One of the biggest challenges identified with our tax system is lack of enforcement of our tax laws. I must say that Ghana has one of the best tax laws which can rake in the needed tax revenues we desire and improves our tax system if they are properly enforced. As a tax practitioner, any effort by the tax authorities to ensure enforcement of our tax laws is heart-warming and welcoming news which requires every support and commendation it deserves.
That notwithstanding, such enforcement should be carried out in conformity with the tax laws to ensure smooth operations of businesses. It’s from this backdrop that I seek to analyse the communication of the Commissioner General (CG) on a pending directive to reject companies’ expenses which are not supported by VAT invoices from 1st October 2021 as a legitimate deductible business expense during the launch of Revenue Assurance, Compliance and Enforcement (RACE) initiative in Accra and a certain GRA’s internal memo on guidelines on the said directive to tax officers.
My analysis may be seen as jumping the gun, but I believe with the announcement of the CG and the internal memo currently in the public domain, I am duty bound to conduct this analysis to assist in guiding the CG and policy makers on things they must consider in their enforcement drive to ensure the success of the directive for both taxpayers and mother Ghana.
1. Ascertainment of tax liability
Section 1 of Income Tax Act 2015 (Act 896) states that income tax is payable for each year of assessment by a person who has chargeable income for the year and a person who receives a final withholding payment during the year.
The chargeable income stated in section 1 of Act 896 has been defined in section 2(1) as the income of a person for a year of assessment which is the total of the assessable income of that person for the year from each Employment, Business or Investment less the total amount of deduction allowed that person under this Act. My area of interest in this definition of chargeable income is the phrase “less the total amount of deduction allowed that person under this Act (896)”.
The CG has been restricted on the extent of deduction he can allow taxpayers for the determination of a chargeable income. Section 8(1) and (2) states that subject to the Sixth Schedule, the CG shall not allow a deduction for the purpose of ascertaining the income of a person from employment and shall not allow a deduction in respect of domestic or excluded expenses incurred by a person. For an expense to be allowed as a legitimate deduction, section 9(1) stipulates that, a person who is ascertaining the income of that person or of another person from an Investment or Business conducted for a year of assessment or for a part of that year shall deduct from the income, an expense to the extent that that expense is Wholly, Exclusively and Necessarily (WEN) incurred by the person in the production of the income from the investment or business during the year.
From the forgoing, it’s clear that the conditions to be satisfied for an expense to be legitimately deductible from investment and business income, such expense must satisfy sections 8 and 9 of Act 896 as reviewed above.
2. Tax administration
Section 1 of the Revenue Administration Act, 2016 (Act 915) puts the responsibilities of administering and giving effect to tax laws on Ghana Revenue Authority through the CG. It’s from these huge responsibilities that the CG has been clothed with a lot of powers and discretions in our tax laws to enable him to discharge his duties dutifully.
Without limiting the powers and responsibilities of the CG under Act 915, the CG may give written directives that are necessary for the administration and implementation of tax laws. One must note that, administering and giving effects to tax laws per ser does not tantamount to issuing directives which may contradict the provisions of existing laws or may in effect be seen as creation of new laws which have not been subjected to parliamentary approval.
3. Value Added Tax Act, 2013 (Act 870) as amended
Section 1(1) of Act 870 imposes a tax to be known as the value added tax which is to be charged on the
a. supply of goods or services made in the country other than exempt goods or services; and
b. import of goods or import of services other than exempt import.
The tax shall be paid
a. in the case of a taxable supply, by the taxable person making the supply;
b. in the case of an import of goods, by the importer; or
c. in the case of an import of services, by the recipient of the service except otherwise stated by the Act.
Section 4(1) of the Act defines a taxable person as a person who is registered for purposes of this Act or is required to register under section 6 to 16 of this Act. Subject to sections 6 to 8 and 10 to 16, the effective date of registration of a person as a taxable person is the date specified in the certificate of registration issued by the CG under section 9.
Section 5(1) of Act 870 states that, a “taxable activity” means an activity which is carried on by a person in the country, or partly in the country, whether or not for a pecuniary profit, that involves or is intended to involve, in whole or in part, the supply of goods or services to another person for consideration.
4. Registration Requirements under Act 870
Section 6 to 19 of the Act deals with registration under the Act including criteria and process of registration, cancelation of registration, and enforcement of registration.
