Evolution of Taxation in Ghana

The objective of this chapter is to provide an overview of the tax administration challenges within wa municipality of the upper west region of Ghana. This is to acknowledge what has been done in the past and to facilitate understanding of the analysis with presented in the subsequent chapters Taxation was introduced in Ghana in the year 1946 during the colonial rule era. Since its introduction, Ghana has depend mainly on taxation for it revenue needs for development. Various governments has kept in place a robust tax administration system to manage, control and enhance compliance of firms, corporate bodies and individuals within the country in paying their tax.

The introduction of tax systems aim at mobilizing the needed revenue that governments want for its development.

Income tax was introduced in Ghana when the poll tax ordinance was passed within the period of 1852 and 1892. It was however abolished when the poll tax became outdated. Sir Radford Stanley, the then governor of Gold Coast proposed the imposition of income tax at the rate of six pence in pound sterling of all incomes.

The new tax did not last long as a result of serious worldwide economic depression, which made life unbearable. Tax collection was first presented in Ghana, the then Gold Coast, in September 1943 by the British colonial government when World War II was seething.  Before this few endeavors had been made, for instance, in April 1852, under the then Governor Major Hill, the survey charge mandate was passed to fund-raise to back the expanded expense of British organization, Abdallah, (2006).

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The first Income Tax Law was the Income Tax Ordinance, 1943. This Ordinance was displayed to a huge degree on the general standards underlying the Income Tax Act then enforce in the United Kingdom. It forced the taxes largely on earnings having its source in Ghana so outside source salary was not obligated except if it was dispatched in Ghana. One characteristic element of this mandate was the various individual reliefs and conclusions that it contained. From that point forward, the Income Tax Law has seen a few alterations in finalizing the current Internal Revenue Act 2000. The tax policy of the government went through series of transformations until 2009 when the GRA was established under the Ghana Revenue Authority Act, 2009.

The Act was given presidential assent on December 31, 2009. The Act was aimed at improving tax payer service and progress in Ghana tax system and custom offices as well as ensuring a high level of compliance by the taxpayer. P.E. Taylor defined tax as “a compulsory payment to government without expectation of direct return in benefit to the tax payer is known”. The dictionary of recent economic defined tax as “compulsory levies on the private individuals and organs tons made by governments to boost revenue to finance the expense on public goods and services and to control the volume of private expenditure in the country”. According to Cambridge Dictionary, tax is “money paid to the government that is based on your income or the cost of goods or services you have bought”. Collins English dictionary defines tax “as an enforced financial contribution levied via governments in order to generate revenue, and it is imposed on the income or assets of persons or organizations”.

Types of tax

Broadly, there are two types of tax. They include direct and indirect tax. Direct tax: because the name suggests, are taxes that are directly paid to the govt by the taxpayer. It is a tax applied on individuals and organizations directly by the govt . A direct tax is one that can’t be shifted by the taxpayer to somebody else . Direct tax refers to tax levies imposed on specific group of people or organizations, which are collected, deducted or paid directly to the tax authority. Examples of direct tax are: income tax, corporation tax, wealth tax, capital gains, estate duty and gift tax.

Indirect tax: is a tax that is applied on the manufacture or sale of goods and services produced. This type of taxes are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods and services and passes on the total amount to the final consumer or end-user. Examples of indirect tax includes, value-added tax (VAT), excise duty and custom duty.

Types of direct tax

Income Tax is a form tax charged on an individual’s income from employment, business and investment. Persons such as employees, self-employed, individuals in partnership, company’s owners and directors of companies and trustees and beneficiaries of a trust are all charged tax on income earned. (GRA, 2020)

The main types of Income Tax are:

Pay As You Earn (PAYE)

This is a tax deducted from employees’ income and is paid by an employer on behalf of the employee. This tax is charged on all income of persons in employment, whether it is received in cash or in kind. A monthly or annually PAYE return must be filed by the employer on behalf of employees on or before the fifteenth day of the month following the month in which the deduction was made.

Personal Income Tax (PIT)

This is a tax charged on a person total income (income from employment, business and investment). An individual must pay Income Tax if he or she is a sole proprietor or a person in partnership and you earn income above Gh¢ 261 per month.

Corporate Income Tax (CIT)

This is a tax levied on a company’s total income sources at the end of the company’s accounting period or income year. Company’s payment of tax on business and investment income known as gains and profit. This income does not include expenses made during obtaining the income.

Withholding Tax (WHT)

Is a tax which is taken at source by a withholding agent when making payment to another person and accounted for later to the GRA. A registered partnership or company and other businesses that make payment to a different person for goods and services bought qualify to withhold the tax unless the person is exempted from paying the tax. You must be registered or a member to be allowed to withhold tax from business transactions.

