be done?

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This can be done either by using the cost to the supplier of each item or by using the open market
value of each item. If a supply, however, cannot be split into different components then it is a
composite supply to which one VAT rate must be applied.

Tax Invoice

VAT registered businesses need to charge the tax on all sales that are taxable under the VAT
Law. The VAT registered person is required by VAT law to issue a tax invoice in duplicate for
every taxable supply made. The original is given to the buyer and the duplicate retained in the
booklet.

The tax invoice is a document showing information on the supply of taxable goods or taxable
service to another person. The tax invoice is needed to reclaim input tax.

The tax invoice must show the following information;

(a) The supplying taxable person’s name, address and VAT registration number
(b) The time of supply
(c) The number of the invoice taken from a consecutive series
(d) The customer’s name or business name and VAT registration number if a taxable
person
(e) A description of the goods or services supplied including the quantity of the goods or
the extent of the services supplied
(f) The type of transaction by reference to the following:
(i) sale
(ii) hire purchase, hire, lease or rental
(iii) exchange
(iv) goods and services supplied from the customer’s own supplies
(g) The tax exclusive charge for each description of goods or services supplied
(h) The rate of tax
(i) The total charge on the invoice, exclusive to tax
(j) The rate of any discount
(k) The total tax charge and
(l) The total charge inclusive of the tax

Registration as Taxable Person

All persons who make taxable supplies of goods and/or services are required to register as
taxable persons.
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 (1) Except as otherwise provided in this Act, a person who is engaged in a taxable activity and is
not registered for tax purposes shall register if
(a) at the end of any period of twelve or less months, the person made, during that period,
taxable supplies exceeding one hundred and twenty thousand Ghana Cedis; or

(b) at the end of any month, there are reasonable grounds to expect that that person will make
taxable supplies in the next twelve or less months exceeding one hundred and twenty thousand
Ghana Cedis.

(2) Despite subsection (1), a person shall register if

(a) at the end of any period of three months, the person made, during that period, taxable
supplies exceeding thirty thousand Ghana Cedis; and

(b) there are reasonable grounds to expect that the total value of taxable supplies made by that
person during that period and to be made during the next consecutive nine months will exceed
one hundred and twenty thousand Ghana Cedis.

(3) For the purpose of determining the thresholds under subsections (1) and (2), the
Commissioner-General may have regard to the value of taxable supplies made by another person,
if that other person is a related person or the taxable person and that other person are acting in
concert in making the taxable supplies.

(4) A person who is required to register under this Act shall apply for Value Added Tax
registration in the form and manner prescribed by the Commissioner-General.

(5) A person required to register under subsection (1) shall file the application for registration
within thirty days after the end of (a) the period under paragraph (a) of subsection (1); or (b) the
month under paragraph (b) of subsection (1).

(6) A person required to register under paragraph (a) of subsection (2) shall file the application
for registration within thirty days after the three-month period.

Voluntary Registration

A retailer of goods may apply to be voluntarily registered, if he or she so wishes, even when his
or her annual taxable turnover falls below the registration threshold. This is usually done to
enable such a business to take advantage of the benefit of input tax credits.

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CALCULATION OF VAT

Input and Output VAT

Every registered person is required to do three things:

(i) Pay VAT (called input tax) on all taxable purchases of goods and services and obtain
tax receipts called tax invoice for them.

(ii) Charge VAT (called output tax) on all taxable sales of goods and services and issue tax
invoice for them.

(iii) At the end of the month deduct the total input tax from the total output tax and remit
only the difference to VAT office.

Input Tax is the VAT charged by Suppliers on Purchases made by Customers and include

(a) Goods and services supplied

(b) Goods imported

(c) Goods removed from a wholesale

It also includes the VAT on things like

(i) Office equipment for a business

(ii) Telephone bills for business purposes
(iii) Payments for services for a business, e.g. accountants and legal fees

Output Tax

Output tax is the VAT a registered person charges his customers when he makes taxable supplies
of goods and services at the rate specified by law which is currently 12.5%.

Example 1

Koo Nimo purchased raw materials at GHC20,000 and manufactured a product K, which is sold
at GHC30,000. Compute the input and output VAT taking the rate to be 12.5%. How much will
be paid to the VAT office?

Solution 1 GHC

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(a) Input 20,000

VAT 2,500

(b) Output 30,000

VAT 3,750

VAT to be paid to GRA office = Output tax - input tax

= 3,750- 2,500

= GHC1,250

The VAT to be paid to GRA office can also be calculated by applying the rate to the value added
by Koo Nimo.

