The prevailing income tax regime, where all businesses are required by law to pay 25 percent on their earnings, poses a significant challenge for small businesses, according to a study by the Private Enterprise Federation (PEF).

Despite efforts to foster entrepreneurship and stimulate economic growth, the imposition of a flat 25 percent income tax rate disproportionately affects smaller enterprises, limiting their ability to thrive and expand. The findings of the research, sponsored by Open Society Initiative for West Africa (OSIWA), shed light on the adverse impact of this tax burden on small businesses, highlighting the strain it places on their financial viability and operational sustainability.

“We reviewed the numerous taxes on private businesses and zoomed in on income tax. The income tax law requires everyone to pay 25 percent on their income. It does not allow any deviation,” said Nana Osei-Bonsu, PEF’s Chief Executive Officer.

The tax, however, is not easy for everyone to understand, says the research which surveyed small businesses in Accra, Kumasi, Techiman and other major business centres across the country.

As explained by PEF’s CEO, “the average business person, if they want to be in compliance, has to hire an accountant, pay the accountant to go and pay their taxes”.

Mr. Osei Bonsu said this in Accra during a dialogue with Parliament’s Select Committee on Finance to discuss the current tax regime and the plethora of fees and levies placed on the private sector.

“The purpose of today’s gathering is to appeal to Parliament for assistance in refining the income tax regime. We advocate a tax structure that is proportional to the income generated by businesses; it should not simply impose a flat rate of 25 percent on all earnings.

“It is unjust and inequitable that companies earning vastly different amounts, such as GH¢100 and GH¢1million, are subject to the same 25 percent income tax requirement,” he said.

Tier tax system

“As I explained, a more equitable and preferable income tax system should be structured based on individuals’ earnings – utilising a tiered system – where higher earners contribute proportionally more. It should reflect a graduated scale, such that if you earn GH¢10, you might pay 1 percent; whereas if you earn GH¢1million, your tax liability could be 10 percent. In essence, taxation should be commensurate with income,” Mr. Osei-Bonsu added.

In addition to restructuring the income tax system into a tier system, the study recommends simplifying the tax regime, considering the multitude of duties and levies burdening businesses.

“The cost of tax compliance is very high, in terms of engaging auditors to prepare financial statements, hiring experts to file tax returns and even understanding the tax itself was a big issue for them [small businesses],” Dr. Isaac Nyame, a consultant on the research, said.

Although most of the respondents indicated their willingness to comply with tax regulations, he said lack of education about the various taxes that affect their businesses and who to contact when in doubt remains another hurdle.

“There is a need for a tier tax system which will take into account their specific needs. A tier tax system will make it easier for people to comply with the laws, rather than a one-size-fits-all system.

“We also recommend a simplified tax regime, where small businesses would be allowed to make a one-off payment to cover their tax obligation for an entire year,” Dr. Nyame advocated.

Need for flexibility

Kwaku Kwarteng, Chairman of Parliament’s Committee on Finance and Member of Parliament for Obuasi West, presided over the gathering and stressed the importance of facilitating businesses in meeting their tax obligations.

Regarding the study’s findings, Mr. Kwarteng commended the valuable insights provided and assured stakeholders of Parliament’s willingness to collaborate in simplifying the tax system. However, he cautioned that while simplifying tax laws, measures must be taken to prevent individuals from exploiting loopholes to evade taxes.

“I personally believe that taxation is a preferable alternative to borrowing. Therefore, we must proactively explore avenues to simplify tax compliance for businesses. However, it is equally important for us to live within our means,” he said.