Penalties in new income tax law can collapse businesses – Prof Quartey

Head of the Department of Economics at the University of Ghana, Professor Peter Quartey, has branded as “overly punitive and ridiculous” some of the penalties stipulated in the new Income Tax Law (Act 896) 2015, which he said could lead to the collapse of businesses.

Analysis by Ikern and Associates, which was contracted by the Private Enterprise Federation (PEF) to assess implications of the new tax law on businesses, revealed that under the new tax regime companies that default in paying tax on due dates are subject to payment of 125 percent of the statutory rate (policy rate), compounded monthly, and applicable on the amount outstanding at the start of the period.

Under the old tax regime the penalty for a company’s failure to pay its tax on the due date attracted a fine of GH?4 per day.

While admitting that it is important for every business to honour its tax obligations, and penalties should apply to those who fail to do so, Prof. Quartey said such penalties should not be overly punitive and have the potential of collapsing business.

“Yes, there should be some penalty so that businesses which deliberately delay payments will be compelled to pay. But it should not be overly punitive. I find it very ridiculous because there are many who do not pay taxes, and there are those who pay.

“And those who pay may default in payment for some reasons which may be no fault of theirs. There are times businesses make an attempt to pay on the deadline, but a dysfunction in the system may have prevented them from doing so. So I don’t think such overly punitive rates should be encouraged,” Prof. Quartey said in an interview with the B&FT.

Some of the companies, he said, are going through a lot of difficulties because of the current economic challenges; hence, applying such harsh sanctions will lead to their collapse and thereby increase the country’s unemployment situation.

“Sometimes if you speak with some of the companies, you realise that they have not even been able to pay salaries for some time because of the high cost of doing business. Some of them have not been able to pay their credits because their cash flow has been affected.

“So, genuinely, some businesses are not trying to evade taxes but because of general hardships in the economy they are not able to pay in time. So with such businesses the rates should not be punitive, but should be such that it will encourage them to pay and not collapse their businesses,” Prof. Quartey said.

Using overly-punitive measures to compel businesses to comply with tax obligations will prove to be a disincentive to investors, since people will not be encouraged to own private businesses -- thereby increasing unemployment.

Another punitive measure in the new tax regime is the imposition of a 75 percent tax penalty attributable to the period for companies that fail to maintain records.

Again, in the new income tax regime underestimating instalment tax attracts 125 percent of the policy rate, and it is applied to 90 percent of the actual paid tax.