Introduction & Definition of taxation:
To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government [...] a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [...] whether under the name of toll, tribute, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name." Taxation may be defined as the levying of compulsory contributions by public authorities having tax transaction. No specific reward or direct benefit is gained by the taxpayer. Individuals and persons pay taxes and the money collected is used for the common good, that is, for the production of certain social amenities which are more efficiently provided by the state rather than by individuals, e.g., the provision of security for both Internal and external purposes, the maintenance of law, the construction of roads, etc. Taxes can thus be considered as a compulsory payment from households and firms to government to enable the government finance its projects and programmes. History of Taxation
Prostitution may be the oldest profession, but tax collection as a profession may not be far behind. In the Biblical stories taxation was a major issue, both in the old Testament and the New Testament, for instance, Jesus Christ gave his views on many tax matters to the extent that the converted two prominent individuals, zacheous and Matthew, (the Levite). This indicates that taxation dates back to the Biblical days. Forms of Taxation in the Ancient Days
In those days, taxation did not necessarily mean handing over money to the Tax Authorities. It could be giving out any commodity or rendering of services without a return of a direct benefit. For example:-
The ancient Chinese were reported to have paid taxes with pressed tea. The ancient Greeks and the Romans in Italy could be called upon to serve as soldiers. They had applied their own weapons as a sign of their citizenship. Wealthy subjects were also asked to pay taxes by handing products to their monarchs and kings in lieu of military service. The other early sources of tax revenue was trade tax; with tolls and customers duties being collected from traveling merchants. The advantage of this type of tax was that the incidence fell mostly on visitors rather than residents. One of these earliest taxes imposed by the parliament of England in the 13th century was the “tonnage and poundage” on wine, wool and leather, targeted at the Italian Merchants.
Historical relationships between the ancient Romans and the Jews (on Tax Matters) The Romans conquered the Jews in a war and as a nation defeated by the Romans, the Jews were required to pay the Romans taxes and levies. The type of taxes that they were required to pay included the income Tax, the poll tax and the Ground Tax. i The Income Tax: This was a one percent tax on a person’s income, especially on men. ii The poll Tax:- This was paid by every man from the ages 14 to 65 years and very women between the ages 12and 60 years. iii The Ground Tax: This amounted to one tenth of a man’s grain and one-fifth of his fruit and wine/vine. In those days, in order to save money, the treasury manages of the Roman Empire used the local people to collect the taxes. The tax collector was only responsible to pay a fixed amount of money for each tax type. In situations where the tax collectors managed to collect more than the quota allocated to them, the difference or the excess belonged to the collectors themselves. As one would expect, the Jews hated the tax collectors, though their own people, for the following reasons:- a They became rich due to their extortionate attitude.
b They were seen as dishonest and cheats i.e., they were cheating on their own people and the Roman empire/Government simultaneously. c They represented the interest of the people who had conquered them. History of Modern Income Taxation
Modern form of Taxation dates back to 1797 by the Dutch Bavarian Republic and the 1799 when William Pitt, the then prime minister of Britain, introduced income taxation. The main purpose for the introduction of the modern forms of taxation was to finance war. For instance, Prime Minister William Pitt introduced the income tax to finance the wars with Napoleon Bonaparte of France. William Pitt is therefore often referred to as the father of Income Tax. Four (4) years later, his successor, Prime Minister Henry Aldington, introduced the systematic classification of sources or types of taxes in Britain. The History and Development of Taxation in Ghana
(The Gold Coast)
1850: Taxation started in the form of customs duty. This was levied on imported goods at the rate of 0.5% “ad-valorem”. This tax was paid by colleague whites who were traders importing goods from outside the country. There was a principal collector stationed at the Cape Coast Castle. The 0.5% was calculated based on the value of the imports “ad-Valorem” a Latin expression which means, according to the value. 1852: The poll tax was introduced in the Gold Coast. This was administered as a one shilling payment per head for every man, women or children living in the British protected areas. 1854: Public sentiments and resentments including protestations leading to direct demonstrations caused the Britain Authorities to abolish the poll tax. The people had grown hostile to the system and refused to pay the levy. 1931: Governor Sir Ranford Slater attempted to introduce income taxation in the Gold Coast as it was being administered in the Britain. He could not withstand the strong opposition from the members of the legislative Assembly; instead, he imposed a tax on cocoa exports which yielded sufficient revenue. 1943: However in 1943, as a result of the Second World War, demand for cocoa beans declined and tax revenue from Cocoa exports fell drastically. This was during the reign of Sir Allan Burns K.C.M.G. On Wednesday the 18th day of August 1943, Mr. W.B. Dane, the first commissioner of Income Tax for West Africa, presented the first Income Tax Bill to Gold Coast Legislative Assembly. This was at a sitting of the Assembly in the King George II Memorial Hall. (The current Parliament House). The Bill was debated and became a law in the same year. It was thus captioned THE INCOME TAX ORDINANCE No. 27 1943. This was the first enacted Law in the then Gold Coast on tax matters. The body or institution that was responsible for its administration was the Income Department. It was organized as a department between 1943 and 1944. The first year of assessment was the 1943/44 year of assessment.
