Introduction
In most tax administration systems, taxes imposed on income are normally in the nature of Pay-as-You Earn. The Pay- As You Earn (PAYE) is very common with employment income but for business and investment income, a variant of the “PAYE” requires businesses to pay taxes in four instalments over the year. It uses the self-assessed system which imposes on the taxpayer, the responsibility for calculating taxable income and the tax due and making instalment payments.
Under self-assessment, the onus of determining the tax liability and the payment of the tax is on the taxpayer. The taxpayer is expected to submit to the Commissioner-General an estimate of the chargeable income and the tax liability on or before the due date for the first instalment, mostly 31st March.
Unlike Provisional or Administrative Assessment which is prepared by the GRA showing a person's tax liability based on Commissioner General’s best judgement, self-assessment is now the international best practice in tax administration. Experts say self -assessment makes taxpayers more conscious of their own tax obligations because they are allowed to determine their own liability hence there is the likelihood of increased tax compliance. Businesses with accounting year which begins on 1st January and ends on 31st December are required to pay taxes by 31st March, 30th June, 30th September and finally 31st December. For those with different accounting year, at the end of each three month period.
Income Tax Payment Procedure in Ghana
When tax liabilities are calculated, the taxes must be paid so the Income Tax Act under PART VIII provide rules on tax payment procedures. Section 113 of Act 896 provides three methods of paying for tax liability. It provides that, Income tax is payable by
(a) by withholding
(b) by instalment; or
(c) on assessment
Tax Payable by Withholding
With this payment method, before the recipient gets the money, the tax is withheld, and the net amount paid to him. The main taxes payable by withholding are provided under
i) section 114 (Pay as you Earn withheld by employers)
ii) Section 115 (Withholding tax on Investment Income)
iii) Section 116 (Withholding tax on goods, services and works)
Withholding tax represents a major source of revenue in many countries. The objective for the introduction of withholding tax is to accelerate collection of income tax to curtail possible tax evasion. But when applied to businesses, withholding tax has major problems in its implementation in Ghana and many have called for reforms in the withholding schemes. Even though taxpayers may claim tax credit for amounts previously withheld, section 119 provides a list of withholding taxes which represents final taxation of certain incomes such as dividends and their inclusion in total income is not required, mainly for administrative convenience. Critics therefore say the Withholding tax system is best suited for taxation of interest and dividends as it constitutes a convenient tax collection point at the time of payment of such incomes.
Tax payable by Instalment
Instalment Tax payment is mostly applied to companies and self-employed taxpayers. This method requires estimation of current annual income by the taxpayer. Taxpayers are allowed to amend their forecast in case of fluctuations. If deviation on underestimations exceed the set percentage of 10%, the taxpayer is penalized to deter willful reduction of estimated tax payments.
The quarterly instalments make income tax collection more effective as a fiscal policy instrument. Countries with high inflation rates use this to protect the tax base from inflation. It thus plays a critical role in maintaining the real tax revenue.
The quarterly tax instalment can also be said to be convenient for taxpayers because it spreads the tax liability into four instalments. The taxpayer will budget his taxes and pay over 4 instalments and avoid payment of large sum in one instalment at the end of the year.
Procedure for Tax Instalment Payment
The law provides a formula for businesses to determine the instalment payments. This procedure ensures quarterly revenue flow to the government during the year.
1. Statement of estimated tax payable: The Instalment tax payment begins with filing a statement of estimated tax payable. Section 122 of Act 896 provides that, a person who is an instalment payer for a year of assessment shall file with the Commissioner-General by the date of the first tax instalment, an estimate of tax payable for the year. This is where the taxpayer forecast his own profit for the year and the tax payable.
2. Quarterly payments: Section 121 of Act 896 provides that, if a taxpayer derives or expects to derive income from business or investment (in some cases employment), the person shall pay quarterly instalment on the last day of 31st March, 30th June, 30th September and 31st December if the taxpayer's accounting year begins on 1st January and ends on 31st December and for those with different accounting year, at the end of each three month period.
