Unpacking Ghana’s Minimum Chargeable Income Requirement
Unpacking Ghana’s Minimum Chargeable Income Requirement
Introduction
The new minimum chargeable income tax amendment will see businesses that have declared losses for the previous five-year period now having to pay tax on a minimum chargeable income of 5% of their turnover. This provision, however, does not apply to businesses within their first five years of operation or those engaged in farming.
The Income Tax Act 2015 (Act 896) has long governed the taxation of businesses in Ghana, establishing the framework for determining income tax liabilities.
Income tax is primarily determined based on chargeable income, which serves as the foundation for computing tax obligations for individuals and businesses in Ghana. Before the introduction of the Income Tax (Amendment) Act, 2023 (Act 1094), the principal Income Tax enactment simply defined chargeable income as assessable income less allowable deductions.
However, Act 1094 introduced an addition to this definition. Specifically, the amendment of Section 2 of the principal Income Tax Act has, since 2023, incorporated the concept of minimum chargeable income, fundamentally altering how businesses that have reported losses for extended periods are taxed.
This blog examines the implications of the new minimum chargeable income provision on businesses in Ghana.
Impact on Businesses
For companies already facing financial distress, this amendment adds further strain, limiting their ability to recover, invest in growth, and sustain operations.
For instance, consider a company operating in an industry that requires substantial initial investment and is characterized by low profit margins. Businesses in such industries often record losses for several years before achieving profitability due to the significant capital required to establish operations, penetrate the market, and sustain growth. If this company has recorded losses for five consecutive years but has a revenue of say, GHS 45 million in its sixth year, it would now be required to compute a minimum chargeable income of 5% on this revenue, which amounts to GHS 2.25 million. With the corporate income tax rate commonly at 25%, it would be liable to pay GHS 562,500.00 in taxes, despite not making any taxable profits.
The requirement to start paying taxes in the sixth year, despite the entity’s efforts to breakeven and start making profits, may discourage investment in the sector, as the law disregards the long-term nature of their financial recovery.
Implications for Investment and Economic Growth
Beyond the direct financial strain on affected businesses, the amendment may have wider implications for economic expansion. Industries that rely on innovation, market exploration, and research and development often require extended periods of reinvestment before achieving profitability. If businesses in such sectors face tax obligations despite operating at a loss, it could discourage investment in high-growth industries, particularly those that drive technological advancements and industrial diversification.
Moreover, the policy could shape investor perceptions about Ghana’s business environment. If the tax framework is seen as rigid for long-term investments, it may reduce the country’s attractiveness to both local and foreign investors looking to enter capital-intensive or high-risk industries. In the long run, this could limit the development of key sectors that contribute to employment creation, infrastructure development, and economic transformation.
Conclusion and Recommendation
While the amendment aims to broaden the tax base, it raises significant concerns regarding its impact on industries that require long investment horizons before achieving profitability. The policy could create unintended consequences, such as stifling business recovery, discouraging innovation, and increasing financial distress for companies already facing difficulties.
Policymakers should consider balancing revenue generation with the need to support businesses, perhaps by introducing exemptions for industries that require significant initial investments, rather than limiting such considerations to the farming sector only. A more flexible approach could help sustain economic growth while ensuring tax fairness across different sectors.