GHC

Sales 30,000

Purchases 20,000

Value Added 10,000

: . VAT @ 12.5% = 12.5% x GH10,000

= GHC1,250

The VAT mechanism

The following formula can be deduced from

Example 1

VAT = t (S –P) = t s – t p

= tax on sale - tax on Inputs

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 =12.5% x GHC30,0000 – 12.5% x GHC20,000

= GHC1,250

Example 2

An importer imports raw material worth GHC150,000 sells the raw materials to a manufacturer
at GHC280,000. The manufacturer converts the raw materials into finished goods and sells to a
distributor at GHC420,000. The distributor in turn sold the finished goods to a registered retailer
at GHC600,000. The registered retailer sold to the final consumer at GHC750,000.

Compute the VAT payable at each stage of the production – distribution chain.

Assume VAT rate of 12.5%

Solution 2

Stage 1

Importer Value VAT

Imports 150,000 18750

Value Added 130,000

Sales to manufacturer 280,000 35,000

Stage 2

Manufacturer

Purchases from importer 280,000 35,000

Value Added 140,000

Sales to distributor 420,000 52,500

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Stage 3

Distributor Value VAT

Purchases from manufacturer 420,000 52,500

Value Added 180,000

Sales to registered retailer 600,000 75,000

Stage 4

Retailer

Purchases from distributor 600,000 75,000

Value Added 150,000

Sales to final consumer 750,000 93,750

VAT Treatment of Amounts Calculated

Stage 1

VAT on Sales (output tax) 35,000

Less: VAT reclaimed on purchases (imports) 18,750

Payment to GRA office 16,250

Stage 2

VAT on sales (output tax) 52500

Less VAT on purchases 35,000

Payment to GRA office 17,500

Stage 3

VAT on sales (output tax) 75,000

Less VAT on purchases 52,500

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Payment to GRA office 22,500

Stage 4

VAT on sales (output tax) 93,750

Less: VAT on purchases 75,000

Payment to GRA office 18,750

Illustration 1

(a) The following are the transactions that took place in the month of July 2019 in respect of
Koo Badu, a VAT registered trader:
 Purchased 250 bags of cement @ GHC32.00 each
 Sold 30 packets of roofing sheets @ GHC720.00 each
 Purchased 150 packets of roofing sheets @ GHC610.00 each
 Sold 210 bags of cement @ GHC35.00 each
 Purchased 420 pieces of iron rods @ GHC22.00 each
 Purchased 650 bags of rice @ GHC150.00 each
 Sold 135 packets of roofing sheets @ GHC735.00 each
 Sold 380 pieces of iron rods @ GHC26.00 each
 Sold 600 bags of rice @ GHC168.00 each

You are required to compute the :

(i) input VAT

(ii) output VAT

(ii) the net tax payable by Koo Badu for the month of July, 2019

SOLUTION TO ILLUSTRATION 1

Descriptions Quantity Price/Unit Amount VAT

(GHȻ)
(GHȻ) (GHȻ)

Cement 250 bags 32.00 8,000.00 1,000.00

Roofing Sheets 150 pkts 610.00 91,500.00 11,438.00

Iron Rods 420 22.00 9,240.00 1,155.00

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 Rice 650 bags 150.00 97,500.00 12,188.00

Total Input VAT 25,781.00

Descriptions Quantity Price/Unit Amount VAT

(GHȻ) (GHȻ) (GHȻ)

Roofing Sheets 30 pkts 720.00 21,600.00 2,700.00

Cement 210 bags 35.00 7,350.00 919.00

Roofing Sheets 135 pkts 735.00 99,225.00 12,403.00

Iron Rods 380 26.00 9,880.00 1,235.00

Rice 600 bags 168.00 100,800.00 12,600.00

Total Output VAT 29,857.00

Deductible Input Tax Credit for Mixed, Taxable and Exempt Supply

Where a taxable person supplies both taxable and exempt goods, the input tax to be reclaimed is
calculated as follows (Standard Method):

Value of Taxable Supplies(Excluding VAT )

× Input Tax
Value of Total Supplies( Excluding VAT )

Value of Total Supplies = Taxable supplies + Exempt Supplies

It must be noted that, this is for a case where the taxable person is unable to directly attribute the
input tax to the taxable supplies.

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Illustration 2

The purchases and supplies details of “At Long Last” Ventures for the month of August 2019
showed the following:

GHC

Input tax on exempt supplies 4,500

Value of relief supplies 8,000

Input tax on taxable supplies 6,000

Input tax that cannot be attributed

directly to supplies 3,000

Value of exempt supplies 45,000

Value of taxable supplies

(including 12.5% of VAT) 101,250

You are required to compute input tax claimable by “At Long Last” Ventures.

