Recently, the government of Ghana rolled out a number of tax measures as part of efforts to raise additional revenue for public expenditure financing – and to reduce the country’s debt situation to a sustainable level as part of conditionalities for the extended credit facility agreement with the International Monetary Fund (IMF).
It is estimated that an approximate GH¢4billion will be raised from these new taxes: which include the Excise Duty Amendment bill 2022, Excise Tax Stamp (Amendment) bill 2022, the Growth and Sustainability Levy bill 2022, the Ghana Revenue Authority bill 2022 and the Income Tax Amendment bill 2022. It is instructive to note that earlier this year other tax measures under the Electronic Transfer Levy (Amendment) Act 2022 (Act 1089); Revenue Administration (Amendment) Act, 2022 (Act 1086); and the Value Added Tax (Amendment) No. 2 Act, 2022 (Act 1087) came into effect.
While these government responses to revenue shortfalls may be ways of mobilizing domestic revenue, they have significant impacts on businesses – especially small and medium-scale enterprises and start-ups – particularly at a time when other related operational costs such as electricity and water have also been increased.
Whereas tax still retains its undoubted claim to being the most reliable means by which governments all around the world raise funds for financing public services, it is always important to measure the desire of governments to raise revenue through taxation with the effects of those tax policies on businesses in order to ensure that businesses remain sustainable to pursue their business objectives – so as to enable them to operate and discharge their tax obligations, especially in these torrid economic periods.
Businesses and individuals in general dislike the idea of having to pay taxes, and would easily avoid doing so if that was an option. Indeed, in a recent online poll conducted by the popular news portal Ghanaweb.com between April 3 and 5, nearly 80 percent of respondents disapprove of the new taxes passed by parliament in March 2023. The rationale, according to respondents, was that the Ghanaian taxpayer is already paying far too many taxes to government and ought to be spared new ones.
Industry experts and business leaders – including tax expert and consultant Dr. Abdallah Ali-Nakyea of the University of Ghana School of Law, and Mr. Mark Badu-Aboagye of the Ghana National Chamber of Commerce and Industry (GNCCI) – have expressed considerable concern about the impact of these new revenue measures on the business climate in Ghana, especially in relation to the small and medium scale business ecosystem as well as to employment and job creation.
There is no doubt that these taxes and the general high of cost doing business, which has been worsened by the high inflation rate and exchange rate fluctuation in the last few months, can potentially lead to the collapse of many Ghanaian businesses that may not have strong institutional and financial structures to deal with the related cost implications.
Effect of taxes on businesses
Taxes generally impose additional financial responsibilities on individuals and businesses. For businesses, the first point to note is that taxes inevitably lead to increases in the prices of goods and services. This is because taxes ultimately reflect as elements of the cost structure of businesses. An increase in taxes or the introduction of new ones puts businesses in the difficult situation of having to choose between passing on the extra cost to consumers or cutting the costs of business.
Mostly, businesses respond to this challenge through cost-reduction strategies, such as employee layoffs with the aim of reducing their wage bills. And in our current unemployment situation, the pursuit of this strategy by businesses may worsen and amplify its related implications, while job losses in themselves may account for loss of government revenue by way of direct taxes on the incomes of employees.
Also, the implementation of new or increased taxes makes businesses non-competitive at the point of sale, especially when they decide to pass on the tax to consumers by way of increased prices. In a competitive marketplace, businesses that continuously pass on tax obligations to the final consumer no doubt risk pricing themselves out of business. Their products or services become very expensive and out of reach for many consumers.
These unfortunate price outcomes are the direct consequences of production costs which may have a high incidence of taxation. And where global trading has been liberalised, local businesses stand the risk of being driven out of business with cheaper import options due to their high final prices – potentially affecting the long-term interest of businesses.
Some strategies for coping with the new taxes
In light of the above, it has become necessary for businesses to consider appropriate measures for coping with these tax measures by government in order to survive such changes in the business climate while remaining tax compliant. In what follows below, I will discuss some eight (8) strategies that businesses may adopt in order to deal with the situation described above.
The first strategy is making efforts to understand the new taxes and their scope of application; including any changes in the rate or exceptions that one may be able to take advantage of. It helps to always begin from a position of knowledge. Government tax policies may contain a wide range of measures, including incentives to encourage payment and penalties for non-compliance. They may also contain exemptions for certain categories of businesses – depending on the nature of business, the product or service, the industry under reference, and location of the business.
It is therefore important that as a business you are sufficiently familiar with the extent, scope and application of these tax measures in order to comply with them and take advantage of any benefit, incentive or exemption and avoid penalties for non-compliance.
Additionally, conduct an audit of your business to identify possible wasteful expenses and devise ways of dealing with them. Reducing waste by streamlining both your business operations and expenditure is one sure way of dealing with the adverse effect of new taxes.