Rent Income Tax

This is the tax on income that is charged to someone as a result of rental or leasing a property (residential and commercial) to another person.

Income Tax Stamp

This is a tax designed for people operating in the informal sector, for example, small-scale or self-employed dressmakers/tailors, hairdressers/beauticians / barbers, susu collectors, chop bar owners, cooked food sellers, butchers, container/kiosks/table top operators, garage owners, artisans (masons, carpenters, welders, mechanics, vulcanizers, electricians, sprayers), hawkers and itinerant traders. Income Tax Stamp is to be paid on quarterly basis. The dates for payments are 15th January, 15th April, 15th July and 15th October. It is grouped based on the size, nature and volume of the business.

A Tax Stamp must be conspicuously displayed at the business premises or carried on your person for inspection at any time.  Vehicle Income Tax (VIT) is a tax designed for commercial transport operators. Based on dates for payment of VIT are 15th January, 15th April, 15th July and 15th October. It is made based on the tonnage and number of passengers. The VIT sticker must be conspicuously shown on the windscreen of all commercial vehicles.

Tax Administration

In Ghana, the Organization responsible for taxation is the Ghana Revenue Authority (GRA). Ghana Revenue Authority (GRA) is a semi-autonomous public organization instituted by law as a body corporate, to replace the three tax agencies, namely, Customs, Excise and Preventive Service (CEPS), Internal Revenue Service (IRS), Value Added Tax Service (VATS) and the Revenue Agencies Governing Board Secretariat (RAGB) for responsible for tax administration in Ghana. It represents a change in identity for the revenue agencies – CEPS, IRS and VATS. Also it means a unitization of the administration of taxes and customs duties in Ghana.

The combination of the three revenue agencies into an integrated and modernized revenue authority is part of a worldwide trend in which separate revenue agencies are brought together to achieve efficiency and effectiveness. The Ghana Revenue Authority (GRA) as a revenue authority in Ghana is very strategic in the obtaining of national goals. Therefore, the most important objective of the integration and modernization process is the review and modernization of processes and procedures with the view of improving the quality of service delivery to taxpayers and therefore the general public, create a customer-oriented revenue authority and enhance voluntary tax compliance.

Brief History

In 2009 December, the taxation agencies, namely, the Customs, Excise and Preventive Service (CEPS), the internal Revenue Service (IRS), the value Added Tax Service (VATS) and also the Revenue Agencies Governing Board (RAGB) Secretariat were combined in accordance with the Ghana Revenue Authority Act 2009, Act 791. Ghana Revenue Authority (GRA) replaces the revenue agencies in the administration of taxes and customs duties in the country.

Legal Basis

The establishment of Ghana Revenue Authority (GRA) Act in December, 2009 provides the legal framework for the rebirth of Ghana’s revenue system via merging and modernization. Ghana Revenue Authority Act, 2009 (Act 791) is the law governing taxation in Ghana. This law was passed in December 2009 to achieve three things The three-winged structure designed to make sure proper efficiency within the Authority’s core business of revenue mobilization integrate the management support services of finance, administration, human resource, and research of the erstwhile agencies under one Support Services Division, leaving the Customs Division and also the Domestic tax revenue Division unencumbered by peripheral functions to focus entirely on revenue collection with Support Services Division supporting them with the required management services.

Impartial Appeal Process

Reasonable disagreements may inevitably arise even under most transparent systems. In such situations, an impartial adjudication process should exist that has as part of its function the publication of its decisions, taking into consideration privacy concerns of the affected taxpayer. Such a procedure will promote confidence within the system, and ultimately increase voluntary compliance. Also, in his book, “The Wealth of Nations”, Adam Smith (1778) captions the attributes as cannons of taxation. The principles are so important that they are still true as they were in those days. A good tax system should be made on the bases of such principles. The tax system should take into consideration the interest of both the tax payers and the tax authorities. The canons of taxation are still known as the principles of a good tax system.

Canon of equity

This is one of the characteristics of a good tax system by Adam Smith. The principle states and elaborates the essence of economic and social justice to an economy. Thus, “the taxes should be proportional to income”. This will enable citizens to pay taxes in proportion to the revenue they gain under the protection of the state respectively. This canon states that, the amount of tax attributed to an individual and the time of payment should be known in advance. Also, the system should be designed to provide for the government to know the amount of money that will be taken as tax.

The method and timing of tax payment should be suitable for the tax payers. They should not find it difficult to pay. For example, taxes on land are paid at the time of harvest and taxes on income are taken from source. When a tax system is convenient, it will encourage the payment of tax and increase the revenue of government. In the generation of revenue, the cost of the generation should not exceed the revenue generated. The canon of economy states that, the cost of collection of tax should not exceed the tax collected. So taxes should not be imposed to places where it will be very difficult to reach. And hence there will be economy in the administration of tax.