03 Apr Taxation Of Income From Employment In Ghana
Introduction
Taxation is crucial for developing countries to promote growth and finance social and physical infrastructure needs. A tax is a compulsory charge imposed by an organ of government for public purposes. This charge can be imposed on income, transactions, goods and services, or property.
By generating financial resources, effective taxation can enhance the quality of life for citizens, reduce reliance on external aid, facilitate wealth creation, and foster a more balanced economic development. Ghana is a prime example of a country where taxation is essential for progress.
Legal Basis for the Imposition of Taxes in Ghana
In Ghana, Article 174(1) of the 1992 Constitution confers the power to impose taxes on the Legislative arm of Government. Individuals, partnerships, and companies can only be taxed if such an imposition is authorized by or under the authority of an Act of Parliament.
Again, if an Act confers power on any person or authority to waive or vary a tax imposed by that Act, this power can only be exercised after Parliament has approved of this through a resolution.[1]
Thus, taxes, despite their economic nature, must acquire legal authorization through statutes to be enforceable obligations.
Income from Employment
The primary legislation governing Income Tax in Ghana is the Income Tax Act, 2015 (Act 896) (as amended) (“ITA”). Under the ITA, income is taxed if it is derived from employment, business, or investment.[2]
Income from employment refers to the gains and profits of an individual from employment for the year of assessment or a part of the year.[3] These gains and profits include salaries and wages, overtime pay and bonuses, personal allowances such as rent and travel allowance, and gifts received in respect of employment.[4]
However, the following amounts among others do not qualify as gains and profits from employment;[5]
- A discharge or reimbursement of an expense incurred by an individual for his employer that serves the proper business purposes of the employer.
- A discharge or reimbursement of the dental, medical, or health insurance expenses of an individual where the benefit is available to each full-time employee on equal terms.
- A provision of accommodation by an employer in the timber, mining, building and construction, farming, and petroleum operation to that employee at a place or site where the business or field operation is carried on.
- A final withholding payment.
- Redundancy pay.
For an amount to be deemed a gain or profit from employment, the amount must be in respect of past, present, or prospective employment and must be provided by the employer, an associate of the employer, or a third party under an arrangement with the employer or the associate of the employer.[6]
Income from Employment Which is Subject to Tax
Income tax in Ghana is payable for each year of assessment by a person who has chargeable income for the year and a person who receives a final withholding payment during the year.[7] Although the income tax is chargeable yearly in the case of an individual, practically, it is payable from the employee’s income on a monthly basis.
Chargeable income from employment is simply the income that is subject to tax. It is computed by subtracting the total deductions allowable to a person under the ITA from the total assessable income of that person (i.e. the total income from employment).[8]
Mathematically, Chargeable Income = Total Assessable Income – Total Allowable Deduction.
This income which is taxable in the case of an individual must be accounted for on a cash basis – it must be accounted for income tax purposes when the amount is actually received by the employee and not when it is earned.[9] In other words, even though someone may be employed and earn income, this income will only be subject to tax when it is received by the employee.
Allowable Deductions under the ITA
The deductions which are made from the overall assessable income to arrive at the chargeable income (i.e. the taxable income) are known as allowable deductions. Domestic or excluded expenses incurred by a person are not allowable deductions.[10]
In ascertaining the chargeable income of an individual from employment, the deductions allowed under the ITA include mortgage interest in respect of only one residential premises during the lifetime of that individual.[11]
Contributions and donations to worthwhile causes approved by the government are also allowable deductions for the purposes of ascertaining the income of an individual from employment which is subject to tax. Worthwhile causes approved by the government include a scheme of scholarship for an academic, technical, professional, or other course of study; development of any rural area or urban area; sports development or sports promotion; and any other worthwhile cause approved by the Commissioner-General.[12]
Tax Reliefs
Additionally, a resident individual in employment is entitled to various personal reliefs under the Fifth Schedule in the form of allowable deductions.[13] While these reliefs may not be provided in cash, they effectively contribute to reducing a person’s tax liability.
