The Ministry of Finance has submitted proposals to Parliament to reverse the one per cent withholding tax imposed on interest earned by individuals on any investments.
The tax imposition on interests is part of provisions in the new Income Tax Act, 2015 (Act 896) which came into force on January 1, this year.
However, the implementation sent shock waves across the country, especially among the formal sector workers, as banks and financial institutions started sending SMS alerts to their customers about the provision and how it would affect them.
Sections of the public also raised concerns about the revised withholding tax regime, which increased some of the rates and thresholds.
For instance, the rate for withholding tax on services for residents was increased from 7.5 per cent to 15 per cent. This meant that for any service rendered by any individual, 15 per cent of the payment would be deducted at source and same paid to the government.
But a statement issued by the Minister of Finance, Mr Seth Terkper, explained that the government had taken note of the concerns of taxpayers and the general public on some provisions of the Act, particularly those relating to withholding tax on the provision of services and the payment of tax on interests paid to individuals.
“The essence of the withholding tax regime on services is to improve tax compliance. It is not a final tax but a payment on account. Therefore, the increase in withholding tax on services to 15 per cent is to encourage taxpayers to file their returns, after which they will be entitled to a credit for the amount withheld,” the statement said.
In effect, each time individuals or businesses are deducted the 15 per cent, it will be held as credit to their tax liability, until their final taxes are determined. If the sum of all the 15 per cent they had been paying from the beginning of the year is more than their total tax liabilities in a particular tax year, they will receive refunds.
The withholding tax threshold has also been revised from GHC500 to GHC2,000. This means for services valued at below GHC2,000, withholding tax will not be applied. The rationale is to take account of inflation and exclude small value transactions from the withholding tax mechanism.
Besides this measure, the Act 896 allows the Commissioner-General of the Ghana Revenue Authority to grant withholding tax exemptions to compliant taxpayers.
“The Ministry of Finance has, therefore, directed the Ghana Revenue Authority to implement these provisions. Proposals have also been submitted to Parliament to review the rate,” the statement said.
Objectives and consolidation
The statement further explained that the new Income Tax Law was to revise and consolidate the laws relating to income tax after 15 years of implementing the Internal Revenue Act, 2000 (Act 592).
The new Act did not only revise the Internal Revenue Act but overhauled the general fiscal regime (revenue sources for the country), including the Minerals and Mining Income Tax, Petroleum Operations Tax, and the taxation of entities such as public, mutual, and non-profit causes.
Act 896 also seeks to simplify the tax provisions to make it more user-friendly, enhance efficiency and facilitate compliance.
It retained provisions considered best practice in income tax administration worldwide. This included the withholding tax and tax payable by instalment provisions. For instance, under the new law, all taxpayers are now allowed to determine and pay taxes based on their own estimates.
“It further broadens the tax base and removes the narrow and distorted tax base of the Internal Revenue Act, 2000 (Act 592); rationalises, streamlines and restricts tax concessions; tackles erosion of the tax base and aligns domestic tax rules with current international tax rules.
Tax base refers to the assessed value of an item which is subject to tax. It can also mean the collection of items identified to be subject to taxation.
For individuals who enjoy the benefit of using company vehicles, the threshold for taxation of car benefits has also been improved from GHC150 and GHC300 to GHC250 and GHC600 respectively to take account of inflation.
To allow for businesses to expand faster, the new tax law has given some incentives to support the use of more debt (loans, including listing on capital market) to finance their operations. This is because the debt-to-equity ratio has been revised from 2:1 to 3:1 to allow for additional debt financing.
According to the statement, it will also allow the interest on the debt as deduction as an expense before tax is applied to the profit of businesses.