Starting a business is not easy, let alone being a young person but the reward is often significant compared to employment. Generally, raising capital, finding first customers, gaining the needed experience and having the conducive business environment in the early stages of a start-up can be tricky. Many young people therefore prefer employment rather than starting their own business. Even existing businesses often find themselves in a dilemma. They may want to expand their business to meet demand, but tight financial circumstances can make it difficult to expand.
Mostly government and the private sector work together to achieve a common goal. Thus, whiles government is expected to provide an enabling environment for private sector players to thrive, the private sector is also expected to utilise this conducive environment to drive growth in the economy and pay the necessary taxes to government. At page 409 of the 2017 budget statement, the Minister of Finance stated that ´the number one priority for the Government will be to institute measures that will help businesses expand and create jobs, as well as promote the growth of entrepreneurial opportunities for young Ghanaians in particular”.
At page 886 of the same budget statement, the Minister of Finance stated as follows - “Mr. Speaker, the centrepiece of this budget is to create an environment that will stimulate the private sector to create jobs, especially for the youth. We will create an enabling environment to build the capacity of our youth to take on more active roles in our country’s future and its development”.
2. What are Tax Incentives/Tax Holidays?
Tax incentives are mainly exemptions or tax breaks, expense deductions or tax credits that reduces a person’s tax liability payable to the GRA in exchange for making certain choices e.g., investing in certain types of business or certain deprived parts of the country. But why does the government give tax incentives for businesses? Tax incentives stimulate the economy by way of increasing businesses, jobs, and investments. Tax incentives to small businesses can help governments make headway in meeting their goals of job creation. Business owners can then use that money to invest in other aspects of business for growth and improvement. The incentives are targeted at certain areas of the economy and by encouraging certain types of businesses. The amount of money saved from tax incentives can even help open a new branch.
3. The 2017 Tax Incentive/Tax Holidays for Young Entrepreneurs in Ghana
Motivated by a desire to create jobs and help small businesses grow in a way that highlights its own mission of job creation and to indirectly give small businesses some financial boost, government in 2017 adopted a tax policy that grants incentives to small businesses, by easing their tax burden. This time the policy was targeted at young people. Following promises made in the budget statement, the Income Tax Act, (Amendment No.2) 2017 Act 956 was passed to provide special tax holiday for young entrepreneur in selected business ventures.
4. Categories of the 2017 Tax Incentive/Tax Holidays
The Income Tax Act, (Amendment No.2) 2017 Act 956 provided incentives in 3 main areas
a) 5 years Tax Holiday:
b) Special Location Incentives
c) 5 years carry forward of tax loses.
i. 5 years Tax Holiday:
The amendment made to the Sixth Schedule provided as follows- “The Income of a young entrepreneur from the business of manufacturing, information and communications technology, agro processing, energy production, waste processing, tourism and creative arts, horticulture and medicinal plats shall be exempted from tax for a period of five years”.
This means the young entrepreneur’s income will not be subjected to the usual tax. The fact that there is 5 years tax holiday does not mean zero tax payment. Indeed Paragraph 7 of the First Schedule of the same Income Tax Act, 2015 (Act 896) imposes a tax of 1% on all persons during a tax holiday. Paragraph 7 of the First Schedule provides that- “The Income of a person entitled to a concession in the sixth Schedule is subject to tax at the rate of one person of Chargeable Income.” Despite the 1% tax, this incentive still presents a good tax savings opportunity for young entrepreneurs.
ii. Special Location Incentive:
In addition to the tax holiday, the law provides location incentives to young entrepreneurs. The idea behind these location incentives is to encourage businesses to establish in less deprived areas, mostly in areas other than National and Regional Capitals. Over the years government has announced various tax incentives to businesses to encourage them to move into deprived areas, such as the Northern Regions of Ghana and other rural areas with the aim of enticing companies away from the cities. However, by observations these incentives do not appear to be having the desired result because companies are still locating in the cities, especially Accra and Tema. Some of the reasons why companies do not go to the hinterlands includes poor road network, lack of utilities such as portable water and electricity, poor communication network, and above all, easy access to market. Despite the low patronage of location incentives, the 2017 tax policy for young entrepreneurs provided the following tax rates depending on the location of the business of the young entrepreneur. These rates apply immediately after the 5 years holiday.