The personal reliefs include the following;[14]
| # | CIRCUMSTANCE | RELIEF PER YEAR |
| 1 | An individual who has a dependent spouse or at least two dependent children | GH₵1,200.00 |
| 2 | Persons with disability | 25% of the assessable income from employment |
| 3 | Individuals who are sixty years and above | GH₵1,500.00 |
| 4 | An individual sponsoring the education of the child or ward of that individual in a recognized registered educational institution in the country | GH₵600 per child or ward up to three children or wards. |
| 5 | An individual who has dependent relatives other than a child or spouse who is sixty years of age or older | GH₵1000.00
NB: May only claim relief in respect of two dependant relatives. |
| 6 | An individual who has undergone training to update his professional, technical, or vocational skills or knowledge | A personal relief that is equivalent to the cost of the training of not more than GH₵ 2,000. |
It is important to note that where two or more persons qualify in respect of the same child, ward, or relative, the Commissioner-General shall grant the relief to one person.[15] Also, the word “knowledge” as used above does not include academic knowledge.[16]
The Applicable Rate of Tax
The rate of tax applicable to the chargeable income of an individual from employment is dependent on whether the individual is resident or non-resident in Ghana for the year of assessment.
An individual is resident in the country for a year of assessment if that individual:
- is a citizen of Ghana who has no permanent home outside Ghana for a whole year of assessment;
- is present in Ghana for a period/total of 183 days or more in a year of assessment;
- is an employee or official of the government of Ghana posted abroad during the year; or
- a citizen of Ghana who is temporarily absent from Ghana for less than 365 continuous days and has a permanent home in Ghana.[17]
A resident individual’s income is taxed at a graduated tax rate rating from 0% to 35% making it progressive in nature.[18] A progressive tax involves a tax rate that increases as taxable income increases. Individuals with lower incomes are charged less while those with higher incomes are charged more. This is done by dividing taxpayers into income groups called tax brackets. A non-resident individual’s income on the other hand is taxed at a flat rate of twenty-five percent (25%).[19]
Conclusion
In Ghana the taxation of income from employment is critical to the country’s fiscal framework, contributing to revenue generation and economic development. Employers and Employees must have a comprehensive understanding of the income tax system to ensure compliance and contribute to the nation’s growth.
Having a solid understanding of taxation not only ensures legal compliance but also empowers employees to take advantage of the various tax reliefs under the ITA, reducing their tax liability. It also enables employees to better comprehend their net income after taxes, allowing them to manage their finances effectively and plan for the future.
This publication may provide a summary of legal issues but is not intended to give specific legal advice. If you require legal advice, please speak to a qualified lawyer, which may include a qualified member of our legal team at B&P ASSOCIATES (info@bpaghana.com).
The Firm does not own the copyright to the image used.
AUTHOR:
Jennifer Melody Fynn Asiam (2023 Trainee Lawyer)
[1] The 1992 Constitution, Article 174(2)
[2] The Income Tax Act, 2015 (Act 896) (as amended), s 2(1)
[3] Ibid, s 4(1)
[4] Ibid, s 4(2)(a)
[5] Ibid, s 4(2)(b)
[6] Ibid, s 4(3)
[7] Ibid, s 1(1)
[8] Ibid, s 2(1)
[9]Ibid, s 19(2) & 20
[10] Ibid, s 8(2)
[11] Ibid, Sixth Schedule, s 4(4)=
[12] Ibid, s 100
[13] Ibid, s 51
[14] Ibid, Fifth Schedule, s 1
[15] Ibid, Fifth Schedule, s 2
[16] Practice Note on Gains or Profits from Employment under the Income Tax Act, 2015 (Act 896)
[17] The Income Tax Act, 2015 (Act 896) (as amended), s 101(1)
[18] Ibid, First Schedule, s 1(1)
[19] Ibid, First Schedule, s 1(2)