Solution to Illustration 2

Value of Taxable Supplies(Excluding VAT )

Deductible input tax = × Input Tax
Value of Total Supplies(Excluding VAT )

Value of taxable supplies (including VAT) 101,250.00

Value of taxable supplies (excluding VAT) =100 x 101250

112.50

= GHC 90,000.00

Therefore deductible input tax = GHC 90,000.00 x 3,000.00

90,000.00 +45,000.00

= GHC 2,000.00

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Total Input Tax Claimable GHC

Input tax on taxable supplies 6,000.00

Input tax on common supplies 2,000.00

Total 8,000.00

Illustration 3

The following information relate to Kofi Asuma a VAT registered trader for the month of May,
2020. He deals in both taxable and exempt supplies:

GHC
Exempt Supplies 250,000
Input tax on taxable supplies 38,150
Input tax on exempt supplies 30,250
Input tax on common supplies 25,000
Value of taxable supplies
(including 12.5% VAT) 103,500

You are required to compute the input tax claimable for the month of May, 2020

Solution to Illustration 3

Value of taxable supplies (including VAT) 103,500.00

Value of taxable supplies (excluding VAT) = 100 x 103500.00

112.50

= GHC 920,000.00

: . Input tax claimable on common supplies = 920,000.00 x 25,000.00

920,000.00 + 250,000.00

= GHC 19,658.00

Total input tax claimable GHC

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Input tax on taxable supplies 38,150.00

Input tax on common supplies 19,658.00

Total 57,808.00

Assignment 1

The following information was extracted from the VAT Account and other business
records/documents of Kofi Kwakye Enterprise, a VAT registered person, for the month
of September 2019.

The enterprise makes both taxable and exempt supplies. The enterprise sells on both cash
and credit basis.

Purchases/Expenses GHC

(i) Cost of VAT invoice booklets bought 600

(ii) Purchases relating solely to exempt supplies (VAT inclusive) 28,750
(iii) Expenses for which no VAT invoices received 18,000
(iv) Purchases relating solely to relief supplies (VAT inclusive) 23,000
(v) Purchases relating solely to taxable supplies on credit
(VAT inclusive) 34,500
(vi) Purchases relating to entire business (VAT inclusive) 46,000

Supplies Made

(i). VAT-inclusive sales of taxable supplies on credit 41,400

(ii). VAT-exclusive cash sales of taxable supplies 48,000
(iii). Cash sales of exempt supplies 20,000
(iv). Amount received for relief supplies made
(necessary documents received from customers) 15,000

You are required to compute the following for the purposes of completing Kofi Kwakye
Enterprise’s VAT return for September, 2019 using a rate of 12.5%:

A. Total output tax

B. Total deductible tax
C. Net payment or Net credit due
Relief Supply

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The VAT Act provides relief from the tax on a taxable supply to the following individuals,
organizations and businesses specified in schedule 3 to Act 546.

A. The President of the Republic of Ghana

B. For the official use of any commonwealth or foreign embassy, mission or consulate
(relief applies only to VAT on imported goods.)
C. For the use of a permanent member of the Diplomatic Service of any commonwealth or
foreign country, exempted by Parliament from the payment of customs duties (relief
applies to VAT on imported goods.)
D. For the use of an international agency or technical assistance scheme where the terms of
the agreement made with the government include exemption from domestic taxes.
E. Emergency relief approved by Parliament
F. VAT-registered manufacturers for raw materials at importation, subject to the available
conditions.

Assignment 2

The information below relates to the records of Fakye Enterprise, a VAT registered trader, for
the month of June, 2019. You are required to calculate the amount of VAT due to the VAT
service or due to be refunded to the trader, using an applicable rate of 12.5%

Items Purchased Value (GHC)

Imported leather 15,000

Glue 100

Cardboard Sheet 15,000

Cotton Bales 10,000

Dye 2,500

Brown Paper 15,000

Items Sold

Bags 5,000

Complimentary Cards 250

Diaries 20,000
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Wax Print (Exported to Nigeria) 10,000

Seminar Folders 25,000

Additional Information

 GHC2,500 Diaries and GHC1,000 Bags were supplied to the President.