The Income Tax Ordinance No 27 of 1943 was primarily for the administration and collection of the following taxes. The Income Tax
Casino Revenue Tax
1961: As a result of a document prepared by Professor Kaldor, who had been invited to Ghana to take a look at the Revenue needs of the country, recommended among other things the introduction of additional duties and taxes including the following. Property Tax
Excess Profit Tax
Hotel Customers Tax
The above taxes and duties were introduced to augment the existing Income Tax, mineral duty setting Tax, etc. which were in existence prior to 1961. The name of the Income Tax Department was subsequently changed to the Central Revenue Department. The SMCD of 1975
The abovementioned taxes were under separate enactments and Laws and being administered by the Central Revenue Department. As the revenue needs of the nation were changing, there was the need to amend the various laws. The supreme Military Council under General I.K. Acheampong consolidated the various laws into one Law/Decree the SMDC 5, the Supreme Military Council, Decree 5 to govern the collection of direct taxation in Ghana. PNDC Law 143 was passed in 1986 to review the existing SMCD 5. The Central Revenue Department was therefore restructured. It was given a public service status having its own governing Board. The name Central Revenue Department was changed to the Internal Revenue Service (IRS) via the PNDC Law 143 of 1986. The Vat Secretariat and the Introduction of Value Added Tax Before 1995, the IRS and the CEPS (Customs Excise and Preventive Service), were the two main revenue collection agencies in Ghana. Whiles the IRS was in charge of the collection of direct taxes like the Income Tax, Gift Tax, Capital Gains tax, Hotels and Restaurant taxes and Entertainment duty, etc., CEPS was responsible for administering the collection of indirect taxes such as the import duties, excise duties, sales Tax, export duties, etc. The Hotel and Restaurant taxes and the entertainment duties from IRS and the Sales Tax from the CEPS were merged as one and put under separate body called the VAT SECRETARIAT. There were put under an enactment called the VALUE ADDED TAX ACT, ACT of 1995. The body established to be responsible for its administration was the VAT SECRETARIAT. The Tax could not sustain or enjoy its virginity long enough as it was repealed in June 1996. This was due to the protestations riots and demonstration characterized by its introduction. The infamous “Kume Preko” demonstration can be cited. Having in mind that the tax would be re-introduced later, the following measures were taken. Two (2) separate laws were enacted to cater for the various taxes that were taken from IRS and CEPS respectively to form the VAT ACT. Service Tax ACT.
This was in charge of Entertainment duty and Hotel & Restaurant tax. The defunct VAT Secretariat was to collect the tax under the direct supervision of the IRS. Sales Tax ACT.
This was the same Sales Tax which was previously being administered and collected by the CEPS but under the VAT ACT 1995. In 1998, after careful study and the necessary ground work undertaken, including adequate public education, these two Laws (the Sales Tax and the Service Tax) were repackaged and enacted into the current VAT ACT, VALUE ADDED TAX ACT 1998, ACT 546. The VAT Secretariat was not dissolved, but the officers were retained to undertake a mop-up exercise of the revenue under the VAT ACT of 1995 and to participate in the public education of the tax pending its “second coming”. The Internal Revenue Act 2000, Act 592
This is the current law prevailing for the administration of Income Taxation in Ghana. The IRA 2000, ACT 592 was introduced to consolidate the various laws that were for direct taxes but were not included in SMCD 5. Though these; direct taxes, Capital Gains Tax and Gift Tax were being administered and collected by the I.R.S. It was considered that all the taxes that were being administered by the I.R.S were put together in one composite law, hence the IRA 2000, ACT 592. Several other additions were made to the current ACT. These additions were to ensure that difficulties that were encountered previously in the SMCD 5 were addressed. These include provisions in the ACT 592 relating to Roll-over Reliefs, collateral benefits, changes in Control, Profit or dividend stripping Anti-avoidance measure; income splitting, transfer pricing and thin capitalization have also been taken care of in the ACT 592. The history and development of taxation in Ghana has shown that, there is always the need to constantly review the law relating to tax collection. The constant review is undertaken as a result of the need to appraise tax administration for national development. For instance, the IRA 2000, ACT 592 has already suffered some amendments. The Internal Revenue (amendment) ACT 2002, ACT 622 with 2nd May, 2002 as the date of assent and the Internal Revenue (amendment) ACT 2003, ACT 644 with 14th April, 2003 being its date of assent, respectively have been some of the reviews that have been made to original ACT 592. The ammend
THE ROLE OF TAXATION IN THE NATIONAL ECONOMY
The tax revenue is the most important source of public revenue. The revenue is used to maintain law and order and also providing infrastructure such as roads hospital, schools and public services, Apart from raising revenue, taxation has been used to achieve the following objectives; Redistribution of Income
Imposing taxes on the rich or levying them so high so as to reduce their incomes whilst leaving the poor untouched or lowly taxed. This helps to reduce inequalities arising from distribution of wealth.
To protect indigenous industries
Sometimes the government resorts to super taxes to discourage the imports of certain goods to conserve foreign exchange and to protect local industries. Social and Health
Sometimes taxes are imposed to discourage certain harmful practices and the consumption of certain goods e.g. alcoholic beverages, and cigarettes.
Taxation may be used as a tool to minimize budgetary deficit. In most developing countries budgets always go through deficit financing, that is, expenditure always out weights the income. Tax revenue may be used to balance the budget.