Like other location incentives, the Northern part of Ghana provides greater tax incentives for businesses to establish there. However, many businesses still prefer to be located in Accra and Tema, hence their high tax rate. This policy is an attempt to encourage and promote individuals to create jobs. It must be noted that, the general corporate income tax rate is 25%. Mining and Petroleum companies are subject to tax at the rate of 35%.
iii. 5 years Carry forward of Tax Losses
Under the income tax law, losses from one activity generating income generally cannot be offset against the income of another activity or even carried over to be offset against the same type of income from one year to the next. This treatment is a disadvantage to taxpayers, though universally sound. The stringent treatment of business losses is an unfair treatment because the government shares in the gains while the investor may have to bear all of the losses when it occurs. In order to have a more liberal treatment of business losses the Income Tax Regulations provided two categories of sectors where businesses can carry forward tax losses for 5 years in the Mining, Petroleum, energy and power, manufacturing, agro processing, tourism, and Information Technology. All other businesses are allowed to carry forward tax losses for 3 years (see section 17 of Act 896 and Regulations 19 of L.I 2244). The Income Tax Act, (Amendment No.2) 2017 Act 956 provided similar 5 year carry forward rule in paragraph 3 that “the person may carry forward an unrelieved loss for a period of five basis periods”
5. Qualification for the Tax Incentive/Tax Holidays
The requirements are quite simple. To benefit from this incentive, two conditions need to be satisfied. Firstly, you must be a “young entrepreneur “and secondly, you must be prepared to invest in the specified sectors of the economy.
a) Who is a Young Entrepreneur?
The law provided a definition of who a young entrepreneur for the purpose of the tax holiday. The Income Tax Act, (Amendment No.2) 2017 Act 956 provided in paragraph 4 that a young entrepreneur is an “entrepreneur who is not more than thirty-five years old”. The age limitation is very important. Only natural persons come into focus since companies cannot have this age description.
b) Be prepared to Invest in Priority Sectors
Most often government designate some sectors in the economy as “priority sectors” and tend to provide incentives for those sectors. Section 17 of Act 896 and Regulations 19 of L.I 2244 identified Minerals and mining, Petroleum, Energy and power, Manufacturing, Farming, Agro processing; Tourism, Information and communication technology as the main priority sectors of Ghana’s economy and granted carry over of tax losses for 5 years for businesses in that sector.
Similar objective is what is repeated in this tax incentive. To qualify for this incentive, the young entrepreneur must invest in any of these businesses.
iii. Energy production
iv. Agro processing
v. Waste Processing
vi. Tourism and creative Art
vii. Horticulture and Medicinal Plants
6. Conclusion and Policy implementation Challenges
There is no doubt unemployment, particularly graduate unemployment is a major problem in Ghana. Thousands of young graduates pass-out in the various universities and colleges every year ready on the job market where there are limited job opportunities. Any policy that seeks to create jobs for young people is highly welcome. It is in this regard that the tax incentive for young entrepreneurs is touted as one of the best targeted tax policies in Ghana.
However, a cursory look at the policy implementation seems to have some implementation challenges.
1. Age Limitation: The approach of limiting the tax incentive to individuals and not companies appear not to reflect the reality. With all intent and purpose, the tax incentives apply to the business income of an enterprise owned by a young entrepreneur and not the income earned by the young entrepreneur as a shareholder. Many existing entrepreneurs have their businesses registered as companies. Most importantly, how many under-35 years have the requisite business experience to transform major businesses in Ghana?
2. Capital Intensity: The priority sectors listed for investment by young entrepreneurs are capital intensive sectors which requires investment far beyond the means of an average young person under the age of 35 years. In effect, the incentive cannot be accessed by young graduates who are faced with unemployment issues and with no money at their disposal.
3. Restrictions on Foreign Investment: The Act does not specify restrictions relating to foreigners. In the absence of any restrictions or limitations in the application of these provisions to foreigners, it seems foreign investors in Ghana under the age of 35 years can benefit from this incentive. If this is the case, then the motive of solving unemployment in Ghana could have been missed if foreigners with the needed capital takes over such businesses.
4. Commencement of Exemption period: It is also not clear when the 5 years tax holidays will commence for businesses such as agro processing business. Should the exemption commence when Commercial Production starts or when the business commences? The law is silent on such.
It is hoped that the necessary amendments will be made to this all-important and specifically targeted policy to help solve graduate unemployment. The number of businesses should not be limited to the priority sectors and the age limit could be increased to say 40yrs. In this way, a lot more people who may have the means can establish businesses, leading to the creation of jobs.
The writer is a tax consultant and a member of the Chartered Institute of Taxation, Ghana