Strategic Tax Planning in Ghana, Series

Part One: Income Taxes From Employment plus comparison from across the continent

Paying tax in Africa

When/How it started

Ghana’s Income tax system can be traced to the poll tax ordinance passed in 1852 until it became “outmoded” in 1890s. The then tax rate stood at six pence in pound sterling of all incomes but did not last long as a result of serious world-wide economic depression, which made life unbearable. The word tax is from a Latin word “taxo”, defined as a mandatory financial charge or some other type of levy imposed upon an individual or other legal entity by a governmental organization in order to fund various public expenditures (Wikipedia.com). The current tax policy of the Ghana has gone through series of transformation until 2009 when the GRA was established under the Ghana Revenue Authority Act, 2009 (Act 791). The Act was aimed at improving tax payer service and processes in Ghana tax system and custom offices as well as ensuring a high level of compliance by the taxpayer.

What is Income?

The first problem faced in Income Tax laws is the definition of “Income” as it is not exclusively defined in the Income Tax Act, 2015 (Act 896). By convention and practice, income has been regarded as periodic inflow of monetary value with emphasis on regularity. The tax is then calculated on the chargeable income from employment, business and investment. The chargeable income is the sum of the basic salary (usually referred to the as the gross salary but not necessarily the same), allowances, bonuses and overtime and other cash and non-cash benefits, income from business (profit) and income from investment less personal reliefs as allowed by section 15 of the Income Tax Act.

Are you still Interested? Let’s Clarify some stuff.

Bonus: For a junior qualifying employee, (if your annual salary is not more than GHS 18,000 per annum) bonus paid to you is charged at a final withholding tax of 5% if it is not more than 15% of your basic salary the excess is added to income and taxed on the graduated system. If you are not a junior qualifying employee, the full bonus is added to income and taxed

Overtime: If your overtime is not more than 50% of your basic salary, it is taxed at a final withholding tax of 5%. However, if the overtime makes more than 50%, the excess is taxed at 10%

Non-Cash Benefits: This is generally the provision of vehicle and or accommodation to employees. The question is how do we attach monetary value this items that cash is not placed in the hands of the taxpayer? The tax schedule helps with this. Per the schedule, if you get a vehicle with fuel and driver, 12.5% of Total Cash Emoluments is added to your income to represent this. Vehicle with fuel, vehicle only and fuel only at 10% and 5% respectively. For a furnished accommodation, accommodation only, furniture only and shared accommodation the rates are 10%, 7.5% and 2.5% respectively.

What are these Personal Reliefs?

Perhaps the most important thing we should know while filing returns. Employees who apply for and qualify for these reliefs may be granted these reliefs upfront on a monthly basis. The figures provided below reflect the amendment of the Act as at 28th December 2019 to take effect on 1st January 2020

• Dependent Spouse or Dependent Children Relief: An individual who provides the basic necessities of life to a dependent spouse or two children (not necessarily biological) is entitled to personal relief of GHS 1,200. This is deducted from the assessible income. This can only be claimed by one person in relation same spouse/children.

• Disability Relief: A disabled individual verified by the Department of Social Welfare as such is entitled to a relief of 25% of assessable income from employment and business.

• Old Age: An induvial over 60 years of age is entitled to personal relief of GHS 1,500

• Child Education Relief: this will be granted to an induvial who sponsors the education of not more than three wards in a recognized educational institution in Ghana. The relief is GHS 600 per child. This can also be claimed by one person in relation to the same children.

• Aged Dependent Relative: An individual that provides the basic necessities of life to a person is not less than 60 years of age is entitled to a personal relief of GHS 1000. This relates to not more than two dependents and can only be claimed by one person in relation to the same dependents.

• SNITT Contribution: This is probably the most basic relief we know about. The 5.5% of your basic salary that is paid to SNITT is granted as an upfront relief

To drive the point home, these reliefs are deducted from your assessable income to reduce your chargeable income.

Have you learnt a thing or two? How is Tax Calculated?

In our tax system, the tax payable is calculated on a graduated system for resident individuals. This means that there is not definitive tax rate for income rather a bracket ranging from 0 to 30%.

How is this better?

Say you earn a chargeable income of GHS 12000 a year, in fixed rate system of 25%, your income tax would be GHS 3,000. However, in the graduated system as amended on 1st January 2020, you tax liability will be GHS 2,052 if your income does not exceed the maximum in the bracket.

So, what is this Graduated System?

Below is the tax schedule taking effect from January 1 2020 as seen on the KMPG Tax Flash Alert. You can also assess the sheet here to aid in the calculations.

What About Non-Resident Individuals?

For the purposes of taxation, how is an individual defined as a resident of Ghana?

• An individual is deemed resident for a year of assessment if that individual is a citizen of Ghana except when you have a permanent resident outside Ghana.

Present in Ghana for a period, or periods amounting in total to 183 days or more in any 12-month period that commences or ends during the year of assessment.

An employee or official of the Ghana government on posting abroad.

A citizen who is temporarily absent from Ghana for not more than 365 continuous days (where the individual has a permanent home in Ghana).

An individual who does not meet these conditions is deemed non-resident and taxed at 25% flat rate

Remitting Income Tax

The employer is required to compute the income tax on any employment income and remit it to the GRA within the first 15 days of the ensuing month in which the payment was made. At the year-end, the employer is required to do an annual reconciliation to determine whether there are any differences. Where there is a short fall, the employer is required to pay the difference within 15 days after the end of the year (that is on or before 15 January). Failure of the employer to settle the balance due by 15

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