To control certain aspects of the economy e.g. savings, balance of payments, employments, investment, productivity and inflation. Attributes of a Good Tax System or Canons of Taxation
Every tax system is geared at raising the much needed revenue for governance. Canons simply mean qualities or principles. So any tax system which follows these principles will bring about efficiency and equity. The canons of taxation were enunciated by the renowned British economist, Adam Smith in his book, “the wealth of Nations” in the 18th century. The canons are;
By equity, he implied that taxation should be proportional to one’s income. The tax due should be related to the taxpayer’s ability to pay. When Adam Smith looked at the equity, he was looking at the vertical equity; that is, the rich and the poor, but today the perspective is horizontal equity, that is, between two equals where people of the same income should be made to pay the same tax. This is to ensure fairness. Certainty
By certainty, he says tax must be certain and should be simple to understand. The amount to be paid as tax and the time to pay that amount, must be known in advance or be certain. By implication, tax must be based on sound principles that the amount to be paid ought to be clear and plain to the taxpayer and every other person. Convenience
The tax administration should put mechanisms into the tax collection system that will facilitate easy payment and collection of taxes. That is, the procedures for payment should not be inconvenience the taxpayer and should also be easy administer. Economy
By economy, he advocates that the administration cost of collection of taxes should be minimal to the yield. It should also produce a high net yield of revenue but not so high as to damage the source of that revenue. His principle states that there should be economy in tax administration. The cost of tax collection should be lower than the amount of tax collected. It may not serve any purpose, if the taxes imposed are widespread but are difficult to administer. Therefore, it would make no sense to impose certain taxes, if it is difficult to administer. (The IRS pegged its minimum administrative cost at 5.88%). Additional Canons of Taxation
Activities and functions of governments have increased significantly since Adam Smith's time. Governments are expected to maintain economic stability, full employment, reduce income inequality & promote growth and development. Tax system should be such that it meets the requirements of growing state activities. Accordingly, modern economists gave following additional canons of taxation. Productivity
It is also known as the canon of fiscal adequacy. According to this principle, the tax system should be able to yield enough revenue for the treasury and the government should have no need to resort to deficit financing. This is a good principle to follow in a developing economy.
According to this canon, every tax imposed by the government should be elastic in nature. In other words, the income from tax should be capable of increasing or decreasing according to the requirement of the country. For example, if the government needs more income at time of crisis, the tax should be capable of yielding more income through increase in its rate.
It should be easily possible for the authorities to revise the tax structure both with respect to its coverage and rates, to suit the changing requirements of the economy. With changing time and conditions the tax system needs to be changed without much difficulty. The tax system must be flexible and not rigid.
The tax system should not be complicated. That makes it difficult to understand and administer and results in problems of interpretation and disputes. In India, the efforts of the government in recent years have been to make the system simple. Diversity
This principle states that the government should collect taxes from different sources rather than concentrating on a single source of tax. It is not advisable for the government to depend upon a single source of tax, it may result in inequity to the certain section of the society; uncertainty for the government to raise funds. If the tax revenue comes from diversified source, then any reduction in tax revenue on account of any one cause is bound to be small.
KINDS OF TAXES
Taxes are commonly and generally described as Direct and Indirect. Direct taxes
The tax is intended to be paid by the person or organization on whom/which it is actually levied, the impact and incidence being on the same person or entity. Direct taxes affect the income of the recipient visibly. The income of the Taxpayer is reduced by the imposition of the tax. The burden falls directly on the income earner. Currently, there are three kinds of Direct Taxes in Ghana. These are i Income Tax
ii Capital gains tax
iii Gift tax
These taxes are administered by the Internal Revenue Service. Advantages of direct taxes
Incidence and yield are easy to determine
The income earner is certain as to what is expected to pay
As population and wealth increases, the tax yield also yields automatically. Direct taxes are generally progressive in nature.
The cost of administration may be very high
The effect on incentive, enterprise and savings may be considerably high. Indirect taxes
Indirect taxes on the other hand are levied on one person in the expectation that the tax will be shifted or passed on to another person. Indirect taxes are not visible in payment. Examples of Indirect taxes are i Customs Duty
ii Excise Duty
iii Value added tax, in Ghana.
Advantages of indirect taxes
Tax evasion is difficult.
Government may apply this to restrict the consumption of harmful goods. Tax revenue for national development is elastic
Payment and collection of taxes are easy and convenient.
They are often aggressive
Equity is always not exhibited
Incident of tax not always easy to determine
Revenue may be uncertain due to elasticity of demand.
Difference between Direct and Indirect Taxes - Comparison
The allocative effects of direct taxes are superior to those of indirect taxes. When a particular amount is raised through a direct tax like income tax, it would imply a lesser burden than the same amount raised through an indirect tax like excise duty.
An indirect tax involves excessive burden as it distorts the consumer's preference regarding goods due to price changes. Thus an indirect tax has an adverse effect on the allocation of resources than a direct tax.
Direct taxes are progressive and they help to reduce inequalities. But indirect taxes are regressive and they widen the gap of inequalities. Hence, direct taxes are regarded to be superior to indirect taxes in effecting a more equitable distribution of income and wealth. But this is not always true. Even indirect taxes can be made progressive by levying them on luxuries and exempting them on necessaries. Both direct and indirect taxes are alternative methods of achieving any particular redistribution of income.
