Tax incentive for young entrepreneurs opportunities and challenges

SIntroduction tarting 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 utilize 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 centerpiece 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”.

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.

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 indirectly give small businesses some financial boost, the 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 a special tax holiday for young entrepreneurs in selected business ventures.

Categories of the 2017 Tax Incentive/Tax Holidays

The Income Tax Act, (Amendment No.2) 2017 Act 956 provided incentives in 3 main areas

5 years Tax Holiday:

Special Location Incentives

5 years carry forward of tax losses.

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.

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 deprived areas, mostly in areas other than National and Regional Capitals. Over the years the 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 observation, 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 include