Revision of the Estimate:
This provision is very critical to businesses. Section 122(5) of Act 896 provides that the estimate filed remains in force for the whole year unless the person files a revised estimate with the Commissioner-General together with a statement of reasons for the revision. One can revise upwards or downwards depending on actual circumstances.
The 90% Rule and Interest for under-estimation of Instalment
This rule has been criticized by experts as very unfair especially setting the margin of error at 10% in the case of Ghana. Uncertainties in business are undeniable. For this reason, the tax law makes room for under-estimating the income tax payable up to 90% of the actual tax payable at the end of year. This implies that, estimates below 90% of the actual taxable income attracts interest.
Section 70(2) of the Revenue Administration Act, 2016 (Act 915) provides that, where a person underestimate quarterly tax, the taxpayer is liable to pay interest for the period from the date the first instalment is payable until the due date by which the person files tax returns.
Section 70(3) provides that the amount of interest that a taxpayer shall pay is calculated as 125% of the statutory rate, compounded monthly, and applied to the difference between
(a) 90% of the total amount that would have been paid by way of instalments during the year of assessment to the start of the period had the estimate of the person equaled the correct amount; and
(b) the amount of income tax paid by instalments during the year of assessment to the start of the period.
By implication, the law requires taxpayers to be 90% accurate in their forecast. A deviation of 10% is allowed. Any deviation from actual tax liability of more than 10% will attract an interest of 125% of the statutory rate which is compounded monthly.
Some experts have criticized this aspect of the tax law on the following grounds:
1. The 10% margin of error is very small and to require businesses to have 90% accuracy is not realistic.
2. The business environment in Ghana is quite uncertain and forecasting is a problem.
3. The interest of 125% is excessive and the compounding of interest monthly is unjustly punishing entities. The is unjust enrichment, indirectly curtailing business growth.
4. When the GRA is owing a taxpayer as a result of overpaid tax and a refund of tax is required under section 68 of the Revenue Administration Act, 2016 (Act 915), the Commissioner General does not pay interest on the overpaid tax until audit is conducted, sometimes 4 years later. Even when refund is required, the interest on overpaid tax is only 50% of the statutory rate without compounding. This inequality is unjust and requires immediate amendment.
Avoiding the dangers of interest and penalties
The business environment cannot be devoid of uncertainties and if these uncertainties exist, companies are bound to have estimation errors. When you overpay tax, there is no interest on the money. When there is underpayment, there are huge interest. This is a very sad situation. These errors however can be minimized by:
i. Monitoring of actual performance with estimate: Constantly monitoring actual performance with the forecasted income will signal any deviation. This requires review of monthly profit and loss, significant fixed assets for capital allowances and other important year end adjustment that will have impact on profit.
ii. Year End Revised Estimate: The law allows taxpayers to revise anytime, either upwards or downwards. Revise to reflect actual profit, especially before 31st December. By the last week in December, businesses will have a clear picture of how their performance for the year will be.
iii. Avoid overpayment: The GRA does not pay interest when there is overpayment. Businesses should therefore avoid over-estimation but also avoid under-estimation. There should be a balanced estimation with 10% margin of error from the actual.
Conclusion and Way forward:
Self- assessment in tax administration has come to stay and almost all companies are required to estimate their tax. Whiles it is international best practice, some aspects in Ghana require consideration:
1. It is recommended that the 90% threshold should be reduced to 80% due to uncertainties. 90% accuracy in forecast with only 10% margin of error is a very high standard.
2. Monthly compounding of interest at 125% on understatement of tax is unjust and indirectly punishes companies. In some cases, the interest which results from tax audit is higher than the tax liability itself.
3. Businesses should put in adequate measures to enable them estimate correctly.
4. The best time to revise could be December. Companies should not wait till the end of the year when audited accounts are being prepared. It will be too late.
5. The tax law should be amended so that interest should be applied to only willful under-estimation. Unusual and reasonable causes of under-estimation should be exempted from the interest.
6. The interest is a non-deductible expense hence businesses should endeavor to avoid this.