Small and Middle-Sized Enterprises (SMEs) constitute an essential part of the economic ecosystem in all parts of the world. Morden day SMEs are genuine solvers of societal challenges such as driving regional growth, curbing urban population, providing employment and contributing to environmental sustainability.
According to available data from the Registrar General’s Department, 92% of businesses registered in Ghana are SMEs, employing 70% of the population.
However, much has not been talked about concerning the plights of SMEs in Ghana, which is tax-capital investment decisions. SMEs in Ghana operate in a tax space requiring investment decisions to go beyond raising only investment capital.
In starting SMEs in Ghana, entrepreneurs are often keen on raising capital for the business without recourse to future tax liability that may arise and be paid.
Businesses registered in Ghana must operate within the confinement of the income tax Act 896, Value Added Tax Act 870, the Revenue Administration Act 915, Customs Act 891 and their respective regulations. Most SMEs in Ghana either do not carefully evaluate the impact of these tax laws on their businesses or ignorantly trade at the blind side of the tax laws in Ghana.
The capital base of SMEs must be tax absorptive in the early stages of business development. The early stages of most SMEs development are characterized by low turnover to cover the cost of sales and administrative expenses, high level of receivables, bad debts, high operational costs, competitive market dynamism, low pricing strategies etc.
However, for instance, the VAT act does not relieve a VAT registered person from VAT liability for taxable supplies regardless of whether the sales were made on credit except for exempt and zero-rated supplies. Likewise, except for section 7 of Act 896, the income tax Act will not relieve a person from income tax liability once income has been earned.
Therefore, SMEs are responsible for raising capital above investment needs deliberately. In some cases, the cash effect of taxable transactions lags while the tax compliance period is shorter, creating the tax financing gap.
Most SMEs frequently try to finance this gap by filing returns without payment, not registering with the Ghana Revenue Authority, or through short-term borrowing.
Furthermore, having a capital base that is tax absorptive enough reduces tax and pension contribution compliance risks, which become a financial burden on most SMEs in Ghana in their early stages.
This means of planning is the cheapest channel for meeting statutory obligations for SMEs.
Moreover, the uncertainty in the tax environment may render SMEs into capital depletion if the capital base is not taxed absorptive. The recent VAT amendment, which restricted a flat VAT rate of 4% to retailers within the annual threshold of ₵500,000, means customers have to determine whether to buy from suppliers within this threshold and pay VAT at 4% or suppliers above the threshold would have to absorb the standard VAT rate of 12.5% to able to serve the existing clients at the current margin.
Statutory compliance is costly; SMEs must endeavour to avoid this risk and its associated penalties and interest by anticipating and projecting such liabilities in their earlier business cash flow projections, especially during the uncertain turnover period.
Again, Investors must appreciate and understand the statutory space within which SMEs operate to enhance compliance. Statutory compliance requires proper financial planning and stakeholders’ support.
Failure to observe statutory compliance can result in extreme case criminal prosecutions in Ghana and avoidable legal charges that may even discolour the organization’s image. The Ghanaian tax laws are immune to any explanations and excuses or business difficulties regarding payment of tax liabilities.
Author: Isaac Yalley,
Tax Economist at the Institute for Liberty & Policy Innovation (ILAPI) with Interest in fiscal research and Public Policy for economic freedom.