Except as otherwise provided in this Act, a person who is engaged in a taxable activity and is not registered for tax purposes shall register if:
- at the end of any period of twelve or less months, the person made, during that period, taxable supplies exceeding Two Hundred Thousand Ghana Cedis (Ghs200,000); or
- at the end of any month, there are reasonable grounds to expect that that person will make taxable supplies in the next twelve or less months exceeding Two Hundred Thousand Ghana Cedis (Ghs200,000).
- Despite subsection (1), a person shall register if at the end of any period of three months, the person made, during that period, taxable supplies exceeding Fifty Thousand Ghana Cedis (Ghs50,000); and there are reasonable grounds to expect that the total value of taxable supplies made by that person during that period and to be made during the next consecutive nine months will exceed Two Hundred Thousand Ghana Cedis (Ghs200,000).
- For the purpose of determining the thresholds under subsections (1) and (2), the CG may have regard to the value of taxable supplies made by another person, if that other person is a related person or the taxable person and that other person are acting in concert in making the taxable supplies.
- A person who is required to register under this Act shall apply for Value Added Tax registration in the form and manner prescribed by the CG.
A person who is not registered, but who is required to apply for registration under this Act, is a taxable person from the beginning of the tax period immediately following the tax period in which the duty to apply for registration arose.
Despite the threshold rules in section 6, a promoter of public entertainment, an auctioneer, or a national, regional, local or other authority or body, which carries on any taxable activity shall apply for registration. Where a person required to register under this Act fails to apply for registration, the CG shall register that person as stated in section 14 of Act 870.
The CG has the powers to compulsorily register or cancel the registration of a person if it believes that such a person has met the revenue threshold and is registrable or has not meet the revenue threshold. In such instances, the CG may, in writing, notify a person that, that person has within the time specified in the notice, made taxable supplies in excess of a turnover threshold; or below the turnover threshold, specified in subsection (1) or (2) of section 6 and is registrable as a taxable person or not registrable and the CG shall act accordingly by registering or cancelling the registration of the person.
A person who fails to apply for registration is liable to a penalty of not more than two times the amount of tax on taxable supplies payable from the time the person is required to apply for registration until the person files an application for registration with the CG.
The CG shall cancel the registration of a taxable person where the CG is satisfied that the taxable person no longer exists; is not carrying on a taxable activity; is not required or entitled to apply for registration; has no fixed place of business or abode; has not kept proper accounting records related to a business activity carried on by that person; or has not submitted regular and reliable tax returns required under this Act.
The responsibilities of taxpayers and the CG on issues bothering registration have been clearly stated in unambiguous words in Act 870.
5. Issuing of tax invoice or sales receipt
Section 41(1) of Act 870 enjoins a taxable person to upon making a taxable supply of goods or services, issue to the recipient, a tax invoice in the form and with the details that are prescribed by the CG. Since VAT invoices are in pre-printed booklet from GRA which must be completed with pen for every taxable supply, the law allows the CG to give a special dispensation to some taxpayers to issue their own system generated VAT invoice due to the nature of their businesses in accordance with specifications of the CG.
Section 9 of Act 870 states that a person who issues a false tax invoice or sales receipt, uses a false taxpayer identification number, or fails to issue a tax invoice or sales receipt as required under subsection (1) or (3), is in addition to the penalty provided in section 58 liable to pay a penalty of an amount not more than five hundred currency points or three times the amount of tax involved, whichever is higher.
The law charges every VAT registered person to issue a VAT invoice or sales receipt to cover every vatable transaction and it’s an offence for a non-VAT registered person to issue a VAT invoice and charge VAT.
The CG may authorise a taxable person who makes a taxable supply to issue a sales receipt instead of a tax invoice in accordance with the conditions and procedures specified in Regulations made under this Act. A person shall not provide a tax invoice or sales receipt in circumstances other than those specified under this section. Subject to subsection (8), a taxable person shall issue only one tax invoice or sales receipt for each taxable supply.
6. Offences and sanctions under Act 870
Some of the offences and their accompanied sanctions under the Act 870 have been outlined below.
7. Sanctions for failure to register
A person who fails to apply for registration is liable to a penalty of not more than two times the amount of tax on taxable supplies payable from the time the person is required to apply for registration until the person files an application for registration with the CG as stated in section 15 of Act 870.
8. Failure to issue tax invoice
A person who fails to issue a tax invoice or sales receipt as required under section 41 for taxable goods supplied or taxable services rendered, commits an offence and is liable on summary conviction to a fine of not more than one hundred penalty units or to a term of imprisonment of not more than six months or to both as stated in section 58 of Act 870.