The administrative costs of direct taxes are more than that of indirect taxes. Direct taxes are narrow-based and have many exemptions. Indirect taxes can be conveniently collected and cost of collection is constant overtime. Indirect taxes are easier to administer than direct taxes. From point of view of efficiency and productivity, indirect taxes are better. Indirect taxes are wrapped up in prices and hence they cannot be easily evaded. They are more productive as their cost of collection is the least. Thus, from point of view of administrative costs, indirect taxes are relatively superior.
Built-in Flexibility and Stability
Direct taxes are more flexible than indirect taxes. During a period of prosperity, direct taxes fetch more revenue as they are progressive. But indirect taxes are proportional and they do not fetch as much revenue as direct taxes. Direct taxes help to reduce the inflationary pressure by taking away the excess purchasing power and hence they promote stability. But indirect taxes are inflationary. Hence, from the point of stability, direct taxes are preferred to indirect taxes.
Indirect taxes are more growth oriented than direct taxes. Direct taxes, being progressive, reduce savings. When savings and investments are discouraged, economic growth is adversely effected. Indirect taxes discourage consumption and increase savings. Indirect taxes on luxuries reduce conspicuous consumption and channel resources in to growth oriented programmes.
Thus from the above points allocation, distribution and stability, direct taxes are superior. From the view of productivity and economic growth, indirect taxes are more superior. But the use of both direct and indirect taxes is indispensable in modern public finance. Practice Questions
a)Canons of taxation are the fundamental principles universally accepted as guidelines to promote good relations and understanding between the taxpayer and the tax administration as well as ensure efficiency in the system. These canons were enunciated by the renowned British economist, Adam Smith.
State and explain the canons of taxation
b)In recent times, Taxation has been used to achieve political, economic and fiscal objectives. State any six (5) reasons why nations collect taxes.
a)“Prostitution may be the oldest profession, but tax collection as a profession may not be far behind”.
Explain this statement with a brief emphasis on the history of taxation from the time that the Income Tax Ordinance, No 27, 1943 to the time of the enactment of the Internal Revenue Act, 2000 ACT 592. Question 3
From the view point of allocation, distribution and stability, direct taxes are said to be superior, whereas, from the view of productivity and economic growth, indirect taxes are more superior.
TAX ADMINISTRATION GHANA (Tax Authorities)
Revenue agencies governing board (RAGB)
By 1998, during the introduction of the Value Added Tax, it had dawned on the Government that there was the need for harmonization, co-ordination and co-operation between the three Revenue Collecting agencies (Governing Board) ACT of 1998 ACT 558. The Separate Board of Directors of the three agencies were dissolved the Revenue Agencies Governing Board (RAGB) was established to bring all the three Revenue agencies under one governing board. The Board was finally put in place in July, 2001. Membership of the board
i A Chairman
ii The Governor of the Bank of Ghana
iii The Executive secretary of the Board
iv The Commissioner of CEPS
v The Commissioner of IRS
vi The Commissioner of VAT
vii Representative of the ministry of Finance not below the rank of a Director. viii Four (4) other persons at least two (2) of who shall be women. Criteria for selecting members of the revenue agencies governing board The president shall appoint the chairman and other members of the RAGB. The Governor of the Bank of Ghana and the three commissioners of IRS, CEPS and VAT are automatic members by virtue of their office. In appointing the other members consideration is given to the following. Integrity
Expertise; of the persons and particular their knowledge in matters relevant to their functions as members of the board. Functions of the RAGB
The functions of the RAGB are as follows:
1 To ensure supervision and co-ordination of the activities of IRS, CEPS and VAT Service in the performance of their functions as prescribed by their respective laws. 2 To cause out be prepared plans for developing and maintaining an effective, fair and efficient revenue collection system and ensure that the plans are implemented. 3 To effect the restructuring of any of the revenue agencies as and when necessary; 4 To ensure the effective, efficient and optimum collection of taxes, penalties and interest due to the State under the enactments establishing the three revenue agencies and under any other law; 5 To direct generally the revenue agencies on revenue related policies; 6 To monitor the performance of the revenue agencies in carrying out their functions; 7 To ensure that all amounts collected by the revenue agencies are paid into the Consolidated Fund unless otherwise provided by an enactment; 8 To recommend to the Minister of Finance measures for effective collection of taxes and non-tax revenue; 9 To delimit customs and surveillance zones, approve routes for customs purpose and cause to be built and managed government warehouse for the purpose of revenue collection; 10 To cause systems to be developed and maintained, whether by computer or other means, for co-ordination, and supervising the collection, storage and retrieval of information. 11 To rearrange for the training and manpower development programmes for employees of the revenue agencies; 12 To establish a system for the exchange of information among the revenue agencies; 13 To initiate and sustain programmes for public education on tax payment; 14 To establish and maintain a financial and accounting system in accordance with prescribed government accounting practice; 15 To draw up a scheme of service for the staff of the revenue agencies; and 16 To perform such other functions in relation to revenue as the Minister Finance may direct as may be conferred on it by any other law. The tenure of office of the board members
Members of the RAGB shall hold office for a period of three (3) years and shall on the expiration of that period be eligible for reappointment except that no such member shall be on the RAGB for more than three (3) terms in succession. It should be noted that this restriction on tenure of office does not affect the Governor of the Bank of Ghana, the three (3) commissioners, the executive and the representative of the Ministry of Finance.
