A new research into Ghana’s tax regime has proposed a tiered tax system for micro, small and medium enterprises (MSMEs) in the country.

The research which was carried out by the Private Enterprise Federation (PEF) with support from OSIWA, revealed that the country’s one size fits all approach to taxation to MSMEs was hostile to business growth and inhibits the ease of doing business in the country.

Presenting the report to the media, the Executive Secretary of PEF, Nana Osei Bonsu, said a tiered tax system, which reduces the tax burden on businesses especially MSMEs, would encourage voluntary compliance and reduce the cost of tax administration in the country.

He noted that although the MSME sector formed about 92 per cent of the total registered companies in the country, they contributed only about four per cent to the total domestic revenue.

The PEF Boss said that was due to what he described as the one size fits all approach to taxation being implemented in the country, which made it difficult for the MSMEs to comply.

“Apart from small taxpayers threshold exemption from VAT, all MSME taxpayers are subject to the same Company Income Tax of 25 per cent of chargeable income. All MSME taxpayers are also subject to withholding tax on services, works and goods as well as company income tax just like large entities.

“There are no separate legal regimes for taxation of MSMEs. Therefore, the tax regime and the tax environment has a model of one size fits all. Further, the tax laws impose on MSMEs the same compliance obligations including tax calculation, payment and filing just as the large entities,” he explained.

He said this was not helpful for the country and the MSMEs because all the countries the research studied had clear definitions for SMEs in their tax laws.

Three taxpayer categories

He proposed to the government to maintain a three-taxpayer categorisation which should include small taxpayer office (STO), Medium Taxpayer officer (MTO), and Large Taxpayer Office (LTO).

He said this system, when implemented especially at the SME level, should be very simple to understand and will have minimal costs to compliance.

“Ghana needs to realistically define without any ambiguity, which entities should be classified as Micro, Small, Medium or Large taxpayers for purposes of taxation and related obligations; The current turnover threshold of GH¢200,000 for small taxpayers for income tax purposes is too low; rather the tax administration should consider Micro taxpayers as those with annual income of GH¢0 – GH¢90,000, Small taxpayers as those with annual income of GH¢90,001 – GH¢1 million and Medium taxpayers as those with annual income of GH¢1.1 million to GH¢5 million,” he explained.

GRA reforms

Nana Osei Bonsu pointed out that the success of the recommendations proposed in the study depended on the ability of the Ghana Revenue Authority (GRA) to reform its administrative system and embark on tax education and awareness creation in partnership with the business associations and other civil society groups.

“Issues about the segregation/categorisation of taxpayers are still outstanding and needs to be addressed to provide certainty for business planning and continuity. The scenario analysis provides good options for policy makers to choose from, considering their potential impact on tax revenue mobilisation.”

“The Private Enterprise Federation believes it is important for policy makers to consider a system which is in line with international best practice and also provides a good opportunity for the government to raise revenue as well as ease the compliance burden on businesses.”

On the basis of this report and prior engagements, the Federation is open for further discussions and engagement with policy makers on this subject,” he stated.