9. Evasion of tax payment
A person who knowingly engages in the evasion of tax or takes steps with a view to evasion of tax payable by that person or any other person, commits an offence and is liable on summary conviction to a fine of not more than three times the tax being evaded or to a term of imprisonment of not more than five years, or to both as stated in section 59(1) of Act 870.
A person who acquires possession of or deals with any goods, or accepts the supply of any goods or services having reason to believe that the tax on the supply of the goods or services has not been, or will not be paid, or that tax has been, or will be, falsely reclaimed, commits an offence and is liable on summary conviction to a fine of not more than three times the tax evaded or to a term of imprisonment of not more than five years, or to both as stated in section 59(2) of Act 870.
10. Responsibilities of suppliers
Suppliers, as expected from them under Act 870 are required to:
- Register for VAT by making an application to the CG when they meet the revenue threshold or are part of the category which requires registration irrespective of the threshold or on their own volution.
- Display the VAT registration certificate at all places of business and procure the authorised VAT invoice from GRA or apply for a dispensation from the CG to issue a self-generated VAT invoice or sales receipts.
- Issue the appropriate VAT invoice to their customers when they make a taxable supply in compliance with section 1 of Act 870.
- Keep proper books of accounts and file the appropriate VAT returns including all required levies.
- They are required to comply with every aspect of the VAT Act.
11. Responsibilities of taxpayers (Ordinary Businesses)
Businesses, as expected from them under Act 870 are required to:
- Register for VAT if they make taxable supply and comply with all the responsibilities of suppliers as stated above.
- When they procure from a taxable person, they should request for a valid VAT invoice or self-generated VAT invoice or sales receipts if they sight evidence of dispensation from the CG to the supplier to issue self-generated invoice.
- They are supposed to keep proper books of accounts including VAT records as documentary evidence to support the expenditure.
12. Responsibilities of the CG
Some of the responsibilities of the CG under Act 870 and LI2243 have been listed below:
- The CG is required to assess VAT registration applications submitted by taxpayers and register them or otherwise based on his discretion.
- The CG is required to compulsorily register any person who is required to register but fails to register when the person meets the registration threshold or are required to register irrespective of the threshold. The CG has the power to even lock up or seal business premise for failure to register.
- The CG is required to apply sanctions under Act 870 to persons who fail to register.
- The CG is required to issue a VAT certificate to applicants upon registration.
- The CG is required to keep a register of taxable persons (Registered persons).
- The CG is required to sell VAT invoice booklets to taxable persons for their issuance to their customers and based on his discretion, allow a taxable person to use their own generated VAT invoice or sales receipts upon application.
- The CG has the right to cancel the registration of a taxable person.
13. The Directive by the CG on the issuance of VAT invoice
The directive from the CG to all staff of GRA with Assistant Commissioner-CPA in copy dated on 23rd August 2021 on the subject “VAT Invoice: a condition for the acceptance of expenditure for tax purpose” has been paraphrased with emphasis on saliant points for the purpose of this article as follows:
- The purpose of the directive is to ensure tax compliance, especially with VAT.
- All staff should insist on the production of VAT invoice as a basis for allowing an expenditure as deduction for tax purpose.
- Section 9 of Act 896 was quoted, and a conclusion was made that as part of the process of ensuring the proper deductibility of any expense that is taxable for VAT, staff should insist on the production of valid VAT Invoice or approved self-generated invoice.
- Section 1 of Act 870 was quoted, and a conclusion was made that on the basis of section 1 of Act 870, no expense should be granted as allowable deduction without VAT invoice to a person unless that person is exempt and or the activity is exempt from the VAT.
- He acknowledged the presence of traders who are below the VAT registrable threshold by stating that, we are, however minded about traders who are operating below the VAT threshold and may supply goods or services to other businesses or may trade between/among themselves. He therefore established a threshold of Two Thousand Ghana Cedis (GHs2,000), beyond which a cost incurred shall not be allowed as a deduction without VAT invoice or self-generated invoice.
- Section 58 of Act 870 was quoted, and he charged all staff to educate taxpayers to observe the directive accordingly and charged the field staff to ensure strict adherence to the directive after the expiration of a grace period.
- The effective date for the implementation of the directive is 1st October 2021 this was to allow GRA to carry out public sensitizations and raise public awareness.
- It was signed by the CG.
14. My Observation on the forgoing
My readings of Act 896, 870 and its LI 2243 indicates the following:
- VAT is chargeable on the supply and import of goods or services other than exempt goods or services. Any goods or services which does not constitute exempt supply or import shall attract VAT.