The Commissioner of Internal Revenue Service
The Commissioner of Internal Revenue Service (CIR) is the head of the Internal Revenue Service and shall be appointed by the President in accordance with the advice of the Internal Revenue Service Board given in consultation with the Public Services Commission. The functions to be performed by the CIR are
1 To administer the Internal Revenue Act. The CIR sees to ensuring that provisions of the Act are carried into effect and complied with. 2 To identify taxpayers. The CIR sees to the determination of taxable persons and getting them roped into the tax net. 3 To assess taxpayers to tax. The CIR ensures that taxpayers are served with the relevant assessment based on the taxpayers’ earnings and capacity, as well as the category in which the taxpayer falls. 4 To collect taxes, penalties and interest due to the State. All taxes dully assessed are payable to the CIR, as well as all penalties and interest charged by the CIR on defaulting taxpayers. The CIR is thus tasked with ensuring that such monies are duly collected. 5 To pay into the consolidated Fund monies collected on behalf of the State. All tax revenue belongs to the State; hence all collections are to be paid into the consolidated fund by the CIR. Powers of the Commissioner of Internal revenue Service
To enable the CIR duly carry out the functions assigned to him/her as outlined above, he/she is empowered to facilitate the execution of the functions. There are powers that are EXCLUSIVE to the CIR, that is, these powers cannot be delegated as they are the preserve of the CIR only. These powers are as follows: 1 The power to remit taxes, penalties, and interest.
2 The power to exempt a person from the 5% withholding tax on contract payments as provided for under section 84 (4) (b) of Act 592. 3 The power to determine whether the appropriate tax to be paid by taxpayer in respect of capitalization of profits. 4 The power to determine whether a company controlled by not more than five persons has distributed a reasonable part of its income as dividend. This is to enable the CIR invoke section 45 of Act 592 which govern undistributed profits of companies. 5 The power to compound on offence other than to the Solicitor of the Service. The are other powers that CIR possesses but that can be delegated to senior officers of the Service, authorized by the CIR, to enable them fully carry out their functions. These are:
1 The power to determine objections.
2 The power to summon witnesses
3 The power to prosecute in the courts
4 The power to collect taxes by distress, that is, by seizing property to recover tax. 5 The power to garnishee monies to taxpayers, that is, orders a third party to pay amount due to the taxpayer directly to the CIR. 6 The power to impose penalties.
7 The power to enter premises, search and seize documents and items. 8 The power to extend time to furnish returns.
9 The power to appoint a person to prepare and furnish a return on behalf of a person who has failed to furnish a return. 10 The power to adjust the chargeable income of a person in tax avoidance cases. The above notwithstanding there are some powers of the CIR which can be delegated to only officers of the rank of Senior Inspector of Taxes up to Deputy Commissioners of Internal Revenue Service. These powers are: 1 The power to extend the due date for payments of taxes and vary tax installments. 2 The delegation of powers other than the exclusive powers of the Commissioner. 3 The power to authorize an officer to exercise the audit search and seizure or to demand the production of information. The Commissioner of Customs, Excise and Preventive Service (CEPS) The Commissioner of CEPS is the head of Customs, Excise and preventive Service and performs the following functions: 1 Responsible for the day to day administration of the Service. 2 The collection of duties, taxes and penalties due to the State. 3 The payment of the amounts collected into the Consolidated Fund. Powers of the Commissioner of Customs Excise and Preventive Service The CEPS Management Law, 1993 has provided the Commissioner of CEPS with the following powers to enable him/her further carry out the functions assigned to him/her as state above: 1 Powers of Police. All officers of CEPS have the same powers, authority and privileges as are given by law to Police Officers. 2 Power to search persons. Any officer of CEPS may search a person he has reason to suspect is carrying or has any un-declared or prohibited goods or excisable goods on his person or in his/her possession or in his/her baggage, the duties on which have not been paid. It should be noted, however, that a female shall be searched by a female. Furthermore, no officer shall be liable to any prosecution, an action or suit on account of a search made in good faith and in accordance with the provisions of the law. 3 Officers of CEPS have power to seal off premises, buildings, etc. which are suspected to be harboring keeping or in which are concealed or being kept unaccustomed, prohibited, or restricted goods or on which excise duty or input VAT have not been paid or secured by certificate. 4 Officers of CEPS have power to stop ships, aircraft or vehicle upon reasonable suspicion that any un-costumed, prohibited or restricted goods on which duties or taxes have not been paid or secured by certificate are loaded. 5 They also have the power to arrest tax evaders, e.g. smugglers. 6 They have power to arrest tax evaders, e.g. smugglers.
7 They have power to patrol freely.
8 They have power to enter any factory.
9 They have power to examine stock to ensure that the requisite and adequate duties and taxes thereon have been paid. 10 They have power to search premises.
11 They have power to seize aircraft or ship found to have been carrying unaccustomed goods, etc. 12 They have the power to prosecute tax defaulters in Court. 13 They have power to impose penalties.
14 They have power to levy distress `for excise and sales tax. The Commissioner of Value Added Tax Service (VATS)
The Commissioner of VAT Service is the head of the Value Added Service and performs the following functions: 1. Responsible for the day to day administration of the Service. 2. The collection of Value Added Taxes, National Health Insurance Levy (NHIL), Ghana Education Trust Fund Levy (Get-Fund) and penalties and interest due to the State. 3. The payment of the amounts collected into the Consolidated Fund, the Get-Fund and National Health Insurance Fund.
