Meta, the company behind Facebook and Instagram, will apply Ghana’s VAT charges across its ad platforms starting on August 1st, 2023. Since April 2022, the Ghana Revenue Authority (GRA) has required e-commerce and digital platforms without physical presence in the country to file tax returns and pay monthly taxes, similar to local businesses. The tax regime is expected to generate around GH¢2.7billion (US$372million) in revenue for the state in its first year.
The Ghana Revenue Authority, responsible for tax collection, estimates collecting approximately GH¢1.7billion from betting and gaming companies and an additional GH¢1billion from digital platforms like Google, Instagram, TikTok, Facebook and others in the e-commerce sector. Non-resident companies failing to comply with the tax requirements may face payment restrictions in Ghana.
Also, the Ministry of Finance (MoF), Ghana Revenue Authority (GRA) and Ministry of Communications and Digitalisation (MoC) have strategised ways to rake in revenue from Over-The-Top (OTT) digital services, as many telecommunication customers are moving away from traditional sources of telecommunication like voice and print – which is reducing government revenue.
An over-the-top (OTT) digital service is a type of media service offered directly to telecommunication customer via the Internet. The OTT system bypasses cable, broadcast and satellite television platforms. Presently, many Ghanaians are resorting to OTT communications to reduce communications expenses incurred from using the traditional calls. Thus, they are open to real-time communications solutions that operate over the Internet – such as WhatsApp, Facebook, Skype, Zoom, Instagram and others.
So, these have resulted in increasing online marketing and advertisement. Therefore, the potential to generate tax revenue from this sector is huge.
Communication Service Tax
The Communication Service Tax (CST) is a levy on charges for using communications services that are provided by electronic communications service providers. CST is imposed under section 1 of the Communications Service Tax (Amendment) Act, 2013 (Act 864) which provides:
- There is imposed by this Act a tax, to be known as Communications Service Tax, to be levied on charges payable by a user of an electronic communications service other than private electronic communications service
- The tax shall be levied on electronic communications services supplied by service providers.
- For the purpose of this section, the supply of any form of recharges shall be considered as a charge for usage of electronic communications service.
According to section 2 of Communications Service Tax, 2008 (Act 2008), the tax is paid by consumers to the communications service providers; who in turn pay all CST collected to the Domestic Tax Revenue Division of the GRA on monthly basis. The GRA is required under the law to pay the CST collected into the Consolidated Fund.
CST is charged only by electronic communication service providers who are in the provision of electronic communication classified by the National Communications Authority under the provisions of the National Communications Regulations 2003 (LI 1719) and notified in writing by the Commissioner-General of the GRA to charge the tax.
An electronic communication service provider is required to levy CST on all charges for usage of communication services provided, in accordance with the provisions of Act 745. Therefore, in addition to the VAT, consumers are to pay CST of 5 percent.
Current VAT Rate for CST
Currently, the tax rate of CST including the Value Added Tax (VAT) is 27.65 percent, and this includes:
- CST = 5 percent
- NHIL = 2.5 percent
- GETFUND = 2.5 percent
- COVID-19 Health Recovery Levy (CHRL) = 1 percent
- VAT = 15 percent
What this means is that if the pre-VAT cost of data is GH¢100 and you want to determine the VAT to pay on it, it is:
Product of the data = GH¢100
- CST = (5 percent * GH¢100) = GH¢5
- NHIL = (2.5 percent *GH¢100) = GH¢2.5
- GETFUND = (2.5 percent *GH¢100) = GH¢2.5
- CHRL = (1 percent *GH¢100) = GH¢1
Sub-total = (GH¢100 + GH¢5 + GH¢2.5 + GH¢2.5 + GH¢1) = GH¢111
VAT = (15 percent * GH¢111) = GH¢16.65
Total cost of data will be = (GH¢111 + GH¢16.65) = GH¢ 127.65.
Thus, total VAT on data = (GH¢ 127.65 – GH¢100) = GH¢27.65
Effectively, under the current tax regime the compound standard VAT rate is approximately 27.65 percent for every mobile data you buy for online marketing and advertisement. Government’s plan is to impose additional charges for Facebook and Instagram advertisement despite the fact that consumers are already paying a 5 percent CST on data – which is a tax for using communications services that are provided by the telcos.
