January 5, 2016Jerome Kuseh, CA

On withholding taxes and tax compliance

tax calc

Happy new year to all readers of CediTalk. A lot of discussions are going on about the new Tax Act (download here) especially with regards to withholding taxes (WHT). And I want to share a few quick thoughts.

What are Withholding Taxes (WHT)?

WHTs are taxes that are charged at source. For example, if you were to receive GH¢10,000 for a service you rendered, a WHT of 15% would mean you will receive GH¢8,500 from the person and then the person is required to pay GH¢1,500 to the tax authorities on your behalf. The most popular example is PAYE, where your employer withholds taxes from your salary and pays same to the tax authority.

A WHT can be final or on account. Where it is on account, it means the tax withheld will be subtracted from your total tax obligations at the end of the period. So if you owe GH¢20,000 but paid WHT of GH¢1,500 during the period, your tax payable is GH¢18,500. Where it is final, then it is not considered at all in reaching your tax burden for the period.

Quick facts on new WHTs

• Withholding tax rate on services for residents is now 15%.

• Reduction on withholding rate on goods from 5% to 3%.

• Introduction of 5% withholding rate on the provision of any works.

• Lottery winnings are subject to 5% final withholding tax.

• Dividend paid in petroleum operations is subject to a final withholding tax of 8%.

• Subcontractors that perform works or services for or in connection with a petroleum agreement shall be liable to withholding tax of 15%. The 15% is a final tax for a non- resident.

• A resident person who purchases unprocessed precious minerals located in the country or won from the country shall withhold tax at the rate of 10%.

• A resident person shall withhold tax at 1% where that person pays interest to individuals.

• A withholding agent is required to prepare and serve on the person paying the tax a withholding certificate in the prescribed form.

Increase in the threshold for withholding tax from GHC 500 to GHC 2,000 for supply of goods, works and services.

Source: gra.gov.gh

Thoughts

Government reversed its decision to levy a 1% charge on all investment income including treasury bills. My view is that in the long run, we need to tax investment making sure that it is deducted from the tax burden of people paying PAYE and other income tax. It is regressive for people with capital enough to live off investment returns to effectively pay no tax while people with only their labour to offer pay more tax. It has impacts for inequality. I am speaking on principle only as I have done no research on the sources of the funds for the investments that will be taxed or the impact on investment.

As far as the WHT on services go, I feel it is too high even with the raise of the threshold (minimum amount that will attract WHT) to GH¢2,000. I hope there’s enough discussions with stakeholders to arrive at a lower rate with the encouragement of self-assessment and compliance.

Wider View

There’s no escaping it. Ghana has to improve revenue collection if it is to stop running large deficits. Collapsing commodity prices and rising cost of loans is making tax reform more and more important. This however should not lead to a myopic levying of tax on every economic activity. We need discussions on fairness, ending tax exemptions, tax effectiveness, market distortions and widening the tax base. We need to make public financial management more effective (although I am a skeptic on any policy which makes this vague thing a cornerstone) and we need much better communication of tax policies and the reasoning behind them.

34 comments

  11. “It is regressive for people with capital enough to live off investment returns to effectively pay no tax while people with only their labour to offer pay more tax. It has impacts for inequality.”

    Are you kidding me? Are you freaking kidding me? Let’s use a T-Bill as an example. I lend my hard earned cedis to the gov and they repay me with interest. You are saying it’s regressive for me to pay no tax AFTER lending my money to the government. Are you kidding me? Are investments solely the prerogative of ‘rich’ people. Your classist views, which you are entitled to, don’t sit well with me

    Reply

  12. “It is regressive for people with capital enough to live off investment returns to effectively pay no tax while people with only their labour to offer pay more tax. It has impacts for inequality.”

    Are you kidding me? Are you freaking kidding me? Let’s use a T-Bill as an example. I lend my hard earned cedis to the gov and they repay me with interest. You are saying it’s regressive for me to pay no tax AFTER lending my money to the government. Are you kidding me? Are investments solely the prerogative of ‘rich’ people. Your classist views, which you are entitled to, don’t sit well with me

    Reply

    • It’s a withholding tax, which means it’ll be deducted from your tax burden if you’ve already paid tax on the income with which you bought the t-bills with. However, if you’ve not paid any tax on that income, it should be taxed. The part you’ve quoted is a general statement which is true. The rich own more capital than the poor. So a tax system which taxes more of labour income and less of capital income is regressive i.e. there’s a larger burden on the poor than the rich. That contributes to inequality. If wanting the rich to pay more tax than the poor doesn’t sit well with you then I’m not the one being classist.

      Reply

  19. Hello Jerome, pls this 5% withholding tax which is currently reduced to 3%; is it applicable to stock (Pharmacies)? As in, am with a pharmacy ( limited liability company) do we have to withhold 3% when ever our suppliers supply us with goods of ghc2000.00 and above?

    Reply

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