Powers of the Commissioner of Value Added Tax Service (VATS) The VAT Act, 1998 has provided the Commissioner of VAT with the following powers to enable him/her further carry out the functions assigned to him/her as stated above: 1 The power to take samples. Any officer of the VAT Service may take samples of goods from the possession of any person where he considers it necessary to protect revenue against mistake of fraud. 2 The power to seal off premises. The commissioner of VAT or any officer authorized by him may apply to a Court to seal off, lock up or in any physical manner prevent any person from entering or gaining access to the premises of any person or taxable person who, there are reasonable grounds to believe has not paid the tax due or has made a false claim for repayment of his tax. 3 The power of inspection and warrants. An officer of the VAT Service may at any reasonable time enter premises used in any way for business purpose, including premises where taxable goods are stored, and the officer may open any packaging and inspect and takes stock of any goods and examine business records, accounts and correspondence on the premises. 4 The power to compound an offence. It should be noted that this power is the exclusive right of the Commissioner of VAT. 5 The power to impose penalties.
6 The power to prosecute tax defaulters in court.
7 The power to garnishee amounts owed to a tax debtor.
8 The power to levy distress.
The Ghana Revenue Authority (GRA)
In December 2009, the three tax revenue agencies, the Customs, Excise and Preventive Service (CEPS), the Internal Revenue Service (IRS) and the Value Added Tax Service (VATS) including the Revenue Agencies Governing Board (RAGB) Secretariat were merged in accordance with Ghana Revenue Authority Act 2009, Act 791. The Ghana Revenue Authority (GRA) thus replaces the revenue agencies in the administration of taxes and customs duties in the country. The Ghana Revenue Authority (GRA) has been established to:
Integrate the management of Domestic Tax and Customs
Modernise Domestic Tax and Customs operations through the review of processes and procedures Integrate Internal Revenue Service (IRS) and Value Added Tax Service (VATS) into domestic tax operations on functional lines
The establishment of the GRA is a culmination of years of plans to streamline the administration of tax collection in Ghana which began in 1986 when CEPS and IRS were taken out of the Civil Service and made semi- autonomous and self-accounting public sector institutions with separate boards. The same year, the National Revenue Secretariat (NRS) was set up to formulate revenue policies, manage tax reforms and supervise the activities of CEPS and IRS.
In 1998, the Value Added Tax Service was established to administer VAT and other consumption taxes. The Revenue Agencies Governing Board (RAGB) also began operations in 2001 to supervise and monitor the operations of the Revenue Agencies. In 2002, the Taxpayer Identification Number was introduced to enhance information interchange and risk profiling. Then in 2004, the Large Taxpayer Unit (LTU) was set up to operate on functional lines as a pilot programme for the future integration of tax administration in Ghana as well as to serve the needs of large taxpayers as a one stop shop operation.
It is envisaged that the integration of the Revenue Agencies will bring the following benefits to taxpayers and tax administration. Reduced administrative and tax compliance cost
Better service delivery
Improved departmental information flow.
Holistic approach to domestic tax and customs administration Enhanced revenue mobilisation
The GRA has three main divisions:
1 Customs Division
2 Domestic Tax Revenue Division
3 Support Services Division
Objectives of the Ghana Revenue Authority
The objects of the Authority are to:
1 Provide a holistic approach to tax and customs administration; 2 Reduce administrative and tax compliance cost and provide better service to taxpayers; 3 Promote efficient collection of revenue and the equitable distribution of tax burden and ensure greater transparency and integrity. 4 Ensure greater accountability to Government for the professional management of tax administration; 5 Improve information linkage and sharing of information among the Divisions of the Authority; 6 Provide a one-stop service for taxpayers for the submission of returns and payment of taxes; 7 Provide common tax procedures that enable tax payers to be governed by a single set of rules: and 8 Provide for other matters related to the improvement of revenue administration.
Functions of the Ghana Revenue Authority
In order to achieve the above objects, the Authority has been charged to perform the following functions: (a) Assess and collect taxes, interest and penalties on taxes due to the Republic with optimum efficiency; (b) Pay the amounts collected into the Consolidated Fund unless otherwise provided by this Act and other Acts; (c) Promote tax compliance and tax education;
(d) Combat tax fraud and evasion and co-operate to that effect with other competent law enforcement agencies and revenue agencies in other countries; (e) Advise District Assemblies on the assessment and collection of their revenue; (f) Prepare and publish reports and statistics related to its revenue collection; (g) Make recommendations to the Minister on revenue collection policy; and (h) Perform any other function in relation to revenue as directed by the Minister or assigned to it under any other enactment
The Governing Body of the Authority
The governing body of the Authority is a Board consisting of A chairperson
The Commissioner-General of the Authority
A representative of the Minister not below the rank of a Director A representative of the Minister of Trade and Industry
The Governor of the Bank of Ghana or a representative not below the rank of Deputy-Governor Four (4) other persons from the private sector two of whom are women
The President shall appoint the chairperson and members of the board in accordance with article 70 of the constitution of Ghana
Functions of the Board
1. The Board shall ensure the proper and effective performance of the functions of the Authority through the: a Supervision and monitoring of the Authority in the performance of its functions b Formulations of administrative policy for the smooth and efficient management of the authority c Determination of a scheme of service for the staff of the authority, and d Performance of any other function incidental to the objective of the authority
Tenure of members of the Board
a Any member of the board shall hold office for a period of not more than four (4) years and shall be eligible for re-appointment but a member shall not be appointed for more than two (2) terms. b Any person who is member by virtue the person’s employment can hold office for than two (2) terms. c A member of the board may at resign from office in writing addressed to the President through the Minister d Any member of the Board who is absent from three (3) consecutive meetings of the board without a cause ceases to be a member of the board. e The President may by a letter addressed to member revoke the appointment of that member. f Where a member of the Board is for a sufficient reason, unable to act as a member, the Minister shall determine whether the inability will result in the declaration of a vacancy. g Where there is vacancy, the Minister shall notify the President of the Vacancy.
