Tax incentive for young entrepreneurs opportunities and challenges
poor road network, lack of utilities such as potable 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.
Location of Business Tax rate after Holiday
Accra and Tema 15%
Other regional capitals outside the three Northern regions 12.5%
Outside the three Northern regions 10%
The Three Northern Regions 5%
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%.
5 years Carry forward 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. 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 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 years carry forward rule in paragraph 3 that “the person may carry forward an unrelieved loss for a period of five basis periods”
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, be prepared to invest in the specified sectors of the economy.
Who is a Young Entrepreneur?
The law provided a definition of who a young entrepreneur for 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.
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, and Information and communication technology as the main priority sectors of Ghana’s economy and granted carryover of tax losses for 5 years for businesses in that sector.
A 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.
Manufacturing
ICT
Energy production Agro-processingsing
Waste Processing
Tourism and Creative Art Horticulture and Medicinal Plants
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 for 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.
Age Limitation: The approach of limiting the tax incentive to individuals and not companies does not reflect 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?
Capital Intensity: The priority sectors listed for investment by young entrepreneurs are capital intensive sectors which require 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 with unemployment issues and no money at their disposal.
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.
Commencement of Exemption period: It is also not clear when the 5 years tax holidays will commence for businesses such as agro-processing businesses. 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.
Francis Timore Esq. mytimore@yahoo.ca [0266-656595) The writer is a tax consultant and a member of the Chartered Institute of Taxation, Ghana