Business owners often find themselves in uncertain situations that can make it difficult to plan and expand their operations. There are pressures of high interest rates and inflation rates and the demand for wage increases to meet rising cost of living. One of the strategies to keep businesses afloat is to offer them incentives to relieve them of those burdens. However, many business owners are either unaware of tax breaks or have not spent the time familiarizing themselves with tax incentive programs.
Tax Incentives
Indeed, tax incentives are exemptions, credits, deductions or exclusions that reduce a company’s tax liabilities to the state. Indeed, several tax credits, breaks and incentives can encourage business growth or expansion. Generally, incentives take the form of exemption from customs and import duties on plant and machinery and capital allowances on plant and machinery. It also includes a reduction in the actual Corporate Income Tax (CIT) payable where appropriate, retention of foreign exchange earnings, where necessary.
The rest are guaranteed free transfer of dividends or net profits, foreign capital, loan servicing and fees and charges in respect of technology transfer and guarantees against expropriation by the government. Meanwhile, tax incentives bring to the fore the issue of short-term revenues for government as against long-term growth of the economy. This means that government faces a delicate balance between immediate revenue needs to support its development programs and fostering long-term economic growth. In that consideration, tax incentives are part of the equation and must be well executed with the cost-benefit analysis in mind.
Tax Incentives and Special Dispensation
There are various are tax holidays and special tax rates available to encourage strategic investments in the country. The criteria for qualifying for these incentives are based on either location, product or industry particularly in the areas of agriculture, manufacturing industries engaged in export trade or using predominantly local raw materials or producing agricultural equipment, construction and building industries, mining and tourism.
For instance, agro-processing businesses which use local agricultural raw materials as their main inputs are entitled to enjoy reduced corporate tax rates after the expiration of the initial five (5) year tax holiday based on location in which their manufacturing plants are situated. Thus, an agro-processing industry located in either Accra or Tema attracts a reduced corporate income tax (CIT) rate of (20%) while those outside a regional capital or outside the regional capital attract 5% to 15% CIT).
In a related development, companies which engage in the exportation of non-traditional products including horticultural products, processed and raw agricultural products grown in Ghana other than cocoa beans, wood products other than logs and timber, handicrafts and locally manufactured goods enjoy a concessionary tax rate of 8%. In addition, manufacturing entities which have their plants situated outside Accra and Tema attract tax incentive of 18.75% while those outside regional capitals are entitled to 12.50 % (CIT).
Benefits of Tax Incentives
To benefits or unlock tax incentive for a business depends largely on unquestionable bookkeeping. In that regard, it is important for a company to maintain up to date financial records by ensuring that they are well-organized and backed by evidence when filing annual tax returns. The crux of the matter is businesses need services of a good accountant or tax expert to understand how tax incentives work.
Their professional and technical advice will help them to identify the category of tax incentives that are available, the eligibility criteria and how they can take advantage of them. It is also incumbent upon tax authorities to base their decisions on rigorous due diligence and diagnostic assessments of the businesses to give them a clear view of their current state, eligibility and the amount of waivers each one of them can get. That said, tax incentives generally offer the following benefits.
- Reducing the Cost of Doing Business
Some businesses especially start-ups often operate with little resources and usually on tight budgets. Tax incentives are intended to help alleviate their financial burdens by lowering the overall tax liability.
- Promoting Investment and Growth
Government also recognizes that private sector or businesses are essential drivers of economic development. By offering tax incentives, it aims to attract investment into fledgling businesses. Hence, the incentives include tax holidays, tax credits, deductions or exemptions.
- Stimulating Job Creation
Tax incentives stimulate the economy by way of providing a friendly environment for businesses to expand and create more jobs and investments in critical areas of the economy. Thus, government can boost employment creation and strengthen businesses with tax waivers.
- Encouraging Research and Innovation
Innovation drives progress and tax incentives related to Research and Development (R&D) activities motivate or serve as a booster to a business to invest in ground-breaking research.
- Supporting Specific Industries or Regions
Tax incentive program is also designed to address specific needs or development gaps in the country. It is evident that lower CIT rates based on locations outside Accra and Tema, industry specificity and product specificity are meant to incentivize and open the regions for industrial development.
- Attracting Foreign Investment
To compete globally, countries vie for foreign direct investment (FDI). Attractive tax policies or incentives can sway investors’ decisions. As a result, government can offer a reduced corporate tax rate for foreign companies establishing subsidiaries in the country.
- Navigating Compliance Complexity
Tax laws can be intricate especially for small business owners. Incentives are, therefore, intended to simplify compliance and reduce administrative burdens.
- Avoiding Brain Drain
Retaining talents and skills which are crucial for the economy. Tax incentives can encourage skilled professionals to stay in the country and contribute national development.
Monitoring and Evaluating Incentive Programs
By taking advantage of all the different tax breaks and incentives, company owners can save significant amount of funds. These funds can augment resources which can be invested in other areas of business. Incentive programs require a planned monitoring and evaluation regime to ensure that they are properly utilized. Thus, government must regularly evaluate its effectiveness with necessary adjustments to align with changing economic conditions. Policymakers can use monitoring and evaluation reports as a benchmark to modify or introduce new incentive programs.
Conclusion
Tax incentives are powerful tools that shape the business landscape. They can turn out to be a win-win for both government and industry when they yield positive results. It is therefore necessary for business owners to take advantage of available incentive packages and leverage them strategically to fuel their growth. As tax incentives provide significant advantages to businesses, it is also imperative for enterpreneurs to build sustainable business models which will deliver value to their stakeholders especially government which always needs more tax revenues for national development.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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