In December 2009, the three tax revenue agencies, the Customs, Excise and Preventive Service (CEPS), the Internal Revenue Service (IRS), the Value Added Tax Service (VATS) and the Revenue Agencies Governing Board (RAGB) Secretariat were merged in accordance with Ghana Revenue Authority Act 2009, Act 791. You are required to:
a) State the functions of the Ghana Revenue Authority (GRA) b)State the objectives of the Ghana Revenue Authority (GRA) Question 2
To enable the, Commissioner of Internal Revenue Service, CIR, duly carry out the functions assigned to him/her, he/she is empowered to facilitate the execution of the functions. There are powers that are EXCLUSIVE to the CIR, that is, these powers cannot be delegated as they are the preserve of the CIR only.
You are required to;
a)State the powers of the Commissioner of IRS, which can be delegated b)State those powers that cannot be delegated
c)What are the general functions of the Commissioner of IRS?
Section 4(1) of the Ghana Revenue Authority Act, 2009; Act 791, stipulates the establishment of a governing body (board) for the Authority.
You are required to;
a)State the composition of the governing board
b)Briefly explain the functions of the board
c)Discuss the tenure of office for the members of the board
YEAR OF ASSESSMENT AND BASIS PERIODS
Income Tax is a yearly affair. In other words, taxes are levied and collected annually. However the year during which tax is levied and collected is not necessarily the calendar year. A year of Assessment or an Assessment Year, during which taxes are levied and collected, is the government financial year or budget year. Even though it is a period of twelve months, it may not always be from January to December. The period varies from country to country.For instance, in the UK, the Assessment Year is from 6th April in one to 5th April in the following year. In India, the Assessment Year is from 1st April to 31st March in the following year. Year of Assessment in Ghana
In Ghana the year of Assessment has changed from time to time. Originally the year was from 1st April in one year to 31st March in the following year. This type year of assessment was started in the 1944/45 year of assessment. In 1961, it was changed to 1st July in one year to 30th June in the following year. Since 1983 to date, the year of Assessment has been 1st January to 31st December in the same year.Yet the ACT 592 has permitted companies to opt for their own accounting date as the year of assessment. This shows that there are three types of year of assessment. These are: Preceding Year of Assessment
Current Year of Assessment
Accounting Year of Assessment
Examples (current year assessment system)
2007: Year of Assessment = 1/1/07 – 31/12/07
2008: Year of Assessment = 1/1/08 – 31/12/08
2009: Year of Assessment = 1/1/09 – 31/12/09
Section 24(1) of Act 592 defines a year of assessment as: - “The year of assessment for a person shall be the calendar year from 1st January to 31stDecember”. The word “person” as used in the context embraces all individuals and partnerships excluding companies.
Basis Period: Section 94 defines “basis period” as follows:- “Basis period means the period by reference to which assessable income of any person is computed in accordance with the provisions of this Act” Section 24(2) clarifies this definition further by providing that:- “The basis period of a person is:-
(a) In case of an individual or partnership, the calendar year from 1st January to 31st December, and (b) In case of a company or body of persons, the accounting year of the company or body”. Section 24(2) may be illustrated as follows:-
1. Individuals (Employees, Self-employed and Partners of a partnership). Commencement
Mr. Nkrumah was employed on 1st March, 2009. His basis period will be 1/3/2009 – 31/12/2009 in the year of assessment 2009. This is because Mr. Nkrumah was not in employment in the first two months of the year of assessment (January and February, 2009) and therefore did not earn any income for the assessment. Here, it is assumed that he would be in the employment up to the end of the year. The rule therefore, is that the individual is assessed from the date of appointment or commencement of business to the end of the year of assessment in which the appointment was made or the business was commenced.
