Tax saving Strategies for Small and Medium Enterprises

Small and medium enterprises (SME) undeniably make up a huge chunk of Ghana’s business industry. In recent times however, the Ghana Revenue Authority has cited the sector as one whose tax contributions have been lower than expected. In this light, the Authority seeks to ramp up efforts to generate more tax from this sector. While this supports GRA’s revenue mobilization efforts, a business should do all it legally can to protect its income from taxes. This can be achieved by efficient tax planning. Tax planning is simply the reduction of tax liability by way of exemptions, deductions, and benefits. In this article, I will highlight some of the ways a business can reduce their taxes.

Record keeping

Every business, regardless of size needs to develop and practise the skill of keeping records. Records serve as evidence of the income and expenses of the business. It would be absolutely dire for any business to wait till the end of the year or even worse, during a tax audit to now try and pull records to support business transactions. When records are kept on a regular basis, it is difficult to misplace receipts or forget that expenses were incurred. These legitimate business expenses can be deducted from income before tax is charged.

Tax credits

A tax credit is an amount of money that taxpayers can subtract directly from the taxes they owe. In Ghana the evidence of this is the Tax Credit Certificate (T.C.C). These T.C.Cs are as good as cash. In most cases (unless the transaction is exempt or below the threshold), before an SME receives income from another for the performance of a contract, the law requires that a certain portion of that income is withheld by the person making the payment (a withholding agent). This amount withheld must be paid to the Ghana Revenue Authority for a receipt to be issued. This receipt should then be handed over to the SME from which it was deducted. This receipt can be used to offset tax liabilities

Due to the relatively small percentage of the amount withheld from the payment of SME’s, most of them are not incentivized to chase these tax credit certificates from their customers who are supposed to make payments and hand the receipts back to them.

However, the scenario below shows why every single Tax credit certificate needs to be chased after.

Scenario

Take a business that operates with a 25% net profit margin. That means that, If the business has total sales of 100,000 then the net profit will be 25,000. The normal corporate tax rate in Ghana is 25%. This means that, tax payable on the face of it, for ease of calculation will be (25,000* 25% = 6,250)
The business will now have tax payable of 6,250 which normally will be payable by cash! However, assuming the business was into provision of services that were within the remit of withholding taxes, the withholding tax that would have been withheld on their revenue would have been (100,000*7.5%=7,500)

If they are in possession of these certificates, they could easily use that to settle their tax liability and still be due some money  from Government!

Reducing your Chargeable Income (Legally!)

GRA taxes your business’s net profit. Net profit is the amount left for the business after all relevant business expenses are deducted from revenues earned for the period. One simple trick to lowering your tax bill is to reduce net profit by accounting for all business-related expense.
Given that a business keeps good records as recommended earlier in this article, this should not be difficult. Apart from showing the true state of profitability of the business, it also prevents GRA from taxing your business unfairly.
A few but easily negligible expenses that fall within these criteria include bad debts, capital allowance, business travel expenses, marketing, training and educating staff, etc. This list is not exhaustive as business expenses vary depending on the nature of the business.

Tax reliefs

Tax reliefs are government programmes or policies designed to help individuals and businesses reduce their tax burden or settle tax-related debts. In Ghana, resident sole proprietorships can be granted allowances to reduce their tax burden. In order to take advantage of such tax reliefs, eligible business owners should apply to the Commissioner General and once the relief is granted, it can be used to reduce a business’ taxable income. Below are some of reliefs available to be claimed.