The second strategy is for businesses to prioritise tax planning and compliance. One cannot overemphasise the importance of effective tax planning in these times. Tax planning enables businesses to plan their tax obligations in a manner that not only takes care of existing tax obligations, but also accounts for future obligations as well. In order to be able to do this, effective tax education is required; and this will involve getting acquainted with the relevant tax law and obligations that are applicable to one’s line of business.
In order to effectively plan your tax, it will be necessary to keep an accurate and reliable record of all expenses, including monies paid and received in the course of running the business over the particular accounting year. It will also require that businesses have in mind all the payment and filing timelines and deadlines, in order to comply with same and avoid penalties. Tax planning should be done at the very earliest opportunity, preferably at beginning of the year in order to effectively forecast potential new taxes and devise strategies for building a culture of compliance.
The closely-related third strategy is that businesses must actively seek tax incentives and exemptions. This can be done, as noted above, by conducting extensive research and reviews of the tax laws to identify potential incentives, particularly the industry-specific ones so that you can apply for and take advantage of them.
For businesses, incentives provide the opportunity and financial space to be able to manage the impact, scope and effect of tax policies on their operations and sustainability. Taking advantage of incentives and exceptions could potentially mean that businesses may also not have to pass on any additional cost to the final consumer, and will be able to maintain competitive prices in the market as well. Exemptions are legal avenues for avoiding the effect of taxes, and businesses are encouraged to take advantage of them, if applicable.
The fourth strategy is for businesses to do an evaluation of their pricing strategies, particularly considering the additional increase in cost of production and general changes in the business climate, with high inflation and reduction in the disposable income of consumers. Because businesses compete in a somewhat perfectly competitive global market, it is important for them to understand for instance how much profit is reasonable for their product or service in order to remain in business.
Unless you are the only one offering a particular product or service, it is also important to understand at what price your competitors are selling their products or services in order that you do not overprice yourself out of business. All of these can be achieved by conducting a review of your pricing policies and strategies, and considering all the relevant market factors.
Fifthly, it is important that as a business you do not depend entirely on one line of business or service delivery. Diversify your revenue streams in order to spread the impact of increases in taxes across various revenue sources, thereby reducing the overall impact on one business model. It is increasingly becoming risky, and indeed difficult, for businesses to rely on one stream of revenue to meet all their operational expenses. The caution is not to rely on a single product or service. Diversification helps to spread the tax burden onto the various sources of revenue. This way, businesses can formulate the necessary resilience to deal with new tax measures and mitigate any harsh effects on their operations.
Further, in order to deal with the effect of the new tax measures, businesses are highly encouraged to rationalise and improve their spending decisions and choices to ensure effective cost controls. To be able to do this effectively, it is important for businesses to take budgeting seriously – especially in these times of high cost of doing business and inflation, which affects cost of raw materials and the entire production chain. Effective budgeting will ensure that only the essential requirements that are budgeted for are covered, and this will help your business to avoid spending on non-essential products and services; thereby, you can gain control over your spending decisions and the impact of taxes on your business.
Again, businesses must cultivate and develop a culture of engaging professionals for advice on not just the effect of these taxes but also every other aspect of their operations where expertise is required; including accounting, branding, marketing and commercials.
Running a successful business requires a diverse set of skills and professional knowledge in various fields of endeavour. This may not seem much of a problem for large businesses, but for small- and medium-scale businesses it is important that they seek and obtain all the necessary and relevant professional advice applicable to their industry and line of business.
Indeed, seeking and obtaining professional advice will promote the possibility and rate of compliance with the new tax measures, take advantage of incentives and exemptions and avoid penalties for non-compliance. Therefore, I cannot overemphasise the need for businesses to ensure that they are getting all the right professional advice in a timely manner so as to be able to process them and ensure full compliance. A business that is not tax-compliant risks being closed down by the relevant authorities, in addition to the various penalties that may be inflicted; and this is why businesses must obtain the right professional guidance to be able to remain in business.
Government tax measures will continue to have an impact on the cost of doing business and the survival of businesses in Ghana – for as long as government continues to see taxation as its major source of raising revenue domestically. It is therefore important that businesses devise alternative approaches to deal with the impact of government tax measures in particular. The effect of these tax measures and government’s general fiscal measures on businesses will obviously vary according to the size and nature of the business model in question, and also the industry of concern.
It is however important to emphasis that no matter the size of a business – that is, whether a small-scale or large-scale business – the effect of taxes can be dire. Non-compliance will also lead to very severe consequences. It is therefore important that businesses devise desirable measures and approaches to deal with the increased cost of business brought about by the new tax measures, in order to mitigate the effect of these taxes on businesses.