Mr. Nkrumah, who was employed since 1st March 2009, resigned on the 31st of October, 2011. The basis period will be 1/1/2011 – 31/10/2011 in the 2011 year of assessment. The rule, in this case, is that the individual is assessed on his/her income from the commencement of the year of assessment to the date of cessation the employment or business in the same year. Thus, the individual did not work for the whole year or up to the end of the year 2011. Commencement and Cessation: In the above examples, Anthony’s assessment will be:- Commencement: 1/3/2009 – 31/12/2009= 2009 year of assessment 1/1/2010 – 31/12/2010 = 2010 year of assessment Cessation: 1/1/2011 – 30/10/2011 = 2011 year of assessment
The basis period assigned to individuals with effect from the year of assessment 2001 is the period commencing from 1st January to 31st December in the same year. However, those already in a trade, business, profession or vocation before December 2000 have been permitted under the transitional provisions to continue to use their accounting dates. Example 1:
Akosua Ode has been in business before Act 592 was enacted preparing accounts to 30th November each year. She is allowed to continue to use her accounting date. His basis periods will be:-
1/12/1999 – 30/11/2000 =2000
1/12/2000 – 30/11/2001 = 2001
1/12/2001 – 30/11/2002 = 2002
1/12/2002 – 30/11/2003 = 2003
Yaa Ba commenced in May, 2008, that is, after Act 592, she is statutorily compelled to use the basis period 1st January to 31st December. In other words, individuals including partnerships cannot have their own accounting dates. In this case, the basis periods will be:-
1/5/2008 – 31/12/2008 =2008
1/1/2009 – 31/12/2009 =2009
1/1/2010 – 31/12/2003 =2010
1/1/2011 – 31/12/2004 =2011
Mr. Agyapong commenced business on the 1st of May 2009 and prepares his final accounts to 31st December, each year. He declared the following profits.
Period to 31/12/2010¢450,000
1/1/11 – 31/12/11¢320,000
1/1/12 – 31/12/12¢430,000
You are required to determine the chargeable income for all relevant years up to 31st December, 2012. Solution
2009 Year of Assessment: 1/5/2009 – 31/12/2009 = (8/20) x ¢450,000 = ¢180,000 2011 Year of Assessment: 1/1/2010 – 31/12/2010 = (12/20) x ¢450,000 = ¢270,000 2011 Year of Assessment: 1/1/2011 – 31/12/2011 = ¢320,000 2011 Year of Assessment: 1/1/2012 – 31/12/2012 = ¢430,000
In cases where a person prepares and declares a profit for a period more than twelve calendar months, the period is referred to as elongated period. In the above example, the period 1/5/2009 – 31/12/2010, is twenty year elongated period. The declared profit is apportioned amongst the two years according to the months in each period.
Basis Period of Companies and Bodies of Persons
Section 24(2) (b) provides that “in the case of a company or a body of persons, the accounting year of the company or body of persons”.
Tina Portia Company Limited has been in business for several years preparing accounts to 30th September each year before Act 592. The basis periods will be follows:-
2000 Year of Assessment: 1/10/1999 – 30/9/2000
2001 Year of Assessment: 1/10/2000 – 30/9/2001
2002 Year of Assessment: 1/10/2001 – 30/9/2002
Where a person, that is, a company or a body of persons, accounting date differs from the calendar date of 1st January to 31st December the same year, the year of assessment should coincide with last date in the basis period. Once, that is established, then twelve months con be counted back to get the starting point of the relevant basis period.
Mama Co. Ltd. Commented on 1st October, 2001 after Act 592 using the accounting date 30th September. The basis periods will be as follows:-
1/10/2001 – 30/9/2002 = 2002 Year of Assessment 1/10/2002 – 30/9/2003 = 2003Year of Assessment 1/10/2003 – 30/9/2004 = 2004Year of Assessment Example 3:
Abigail Abbey Co. Ltd. Commenced business on 1/7/2009 and decided to use 30th September as its accounting date. However, the company prepared its first accounts to 30th September, 2010, a period of 15 months and declared a period profit ¢300,000. Subsequently, the following profits were declared:
Year to 30th September, 2011¢300,000
Year to 30th September, 2012¢450,000
What will be the chargeable income for the relevant years?
The Year of Assessment, the basis periods and the chargeable incomes will be:- 2009 Year of Assessment: 1/7/2009 – 30/9/2009 = (3/15) x ¢300,000 = ¢60,000 2010 Year of Assessment: 1/10/2009 – 30/9/2010 = (12/15) x ¢300,000 = ¢240,000 2011 Year of Assessment: 1/10/2010 – 30/9/2011 = ¢300,000
2012 Year of Assessment: 1/10/2011 – 30/9/2012 = ¢450,000 Profits of the 15 months account to 30/9/2010 will be apportioned among 2009 and 2010 years of assessment. Cessation of Trade or Business of Company
In example 3 above, assuming Mama Co. Ltd. Ceased on 30th April, 2005, the basis periods for years up will remain the same. For the cessation year 2005 the basis period will be from 1/10/2004 – 30/4/2005. Here, the rule is the case of companies, the assessment for the cessation year is based on the period commencing from the beginning of the last accounting year to the date of cessation. Practice Questions
Kosmos Company Ltdcommenced business on 1stJuly, 2006 preparing accounts to 30th September each year. The company ceased operations on 31st March, 2010. The following profits were declared. ¢
Period to 30/9/2007 – 60,000
Year to 30/9/2004 – 68,200
Year to 30/9/2005 – 74,000
Period to 31/3/2006 – 90,500
Required: Determine the chargeable income for all the relevant years of assessment
Diego Limited has the following information
Date of commencement – 1stOctober, 2008
Accounting Date – 31stOctober
Date of cessation – 31stJuly, 2012
Period to 31/10/2009 – 52,000
Year to 31/10/2010 – 60,800
Year to 31/10/2011 – 81,000
Period to 31/10/2012 – (21,800)
Required: Determine the chargeable income for all the relevant years of assessment