 GHC50 glue and GHC5,000 cardboard sheets were purchased from petty traders not
registered with the VAT Service

Conditions for a Refund of VAT paid on Business Inputs

The following conditions have to be satisfied before a registered VAT trader can get a refund of
VAT paid on his/her inputs for business purposes:

(a) The business must be registered for VAT, that is, he/she must be a registered VAT trader.
(b) The business must submit returns for all months for which it has been in operation
(c) The business must complete and submit a prescribed VAT claim form for the refund of
the VAT paid to the VAT service
(d) The business must be engaged in the export of 25% or more of its output.
(e) Total export proceeds should have been repatriated by importer’s bank to exporter’s
authorized dealer banks in Ghana
(f) The VAT paid should qualify as a deductible input VAT
(g) The input VAT paid should exceed the output VAT paid.

OFFENCES AND PENALTIES RELATING TO VAT

Offences Relating to Officers

(a) Offence: any officer who seeks directly or indirectly any payment or reward commits an
offence.

Penalty: 3 x the value of tax or 5 years imprisonment or both plus dismissal from VAT
service

(b) Offence: Any person who directly or indirectly offers to any officer
any part or other reward to induce an officer not to perform

his duties commits an offence.

Penalty: 3 x the value of tax or 5 years imprisonment or both.

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(c) Offence: Any person who impersonates an officer of the service in any way commits an
offence.

Penalty: The person is liable on summary conviction to imprisonment for a term not less
than 6 months and not exceeding 3 years.

Other Offences and Penalties

(a) Offence: Failure to register

Penalty: (i) Where the failure is deliberate or reckless, the person shall be liable on
summary conviction to a fine not exceeding ¢10million or imprisonment for a
term not exceeding 5 years or to both

(ii) Where the failure is for any other reason, to a fine not exceeding ¢5million
or imprisonment for a term not exceeding 1 year or to both.

(b) Offence: Failure to issue tax invoice as required under the VAT Act for goods supplied or
services rendered is an offence.

Penalty: Liable on summary conviction to a fine not exceeding ¢10 million or

imprisonment for a term not exceeding 5 years or to both.

(c) Offence: A person who in any matter relating to the tax (i) makes a statement to an officer
of the service which is false or misleading in any material particular or (ii)
omits from a statement made to the officer any matter or thing without which
the statement is misleading in any material particular commits an offence.

Penalty: (i) Where the statement or omission was made knowingly or recklessly the
person shall be liable on summary conviction to a fine not exceeding ¢10
million or imprisonment for a term not exceeding 5 years or to both; and (ii) in
any other case, be liable on conviction to a fine not exceeding ¢5 million or
imprisonment for a term not exceeding 1 year.

(d) Offence: Falsification or alteration of documents. Any person, who falsifies, forges,
alters any document in relation to the tax commits an offence

Penalty: Liable on summary conviction to a minimum of ¢2 million and not exceeding

¢10million or imprisonment for a term not exceeding 5 years or to both and
any goods involved in the commission of the offence shall be forfeited to the
state.

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(e) Offence: Evasion of tax payment. Any person who tries to evade the payment of tax in
any form commits on offence.

Penalty: Liable on summary conviction to a fine not exceeding 3 times the amount of tax
involved or to imprisonment for a term not exceeding 5 years or to both.

(f) Offence: Failure to maintain proper records.

Any person who fails to maintain proper records as required under the law
commits an offence.

Penalty: Liable on summary conviction to

(i) a fine not exceeding ¢10 million or imprisonment for a term not
exceeding 5 years or to both where the failure was deliberate or
reckless; or
(ii) in any other case, to a fine not exceeding 1 year or to both.
(g) Offence: Obstruction of an officer of the VAT service. Any person who obstructs the
commissioner or an officer authorized by the commissioner in the performance
of his duties under the Act; assaults or refuses to grant access to his premises to
the officer in the performance of his duties commits an offence.

Penalty: Liable on summary conviction to a fine of not less than ¢500,000 and not
exceeding ¢5 million or imprisonment for a term not exceeding 1 year or to
both

(b) Offence: Failure to Submit Returns on Due date. A taxable person who without
justification fails to submit to the commissioner his tax return on the due date
commits an offence.

Penalty: Liable to a pecuniary penalty of ¢1 million and a further penalty of ¢5000 for
each day that the return is not submitted.

Assignment 3

The under-mentioned figures represent extracts from the books of Respect Enterprise, a VAT
registered trader, for the month of May, 2020.

Purchases Value (GHC)

Leather (imported) 15,000

Paper 15,000

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 Glue 200

Cardboard sheet 15,000

Sales

Leather Handbags 10,000

Children’s Books 10,000

Newsprint 45,000

Diaries 25,000

Newsprint (Export) 10,000

Calculate the amount of VAT due to the VAT Service or due to be refunded to the trader,
assuming a VAT rate of 12.5%

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