VAT is an indirect tax. That is to say, whereas the incidence of the tax is on registered businesses – i.e., manufacturers, service providers etc. – the impact is generally on the consumer. In other words, as VAT it is a tax on general consumption that is finally paid by consumers and collected on behalf of the GRA by registered businesses. Thus, it is paid consumers as part of the value added to the actual price of an item.
How do you pay?
In the payment settings, users who are registered for VAT in Ghana will provide their details including VAT/TIN number. The VAT/TIN number will be displayed on ad receipts. All VAT and levies will be added whenever a user is charged for ads, regardless of whether they’re purchasing Facebook or Instagram ads for business or personal purposes.
According to section 16(2) of the Value Added Tax Act 2013, Act 870, Electronic Commerce (e-commerce) is a business transaction that takes place through the electronic transmission of data over communication networks like the Internet.
The implementation of VAT on e-commerce should mark the beginning of digitising tax in Ghana. As a matter of fact, the most valuable asset in the modern world is not gold or oil, but data. Many of the largest companies in the world are not manufacturers, wholesalers, retailers or landlords – but platform providers, data collectors and digital advertisers.
As stated above, the goal of tax digitisation is to collect the maximum amount of revenue with minimum cost to the state. The transitioning to e-commerce will provide data statistics and information about the economy; for example, determining which assessable persons are or are not taxable.
On the other side of the efficacy equation, the transitioning could aid in reducing tax avoidance and evasion by providing unique identification of individual tax data. When combined with other mechanisms like withholding tax and withholding VAT in a proper way, it can loop in the informal sector (the biggest evaders of tax in Ghana). It may not necessarily make people pay the right amount of tax, but it will increase the taxpayer base.
Fiscal Electronic Device (FED)
Let me add that another possible measure for government to maximise revenue generation is for it to implement the Taxation (Use of Fiscal Electronic Device) Act, 2018, after more than four years of it being passed. This Act provides for the use of an approved Fiscal Electronic Device by specified taxable persons at each point of sale.
The FED is a device that will work as a point-of-sale device. The Act requires all VAT-registered persons to issue fiscal receipts generated by the FED. But government may pass a Legislative Instrument to include other persons who do not charge VAT to use the FED in order to loop-in the larger informal economy.
That is, persons will be required to use an approved FED and also keep a back-up FED at their premises. The back-up will be activated and used when there is a problem with the primary device. The initial costs of obtaining and installing the device will not be incurred by taxpayers. GRA, through licenced suppliers, will provide free FEDs up to a maximum of five for every taxpayer – and also ensure it is installed. After this initial setup, the taxable person will be required to purchase any additional FED for use.
International tax rules are being reformed to cope with the increasing digitalisation of businesses. Thus, current international tax rules allow countries to tax the profits of non-resident companies which are attributable to a permanent establishment in the country. Meanwhile, countries including the US, UK and other advanced countries have taken unilateral action to tax non-resident companies outside their countries – although work is ongoing to reach an international consensus.
For example, technology companies with digital platforms such as search-engines and social media platforms make substantial profits through the sale of advertising. Adverts may be targetted at users of the platform in a particular country, yet the technology company may have no substantial physical presence there – but it pays tax to its resident revenue authority on the profits garnered outside the country.
In recent years, considerable media attention has focused on the fact that US-owned technology companies such as Facebook, Instagram and Google have made large profits from interactions with individuals resident outside the country but have paid low levels of tax in those countries – or indeed anywhere. This issue is broader than just technology companies. Ideally, the international tax system needs to be radically reformed to deal with the increasing digitalisation of all types of business.
The insertion of digital tools into public administration and the informal sector may help expand the set of taxpayers, reduce costs and improve tax performance. Governments can better identify taxpayers by issuing Intrusion Detective Systems (IDS).
An IDS is a system that monitors network operating systems to detect suspicious activity and alerts when such activity is discovered or breached. Rather than relying the manual anomaly of detecting and reporting tax evaders, an IDS in the network payment systems in the public – and especially informal private – sectors will monitor, detect and report infringements in the network payment system.
For example, government can alongside the Ghana Card establish an online platform for e-filing and e-payments of taxes and import duties which started effectively 1 July last year. Digital technologies help strengthen tax administration by lowering transaction costs and allowing innovation in tax policy. Digital tax administration may reduce tax evasion and fraud.
These advances will also help the financial inclusion and development agenda reduce economic vulnerability and income inequality through the development of a broad financial inclusion policy, rather than impoverish people with nuisance taxes.
>>>the writer is a Professional Law Student. He can be reached via [email protected]