- No one can charge VAT unless the person has been duly registered by the CG.
- One can apply for registration if the person meets the revenue threshold or is part of the category which requires registration irrespective of the revenue threshold or on their own volution if they are not part of the two categories mentioned. The VAT Act acknowledges that not everyone can satisfy the revenue threshold.
- The CG has the sole right and discretion to register or not to register any applicant.
- The CG has the right to force any person to register and can compulsorily register anyone.
- The CG has the sole right to sanction any person who is registrable but fails to register including sealing off and locking up business premises and prosecuting offenders which can lead to fine or jail term or to both.
- The determination whether someone is required to register or otherwise is the sole responsibility of the CG.
- The directive by the CG failed to mention anything on registration but any enforcement drive on VAT without considering section 6 to 19 of Act 870 shall not lead to a desired result.
- The ordinary businessperson is to ensure that, when they purchase from a VAT registered person, they request for a valid VAT invoice or self-generated VAT invoice (evidence of dispensation from CG shown) or a valid sales receipt.
- The ordinary businessperson cannot demand from his suppliers their sales ledger to ascertain whether they have met the revenue threshold and are required to register before they transact with them.
- For those who are registrable irrespective of the revenue threshold, businesspersons are required to always demand a valid VAT invoice or self-generated VAT invoice (evidence of dispensation from CG shown) or a valid sales receipt.
Based on the above analysis of the facts deduced from the various laws and the GC’s memo, any directive as contained in the internal memo will suffer a set back because it will be in breach of the very law (Act 870) it seeks to enforce.
The CG must discharge his responsibilities under the Act by ensuring that persons who are registered charges the tax, issues the appropriate invoices and accounts for the taxes they collect whiles those who are registrable are compelled to register on their own volution or under compulsion by locking and sealing off their business premises and prosecuting them.
The current content of the memo on the directive will result in an unjustified denial of the deduction of legitimate business expenses of businesses which satisfy section 8 and 9 of Act 896. This action will lead to an increase in the cost of doing business, disagreement, and its resultant avalanche of tax disputes between taxpayers and CG (GRA).
The CG is commended for seeking to enforce the VAT Act but must discharge his duties as stipulated under the Act and not to unjustifiably cause difficulties for law abiding businesses because of his inability to use the powers given him by the laws to punish or force recalcitrant businesses to comply with the tax laws.
As a concern citizen and a practitioner, I recommend the following as some of the things we can consider in the tax enforcement drive:
- The enforcement should be divided into two. Firstly, we must institute measure to ensure that VAT registered persons are issuing the appropriate invoice, charging the appropriate taxes, and they are paying same to GRA. Then, the CG must institute measures to register those who are required to register due to the revenue threshold and those who are required to register irrespective of the revenue threshold using prosecution and the other discretions available to the CG under the laws.
- A directive on the need to show VAT invoice for vatable expense to be tax deductible is required but can read as follows “Any taxpayer who seeks to deduct any expense as a deductible tax expense must provide a valid VAT invoice or self-generated VAT invoice (evidence of dispensation from CG shown) or sales receipts for the expense to pass the wholly, exclusively, and necessarily principles in section 9 of Act 896, if that expense suffered VAT.
- GRA must hold stakeholders’ consultations with recognised bodies like members of Chartered Institute of Taxation Ghana, members of the Institute of Chartered Accountants Ghana, and other relevant professional bodies on matters of this nature before implementation.
- GRA must give enough time for businesses to assimilate such directives which has dire consequence on their operations. The internal memo was issued on 23rd August 2021 and the directive was to take effect on 1st October 2021, but the directive had not been issued to the public. Assuming we even take the internal memo as the directive, just 40 days interval for businesses to comply is too short a notice.
- The CG can request for information on suppliers who have not registered for VAT from some taxpayers to build a database and follow up for registration enforcement. Just like how the Tax Audit and Quality Assurance (TAQA) Department requires the agents of the 7% withholding VAT to forward an excel copy of their 7% withholding VAT return to their office after filling their withholding tax returns. This measure is novel, and it will assist officers in tracking businesses which don’t file their VAT returns. Such measures can be helpful in identifying recalcitrant VAT registrable persons.
This article is not to bastardise the work of GRA or the Commissioner General but rather to open the discussion on how to enforce our tax laws as expected by the tax laws.
The author is a Member of ICAG and an Associate Member of the Chartered Institute of Taxation Ghana.
[email protected]: 0244 423 960